This edition continues Prospect‘s ongoing dissection of the causes and consequences of the financial meltdown. In addition to Geoff Mulgan’s cover story, “After Capitalism,” we have two big pieces on economics: one from Anatole Kaletsky on the failure of economic models (not to mention the economic modellers who built them) and another from Gerry Holtham on what the G20 must do next.
Kaletsky’s piece picks over two economic theories in particular—theories which, although seemingly discredited, still hold great sway over our business schools and investment banks. These are the rational expectations theory, and the efficient markets hypothesis. These theories may not have gone unchallenged in the past in Ivy League seminar rooms and central bank boardrooms, but they formed important building blocks in the theoretical understanding of the global economy which lead to policy mistakes contributing to the current crisis. Equally importantly, they were taught in all graduate level macroeconomics classes. Kaletsky charts their influence, and lays the blame for the crisis squarely on the shoulders of academic economists who promoted them. In response, only an economist’s reformation will do.
But what of the future? In our lead Opinion pice this month, Gerry Holtham isn’t much cheerier on the economic understanding of the current moment leading up to the G20. The problem? No one has yet grasped the type of global coordinated fiscal stimulus needed to put the world economy back on its feet. Uncomfortably, this mean certain countries—especially those prudent nations not as at risk of having their currency sink (i.e. not Britain)—shouldering much more of the burden of reflation. Equally, it means a much greater effort to reform the IMF, with less power for Europe and the US, reflecting their relatively smaller role in the current international set-up. How to mark this change? Holtham thinks moving the IMF itself would help. If the EU would act as its largest member, it could, within the rules, claim its HQ. Bratislava, he thinks, would work nicely.