Eric Beinhocker is the executive director of Oxford’s Institute for New Economic Thinking, part of a transatlantic effort to rethink the basic tenets taught to students over recent decades.
He says: “The crisis has revealed enormous gaps in economists’ understanding of the linkages between the financial system and the broader economy. Before the crisis, few economists would have predicted that trouble in an obscure corner of the US mortgage market could cascade into a global calamity.”
He argues that there is lots of work going on to address these shortcomings, but “some advocate tweaking existing models, while others feel a more radical rethink is needed.”
National Institute for Economic and Social Research director Jonathan Portes falls into the latter camp. He is a fierce critic of the British government’s deficit-cutting strategy. Yet he says that in microeconomics — the bottom-up study of individual firms and markets — it would be wrong to throw the baby out with the bathwater.
“I don’t think the crisis tells us much about the fundamental underpinnings of microeconomics,” he said.
However, he believes where economists failed was in assuming that finance worked just like any other market: “When it came to financial companies, it turned out we needed to think about them completely differently. More markets are not necessarily better.”
He adds that one lesson economists may need to learn is to be more humble about the predictive power of their economic models, however neat and precise the mathematics that underlies them. Complex mathematical equations have replaced what Blanchflower calls “the economics of walking about,” as the foundation of the modern subject.
Lord Skidelsky, economic historian and biographer of Keynes, agrees: “It may be that there’s no perfect model and that the quest for one is an error. Maybe we need different models, different theories, for different situations, and that’s the best we can do. Keynes said economics was a moral science, not a natural science — by which I mean that it has to take into account the variability of human situations.”
In other words, economics is not physics, because people are by their nature unpredictable. No one is going to discover an economic “God particle” that explains why someone decides to sell their house, hire an extra worker or buy a new car.
“There’s no new paradigm; and perhaps the search for one is a bit misguided,” Skidelsky said.” My general feeling is that Nobel prizes in economics very closely follow current fashions in the discipline.”