As anyone paying attention will know, the Queen raised a question to England's best and brightest economists last fall -- Why didn't economists predict the financial crisis? The urgency of her question is in the context of the claim that this is the worst financial crisis the western world has faced since the 1930s. Late in July, a response came from Tim Besley and Peter Hennessy and sent on behalf of the British Academy. The response does not focus on the policy errors made, but instead on a failure of "collective imagination". And that politicians and intellectuals of all stripers were "charmed by the market". Besley and Hennessy argue that is it hard to imagine a better case of "wishful thinking combined with hubris."
One can agree with this last statement, and still find the culprit not in the charm of the market, but the policies of the government. It was the idea not of perfect markets but of perfected monetary policy, fiscal policy and regulation that represents "wishful thinking combined with hubris." And what produces such a "failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole" is, as Hayek argued of an earlier failure of collective imagination, the scientism that has a stranglehold on the policy sciences (including most importantly economics).
I received an email this morning from the Briitish economist, Geoffrey Hodgson (and editor of the Journal of Institutional Economics) that discusses and provides an alternative letter put together by leading heterodox economists in the UK that puts the blame for the collective failure on the education of economists. Their position can be summed up as: "Mathematical technique should not dominate real-world substance." The educational training of economists is too narrow. I am quite sympathetic to these criticisms, but then they go too far in my opinion when they indict "universal rationality" and "efficient market hypothesis" as the main culprits. This just reinforces the idea that it was politicians being "charmed by the market" rather than alignment of scientism and statism that caused the crisis.
Besley and Hennessy letter Download 3e3b6ca8-7a08-11de-b86f-00144feabdc0
Hodgson et. al. letter Download Queen2009b
What do you make of this discussion and will it result in change in economic education and economic policy that could be judged desirable by Austrian economists?