In the most recent edition of the Harvard Journal of Law and Public Policy, Acton’s Research Director Samuel Gregg has an article in which he argues that the ongoing financial and economic crisis has raised serious questions about the credibility and usefulness of much mainstream contemporary economics. Drawing partly on his recent book, Wilhelm Röpke’s Political Economy (2010), Gregg suggests that much mainstream economics after Keynes became gradually dominated by a fixation upon econometrics that has threatened at times to reduce economics to a poor cousin of mathematics. As Gregg writes:

Read more on Adam Smith versus John Maynard Keynes…

Over at Econlog, one of the best economics blogs around, Arnold Kling has been reading Acton Research Director Samuel Gregg’s latest and recently released book, Wilhelm Röpke’s Political Economy (Edward Elgar, 2010). Kling underlines how Röpke used ethical analysis to distinguish between the three ways of allocating resources: altruism, coercion, and what Röpke called “the business principle.”

Read more on Samuel Gregg’s New Book: Wilhelm Röpke’s Political Economy…

The Public Discourse recently published my article, Rethinking Economics in the Post-Crisis World. Text follows:

In the wake of the financial crisis, we need an economics with greater humility about its predictive power and an increased understanding of the complicated human beings who, when the discipline is rightly understood, lie at its center.

Apart from bankers and politicians, few groups have received as much blame for the 2008 financial crisis as economists. “Economists are the forgotten guilty men” was how Anatole Kaletsky, former economics editor and current editor-at-large for the London Times, put it earlier this year when explaining why “a bank with just $1 billion of capital [would] borrow an extra $99 billion and then buy $100 billion of speculative investments.”

Greed and sheer imprudence played a role, but so too, Kaletsky argued, did those (unnamed) economists who posited that their models proved that events such as the collapse of Lehmann Brothers in 2008 or Long Term Capital Management in 1998 were mathematically likely to happen once every billion years.

Kaletsky’s broader point was that contemporary mainstream economics had been sufficiently discredited by the financial crisis that the entire discipline required what he called an “intellectual revolution,” or it risked being dismissed as a rather suspect sub-branch of statistical analysis and mathematical modeling.

Kaletsky is hardly alone in arguing that economists need to rethink key aspects of their discipline. Though unwilling to call for a total paradigm shift, the Economist recently opined that the financial crisis has raised profound questions of coherence about two areas of economics: macro-economics and financial economics. “Few financial economists,” the Economist observed, “thought much about illiquidity or counterparty risk, for instance, because their standard models ignore it.” Likewise, the Economist commented, “Macroeconomists also had a blindspot: their standard models assumed that capital markets work perfectly.”

All this is certainly true. But the key expression to note here is “their standard models.” Read more on Public Discourse: Rethinking Economics in the Post-Crisis World…