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Adam Smith is considered the founding father of modern economics.
Adam Smith is considered the founding father of modern economics.

Economics has met the enemy, and it is economics Add to ...

This year, the American Economics Association agreed to set up a committee to investigate whether economists should develop ethical guidelines similar to those already in place for sociologists, psychologists, statisticians and anthropologists.

But there appears to be little enthusiasm for the idea among mainstream economists. Prof. Lucas of the University of Chicago, in an interview with The New York Times, objected: “What disciplines economics, like any science, is whether your work can be replicated. It either stands up or it doesn't. Your motivations and whatnot are secondary.”

Several billion pennies for their thoughts

The critics, however, are more numerous and considerably better financed than the French students a decade ago. In October, 2009, billionaire financier George Soros said that “the current paradigm has failed.” He resolved to help save economics from itself. He pledged $50-million toward the establishment of the New York-based Institute for New Economic Thinking (INET), with a mandate to promote changes in economic theory and practice through conferences, grants and campaigns for graduate and undergraduate education reforms.

Perry Mehrling, a professor of economics at New York's Columbia University, is the chair of the curriculum task force at INET. He says his graduate students at Columbia are growing increasingly frustrated by at the tendency to define the discipline by its tools instead of its subject matter – like the students in Paris a decade ago, they find little relationship between the mathematical models in class and the world outside the door.

Prof. Mehrling believes that economics education has become far too insular. Never mind cross-disciplinary study – even courses in economic history and the history of economic thought have all but disappeared, so students spend almost no time reading Smith, Keynes or other past masters.

“It's not just that we're not listening to sociologists,” Prof. Mehrling laments. “We're not even listening to economists.”

He says he has no problem with teaching efficient-markets and rational-expectations theories, but as hypothesis, not catechism. “I object to the idea that these are articles of faith and if you don't accept them, you are not a member of the tribe. These things need to be questioned and we need a broader conversation.”

The challenge, as Columbia University economist Joseph Stiglitz said at the opening conference of INET, is that “we need better theories of persistent deviations from rationality.”

Some of those theories are coming from the rapidly growing field of behavioural economics, which borrows insights about human motivation from cognitive psychology: A paper titled The Hubris Hypothesis of Corporate Takeovers, for example, examines how the egos of ambitious chief executive officers can lead them to pursue takeovers, even when all available evidence suggests that the move could be a disaster.

It is not yet clear how such new approaches can evolve into workable models, but they hint at what a post-autistic economics might look like.

Prof. Mehrling is cautiously optimistic. “There's a recognition that things we thought were true aren't necessarily true,” he argues, “and the world is more complicated and interesting than we thought – so all bets are off, and that's exciting intellectually.”

Change comes slowly in academia. The few jobs that are available don't generally go to people who challenge orthodoxy. But over the next decade, as the post-crash crop of economics students make their impact felt in government, business and schools, the lessons learned may well seep into the mainstream.

Theories based on assumptions of rationality, efficiency and equilibrium in the marketplace are likely to be treated with a great deal more skepticism. Homo economicus is a lot more anxious, irrational, unpredictable and complex than most economists believed. And, as Adam Smith recognized, he has a moral and ethical dimension that should not be ignored.

Today, the Post-Autistic Economic Network continues to publish its newsletter, now known as the Real-World Economic Review. It remains a thorn in the side of mainstream economics. In an editorial in January, 2010, the editors called for major economics organizations to censure those economists who “through their teachings, pronouncements and policy recommendations facilitated the global financial collapse” and pointed to the “continuing moral crisis within the economics profession.”

It is unlikely that Prof. Sargent will acknowledge any of this when he travels to Stockholm to accept his (sort of) Nobel Prize in December. Nor is he likely to speak about what role, if any, his models really might have played in “wrecking the world.”

But he did make one concession in his interview with the Nobel website this week: “Many of the practical problems are ahead of where the models are,” he admitted. “That's life.”

Ira Basen is a radio producer, journalist and educator based in Toronto.

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