Why have economists failed to adjust their theories about markets?by Philip Ball / December 19, 2012 / Leave a comment
Last Thursday, the Queen visited the Bank of England. It has been widely claimed that during this event she was “finally” given a response to her question in 2008 about why no one saw the financial crisis coming. Such reporting exemplifies all that is wrong about economic discourse today. Newspapers blandly reported the explanatory remarks offered to the Queen by one of the Bank’s economists, Sujit Kapadia, who picked up on her pertinent enquiry four years ago. Not one report examined the real content of Kapadia’s comments, let alone asked if it was correct.
As a result, it went totally unremarked that what Kapadia said is a shocking indictment of economic theory. Whether by good luck or good planning, Her Majesty received advice from a rare economist who has managed to escape the brainwashing of economic orthodoxy, is prepared to rethink some of the field’s deeply held—and misconceived—notions, and is looking for fresh inspiration outside the narrow boundaries of the mainstream tradition.
Kapadia’s comments focused on three issues: that economic crashes, like earthquakes, are inherently unpredictable; that “because the economy was stable there was [a] growing complacency”; and that “people didn’t realise just how interconnected the system had become.”
The newspapers seemed happy with the Queen’s interpretation of the charge of complacency: “people got a bit lax.” But that is not exactly what Kapadia said, and it is dangerously misleading to propagate the idea that the problems began just because folks were a little slapdash. An earlier response to the Queen’s question from the British Academy in 2009 said that, on the contrary, “Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well.”
“The failure, the Academy went on, was to see how collectively this added up to a series of interconnected imbalances… Individual risks may rightly have been viewed as small, but the risk to the system as a whole was vast.” In other words, the problem was not about individual performance—it was systemic. And Kapadia appreciates this, as his comments on interconnectivity reveal. A part of Kapadia’s own research…