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15 years ago @ Knowledge@Wharton - Why Economists Failed ... · 0 replies · +2 points

As you said: "It's not just that they missed it, they positively denied that it would happen,"

So true.
But I think the issue is larger than just that economists failed to see the importance of banking.

One is a theological notion, touted by Adam Smith, that the markets are governed by the "invisible hand". Although Smith's important and insightful work was deservedly highly influential, (and nevertheless can even be read and understood by ordinary persons--unlike most present day academic economic writing.) The "invisible hand" has unconsciously become part of the theological basis of academic economics. Thus it is assumed that (1)economies will naturally find an outcome in equilibrium with least imposition of any rules and (2) Whenever people follow their own self interest, this will result in the best macroeconomic outcome.

The second difficulty is the artificial abstraction imposed by the mathematical formalism imposed in the name of precision. This gives answers which can be highly precise, but where unfortunately the reality has been abstracted to the point where the real problems are obscured because they can't be easily modeled..