Mark Tansey, "The Key" (1984)
The usual argument is that mainstream economists, because they do science, hold the key to unlocking the gates of economic knowledge. Therefore, all of other economic theories—nonmainstream, heterodox economics—can be ignored or eliminated from the discipline.
Well, to judge by the recent 4th Nobel Laureate Meeting in Lindau, Germany, mainstream economics is in a pretty sorry state.
Here’s Mark Thoma:
Surprisingly, the financial crisis did not receive much attention at the conference. Many of the sessions on macroeconomics and finance didn’t mention it at all, and when it was finally discussed, the reasons cited for the financial meltdown were all over the map.
It was the banks, the Fed, too much regulation, too little regulation, Fannie and Freddie, moral hazard from too-big-to-fail banks, bad and intentionally misleading accounting, irrational exuberance, faulty models, and the ratings agencies. In addition, factors I view as important contributors to the crisis, such as the conditions that allowed troublesome runs on the shadow banking system after regulators let Lehman fail, were hardly mentioned.
Macroeconomic models have not fared well in recent years – the models didn’t predict the financial crisis and gave little guidance to policymakers, and I was anxious to hear the laureates discuss what macroeconomists need to do to fix them. So I found the lack of consensus on what caused the crisis distressing. If the very best economists in the profession cannot come to anything close to agreement about why the crisis happened almost four years after the recession began, how can we possibly address the problems?
And Olaf Storbeck:
It takes a Nobel laureate to talk about banks, hedge funds and financial intermediation for half an hour without even mentioning the current financial crisis. Myron Scholes, the creator of the Black-Scholes formula who received the prize in 1997, accomplished this amazing achievement last week in Lindau, Germany.
Scholes wasn’t the only top-notch economist at the 4th meeting of economic Nobel laureates who apparently had not realised that the world is enduring the worst financial and economic crisis since the great depression.
Robert Aumann even described the current state of the world economy as “pretty good”. . .
Laureates who bothered to acknowledge the crisis gave rather contradictory advice. Frequently, they did it in a way that wasn’t really digestible even for most of the 360 young economists who flocked to Lindau from all over the world.
A telling moment was the lecture of Roger Myerson. The 2007 laureate presented a theoretical model on moral hazard in the financial industry that yields some interesting conclusions. However, his lecture was so technical that Myerson lost most of his audience very quickly. After about 20 minutes, he cracked a joke but only a handful of people of the 300 people attending the speech were laughing.
The conclusion Marcela Velez, a journalist from Chile, tweeted on Twitter at the end of the meeting was head on:
“We are in huge trouble, we need reforms tons of them, we don’t know what or how to implement them.”