Frustrations of the Heterodox
...the heterodox need to realize that they have, to an important extent, been working with the wrong story line.
Heres the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So its time to dethrone the whole thing basically, the whole edifice dating back to Samuelsons 1948 textbook and give other schools of thought equal time.
Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong.
It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasnt because economics lacked the tools to understand such things
weve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didnt look like that anymore. This was a case of myopia but it wasnt a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis.
What about the lousy policy response austerity and all that?
The key point here was that policymakers werent basing their decisions on conventional economics. On the contrary, they decided to blow off textbook macroeconomics and embrace exotic doctrines like expansionary austerity and a mysterious growth cliff at 90 percent debt relative to GDP. The disastrous policy responses that have perpetuated the slump are the result of mainstream economics having too little influence, not too much.
http://krugman.blogs.nytimes.com/2014/04/25/frustrations-of-the-heterodox/