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.