When she visited the London School of Economics back in November she asked the obvious question of all the luminaries showing her around: How come you and your colleagues never saw the collapse coming?
The luminaries have finally replied eight months later with a whole shotgun load of blame saying essentially “it wasn’t us,” blaming everything from “the psychology of denial” to low interest rates making borrowing cheap, to a "feelgood factor" to a foreign savings glut, to a sea of debt. It’s “complex,” they say – code for “beats the hell out of us.”
The best they can offer is to conclude,
"the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of
many bright people, both in this country and internationally, to understand the risks to the system as a whole."
Which still leaves open the question: Why did so many bright people suffer such a drastic failure of “collective imagination”? What is that if not a tacit acceptance that the leading theories of your science have failed – that your bright people have been pursing economic dead ends?
Because the reasons for that failure can be found, ironically, in the profession’s near complete ignorance of what a leading LSE lecturer had to say about booms and busts way back in the Great Depression when he worked there – the very subject which he was brought there to teach, for which he won a Nobel Prize, and the very theory which allowed people like Peter Schiff to predict the coming crash with such certainty he was writing books about it.
There was a time when the London School of Economics actually promoted Friedrich Hayek’s Austrian business cycle theory, which was back when the head of the London School of Economics wrote a book on the causes and consequences of the Great Depression based on that very business cycle theory. Now, they barely know it exists – yet it is today’s advocates of that theory who were prominent in saying the crash was coming, even when all they received in response was laughter.
While alleged economists like Paul Krugman were calling for another bubble to rescue the world economy from the dot-com bust, and the present luminaries at the LSE were up to their eyeballs in their “failure of collective imagination,” it was clear-eyed advocates of Hayek’s Austrian Business Cycle Theory like Peter Schiff, Thorsten Polleit, Mark Thornton, Stefan Karlsson, Anton Mueller, Robert Blumen et al who were explaining what was coming and writing about it extensively.
But no-one was listening then, and no-one wants to listen now. The failure of mainstream theory then has become a failure to recognise the collapse of that mainstream theory now.