Sonntag, Α. (2014) “Is the peace narrative really obsolete?“, EU-Asia Institute, ESSCA School of Management, 22 September.
Efforts such as Rethinking Economics and The Institute for New Economic Thinking are noteworthy attempts to, as INET says, “broaden and accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century. The havoc wrought by our recent global financial crisis has vividly demonstrated the deficiencies in our outdated current economic theories, and shown the need for new economic thinking – right now.
It is certainly true that mainstream, modern macroeconomic models failed us prior to and during the Great Recession. The models failed to give any warning at all about the crisis that was about to hit – if anything those using modern macro models resisted the idea that a bubble was inflating in housing markets – and the models failed to give us the guidance we needed to implement effective monetary and fiscal policy responses to our economic problems.
But amid the calls for change in macroeconomics there is far too much attention on the tools and techniques that macroeconomists use to answer questions, and far too little attention on what really matters, the questions that economists ask.
There are good reasons to be critical of the rational expectations, dynamically optimizing, representative agent approach that underlies modern macroeconomic models. For example, the representative agent approach makes it difficult to study financial markets. At least two agents with different views about the future price of a financial asset are needed before we can even begin to model markets for financial assets, financial intermediation, and other key elements of the financial sector involved in financial meltdowns like the one we just experienced.
Relevant posts:
- Nahles, A. (2014) “European Social Policy For The Next Five Years“, Social Europe Journal, 21 July.
- Emerson, M. (2014) “Trade policy issues in the Wider Europe – that led to war and not yet to peace“, EU Foreign Policy, CEPS Working Documents, 16 July.
- Samadashvili, S. (2014) The magnetic pull of Europe’s soft power, EU Observer, Opinion Article, 27 June.