Conclusion: Economics For The 21st Century

The zombies of horror movies are famously hard to stop. Being already dead, they can absorb all kinds of damage and keep lumbering onwards towards their targets. The zombie ideas discussed in this book are similarly resilient. Throughout the crisis, the economics profession carried on, for the most part, as if nothing had changed. And now that the immediate crisis has passed, market liberals are trying to pretend that it never happened. As Richard Posner, a rare example of a market liberal who has changed his views and embraced Keynesianism observed in a recent interview ‘market correctives work very slowly in dealing with academic markets. Professors have tenure. They have lots of graduate students in the pipeline who need to get their Ph.D.s. They have techniques that they know and are comfortable with. It takes a great deal to drive them out of their accustomed way of doing business.'

An approach to economics that has been dominant for more than three decades will not go away simply because its predictions are inconsistent with the facts. It is necessary to provide an alternative to the zombie economics of market liberalism.

Some suggestions about the way forward have been offered in this book. They can be summed up by three simple propositions. In the 21st century, economics should focus:

  • More on realism, less on rigor
  • More on equity, less on efficiency
  • More on humility, less on hubris

The prevailing emphasis on logical rigor has given economics an internal consistency that is missing in other social science. But there is little value in being consistently wrong. Economics must move on from the infinitely rational, farsighted and asocial beings whose decisions have been the central topic of analysis in recent decades. It will still be necessary to abstract from the messy complexity of human decision processes and focus on critical factors in decisionmaking. But the factors that are relevant in microeconomic analysis of goods markets may not be the same as that matter in labor markets or in analysis of macroeconomic aggregates.

Three decades in which market liberals have pushed policies based on ideas of efficiency and claims about the efficiency of financial markets have not produced much in the way of improved economic performance, but they have led to drastic increases in inequality, particularly in the English-speaking world. Economists need to return their attention to policies that will generate a more equitable distribution of income.

Finally, with the collapse of yet another economic ‘New Era’ it is time for the economics profession to display some humility. More than two centuries after Adam Smith, economists have to admit the force of Socrates’ observation that "The wisest man is he who knows that he knows nothing”. While knowledge in the sense of absolute certainty may be unattainable, economists can still contribute to a better understanding of the strengths and weaknesses of markets, firms and other forms of economic organization, and the possibilities for policy action to yield improved economic and social outcomes.

Every crisis is an opportunity. The global financial crisis gives the economics profession the chance to bury the zombie ideas that led the world into crisis, and to produce more realistic, humble and above all socially useful body of thought.

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