A lot of chatter regarding ideas and interests in the political economy blogosphere lately (here's one at Crooked Timber concerned Rodrik's new op-ed and Blyth's new book, about which I'll post something in a day or two), but I think Krugman is absolutely right:
So what the bad predictions tell us is that we are, in effect, dealing with priests who demand human sacrifices to appease their angry gods — but who actually have no insight whatsoever into what those gods actually want, and are simply projecting their own preferences onto the alleged mind of the market.When folks advocate incorporating "ideas" into social science, they usually mean using them as inputs in the interest-formation equation. And sometimes they are. I've changed my mind on a fair number of issues over the years, not primarily (I think) because of changed material conditions. But just as often ideas follow interests. Wall Street was never going to support a financial transactions tax. Main Street was never going to support cutting Social Security. The rise of "neoliberalism" may have been as much a result of changed material conditions as a cause of them. Etc.
I think this is largely what Phil Arena and Thomas Oatley are talking about here (and see comments).
But another key point of this quote of Krugman's is that it is (implicitly) talking about models. The bad predictions come from a belief that every country is like Greece or Argentina. What this crisis has done, as much as anything, is demonstrate that not all countries are alike. Given that, a similar shock can have asymmetric effects. This may seem like a simple lesson, but it's one that many have missed. The intuition behind it motivated a short article Thomas and I wrote last year when many others were worrying that a Greek exit from the eurozone was going to crush the global economy.
The quality of the model is key.