In the Financial Times yesterday, John Kay talks about "How economics lost sight of real world".
The past two years have not enhanced the reputation of economists. Mostly they failed to point out fundamental weaknesses of financial markets and did not foresee the crisis, and now they disagree on appropriate policies and on the likely future course of events.
As I have (almost) argued before, this is - for better or for worse - not in the job description of the vast majority of academic economists. It is precisely like attacking a physics professor because there was a blackout last night. More importantly:
Economists, like physicists, have been searching for a theory of everything. If there were to be such an economic theory, there is really only one candidate, based on extreme rationality and market efficiency.... a few deranged practitioners of the project believe that their theory really does account for all human behaviour, and that concepts such as goodness, beauty and truth are sloppy sociological constructs.
I have addressed the "economists don't feel feelings" argument before. And, by the way, I guess you can color me deranged. Economics is a theory of everything!
First: the assumption of "rationality" that is central to economic theory is a modeling assumption and makes no restriction on behavior whatsoever. The auxiliary assumptions of what people care about - the things that they "rationally" try to achieve with their limited resources - are restrictive. Second: "market efficiency" is neither a theory or a modeling assumption. It is either a metric (one of many) by which we can evaluate outcomes (i.e. is this "efficient"?) or a result of an economic theory, which, like all economic theories, will probably require many assumptions.
I would agree with the proposition that it is wrong to assume that markets are "efficient" (and what does that even mean?). Economists do not make such an assumption. I would agree with the proposition that it is wrong to assume that people care only about their own material wellbeing. Economists do not make such an assumption.
Academic economists did not predict this recession because that is not what academic economists are "supposed" to do with their time.