Anatole Kaletsky's evisceration of "old economics" in the London Times may be consistent with the general backlash during the current recession, but it's half-baked.
Today’s academic approach prevented economists from thinking about a world that is, by its very nature, unpredictable and inconsistent... others may revive the literary and anecdotal traditions of the great economists of the past... Smith and Hayek produced no real mathematical models. Their eloquent writing lacked the “analytical rigour” demanded by modern economics. And none of them ever produced an econometric forecast.
To wish simultaneously for a return to an "anecdotal tradition" and for theories to be "tested against reality" is perverse. The economy is indeed a complex system, and to draw correct conclusions on the relationships in a complex system requires more than anecdote. As epidemiology is to medicine, so econometrics is to economics; a patient's recovery after leeching does not prove leeching effective, and folk inference in economics would be just as counterproductive, in its own way. The "analytical rigour" so disdained by Mr. Kaletsky represents the struggle to understand and draw inference from the very real complexity that to rely on anecdote risks ignoring.
The first idea, known as “rational expectations”, maintained that capitalist economies with competitive labour markets do not need stabilising by governments.
The second idea — “efficient markets” — asserted that competitive finance always allocates resources in the most efficient way, reflecting all the best available information and forecasts about the future.
The specific "theories" attacked by Mr. Kaletsky are also grossly misrepresented. Hell, the concept of a theoryis being misrepresented. An economic theory is an if-then statement, and this is not a matter of mathematics, which is after all just a language like any other. No theory, no matter how it is expressed, can ever do more than suggest the outcome that would pertain under a given set of conditions. No theory, then, can "[maintain] that capitalist economies... do not need stabilizing by governments", or "[assert] that competitive finance always allocates resources in the most efficient way". To attack the assumptions underlying these theories is good and rigorous; to either attack the value of their existence is to distort the purpose of academic inquiry. It is precisely because theories are if-then that any single conclusion can be given an 'if' and be co-opted and championed by the politically powerful of the moment, but the "assertions" come always from the interpreter, not from the theorem.
Literary and cross-disciplinary approaches to economics can have great value in conveying economic ideas and in complementing other forms of research. What would be unacceptable, however, would be the abandonment of valuable tools to help us to understand the way things are. Perhaps attacking economists makes us feel better, but this is like blaming the shipbuilder, engineer or mathematician for a drunk captain's crash.
And finally, because that felt a bit too serious, I must mention these:
Today’s academic economics reverses this process: if models disagree with reality, it is reality that economists want to change.
Policymakers who turned to academic economists for guidance in last year’s crisis were told in effect: "The situation you are dealing with is impossible: our theories prove that it simply cannot exist."