Reforming Economics after the Financial Crisis

The financial crises of 2008 and after have led to some publicised reflection on the state of modern economics. Some prominent economists have argued that the discipline has some partial responsibility for the market meltdown. This article identifies a cluster of interrelated failings at the core of economics, including the exaggeration of the possibilities for prediction in complex economic systems, the neglect of key concepts such as (unquantifiable) Keynesian uncertainty that help to explain the crash, the crowding out of discursive and historical analysis by mathematical techniques, and the promotion of particular models that are remote from real-world phenomena.

Policy Implications

  • Economists should be much more modest about the possibilities of accurate prediction using economic models.
  • Economists should be wary of using models with unrealistic assumptions that purportedly demonstrate that markets are self-righting phenomena. The current economic crisis suggests otherwise.
  • Concepts such as Keynesian uncertainty, which have been driven out of mainstream economics because they do not fit readily into standard mainstream models, should be rehabilitated.
  • The teaching of economics should be broadened, from the current curriculum dominated by mathematical techniques, to include some reading of economic classics and relevant topics from other disciplines such as sociology, psychology and philosophy. Economists need to be trained to make critical judgements as well as producing models.
  • There should be a professional code of ethics for economists. Like all other scientists, economists have an ethical responsibility to make clear the possible limitations and potential misuses of their analyses or models.
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