One of the many fall outs from the international financial crisis, as is
being increasingly widely recognised, is that it has produced a deep,
and hopefully terminal, crisis in the type and the ethos of economics
that largely dominated university economics faculties for the last
thirty years. George Soros has put up $50 million for an
Institute for New Economic Thinking. A series of
articles, of which a number are noted below, have discussed this issue.
The type of economics that has been struck a devastating blow by the
financial crisis is the one of ‘rational expectations’, ‘efficient
markets hypothesis’ etc. This school had many of the outward features of
a strange and fanatical religious grouping. It was deeply
self-satisfied and cult like - trying to cut itself off from reality
with an 'in-crowd' pretence no ideas other than its own possessed any
merit and therefore were not even worth discussing (the real purpose of
this approach, of course, being that discussion might have revealed the
fatal flaws in the cult's theology). As Paul Krugman wrote: ‘Back in 1980, [Robert] Lucas,
of the University of Chicago, wrote that Keynesian economics was so
ludicrous that “at research seminars, people don’t take Keynesian
theorizing seriously anymore; the audience starts to whisper and giggle
to one another.”’ This school, as with similar theological groups, was
also engaged in an obsessional hunt for heresy. It had its own
Inquisition to try to get it rooted out. As Anatole Kaletsky noted in The Times this was
an era of: ‘theories based on assumptions of rational and efficient
markets. These concepts became increasingly dominant from the 1980s and
gradually acquired a virtual monopoly on senior university appointments
and research funding. This intellectual monopoly has ended up not just
crushing the competition but also destroying itself from within.’
Nevertheless there was a more fundamental sense in which this trend
of economics acted like a theological and religious cult. This was its
steadfast refusal to base itself on the real facts of the world economy.
In other fields of economics and related disciplines major advances
in genuine knowledge were made – it is sufficient to mention Angus
Maddison or Dale Jorgenson in econometrics, or Alfred D Chandler Jr in
theoretical studies regarding the history of business and oligopoly, to
see the quality of what was produced. Still more practically important,
on the other side of the world, in Asia, the most spectacular economic
growth in world history was achieved by countries that did not at all
base themselves on the theories of the dominant schools of academic
Anglo-Saxon economics, with their proposed exclusive reliance on the
‘invisible hand’ of the market. These economies used a different Asian
growth model, of which the foundations were resolute insertion into the world
economy fed by entirely consciously decided upon, and massive,
mobilisations of investment and labour that were not at all achieved by
pure free market mechanisms.
