Why Weren’t Alarm Bells Ringing? Paul Krugman

“…Yes, rising levels of private debt, increased reliance on shadow banking, growing international imbalances, and so on helped set the stage for disaster. But intellectual shifts—the way economists and policymakers unlearned the hard-won lessons of the Great Depression, the return to pre-Keynesian fallacies and prejudices—arguably played an equally large part in the tragedy of the past six years. Say’s Law—the false claim that income is automatically spent—made a comeback. So, incredibly, did liquidationism, the view that any effort to ameliorate the pain of depression would postpone needed adjustment. It’s true that conventional economic analysis fell short in the face of crisis. But when policymakers rejected orthodox economics, what they did by and large was to reject it in favor of doctrines like “expansionary austerity”—the unsupported claim that slashing government spending actually creates jobs—that made the situation worse rather than better…”