Economists failed to heed the lessons of history

WASHINGTON — Niall Ferguson is one of those rare characters: a respected scholar who's also a successful popularizer. Ferguson, a Brit, has taught at Oxford, New York University and now at Harvard. He has written about World War I, the British Empire and the Rothschilds (Europe's most powerful banking family). He has turned four of his projects into TV documentaries, the latest of which — "The Ascent of Money," which is also a book — begins airing on PBS July 8. It is a program that could be usefully viewed by most of America's roughly 13,000 economists.

One intriguing subplot of the economic crisis is the failure of most economists to predict it. Here we have the most spectacular economic and financial crisis in decades — possibly since the Great Depression — and the one group that spends most of its waking hours analyzing the economy basically missed it. Oh, a few economists can legitimately claim some foresight. But they are a handful. Most were as surprised as the rest of us.

Why? This is a compelling question without, as yet, a compelling answer. Indeed, so far as I can tell, economists have not engaged in rigorous self-criticism to explain their lapse. We've had some casual theories and some partisan recriminations: "Free-market ideology" is a standard scapegoat on the assumption that most economists are "free-market ideologues." But that's not true. In any case, the crisis surprised liberal and conservative economists, Republicans and Democrats alike.

This brings us back to Ferguson. The creation of money was a seminal historic event; so was the subsequent invention of finance — the saving and investing of money. Without them, we could never have moved beyond barter to a modern economy based on specialization and building for the future. But these advances came interwoven with bubbles, crashes, swindles and hyperinflations. Finance has been a wellspring of both progress and instability.

Ferguson is an able guide. He relates the creation of the bond market by Italian city-states in the 14th century as a way to finance their wars against each other; he explains the South Sea and Mississippi "bubbles" in England and France around 1720 — stock market manipulations based on fantasized riches in the New World; and, finally, he visits the recent housing bubble.