Economic theory in crisis--another view

Financial journalist Anatole Koletsky compares the plight of mainstream economics to historic intellectual disruptions.

In my column last Thursday, I explained how academic economics has been discredited by recent events. It is now time for what historians of science call a “paradigm shift”. If we want to flatter economists, we could compare this revolution needed to the paradigm shift in physics in 1910 after Einstein discovered relativity and Planck launched quantum mechanics. More realistically, economics today is where astronomy was in the 16th century, when Copernicus and Galileo had proved the heliocentric model, but religious orthodoxy and academic vested interests fought ruthlessly to defend the principle that the sun must revolve around the Earth.

He describes the work of Benoit Mandelbrot, George Soros, and several "imperfect knowledge economists" as contradicting fundamental assumptions of the mainstreamers, who rejected or ignored the heterodox ideas that focus attention on the relative high risk of financial crises.

One reason why such fruitful insights have been ignored is the convention adopted by academic economists some 30 years ago that all serious ideas must be expressed in equations, not words. By this weird standard, the intellectual giants of the subject — Adam Smith, Ricardo, Keynes, Hayek — would not now be recognised as serious economists at all.