One of the most intriguing questions facing the merry band of wanderers interested in the philosophy and history of economics is how mainstream economic approaches appear to have emerged relatively unscathed from the Global Financial Crisis.
Casual observers might well find this a bit of a puzzle. A body of knowledge that professed itself unable to shed any light on one of the most profound social events of recent human history, even though it was squarely in the middle of the relevant intellectual terrain, is on the face of it paradoxical.
Of course, the response from the cognoscenti, bolstered by unfalsifiable doctrines such as the efficient markets hypothesis, is that events such as the GFC are fundamentally unpredictable. So economics cannot be held deficient for failing to do so. And, anyway, mainstream economic ideas such as incentive-incapability in markets subject to significant information asymmetries can do a good job of explaining key aspects of the crisis in retrospect. If that’s any help.
Less enlightened souls might retort that had economists stepped out the ivory tower, removed their theoretical blinkers, and spent a bit more time getting down on the frontline trying to understand the way institutions and behaviours were changing in an increasingly financialised economy then perhaps they wouldn’t have been quite so surprised when a Global Crisis they considered theoretically impossible actually happened. [Read more...]