An important paper from David Colander, et al: “The Financial Crisis and the Systemic Failure of Academic Economics” (pdf).
The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.
From the paper:
The confinement of macroeconomics to models of stable states that are perturbed by limited external shocks and that neglect the intrinsic recurrent Boom-and-bust dynamics of our economic system is remarkable. After all, worldwide financial and economic crises are hardly new and they have had a tremendous impact beyond the immediate economic consequences of mass unemployment and hyper inflation. This is even more surprising, given the long academic legacy of earlier economists’ study of crisis phenomena, which can be found in the work of Walter Bagehot (1873), Axel Leijonhufvud (2000), Charles Kindleberger (1989), and Hyman Minsky (1986), to name a few prominent examples. This tradition, however, has been neglected and even suppressed.
Note well that the work of Friedrich Hayek, Roger Garrison, Steven Horwitz and other Hayekian macroeconomists on the dynamics of the boom-and-bust are neglected by Colander et al — one might even say their work has been suppressed. This is particularly significant given that Colander’s own macroeconomic work largely disregards the key elements driving outcomes in real-world markets identified by Hayek, Garrison, Horwitz, and other market process theorists — things like heterogenous, time consuming productive processes, i.e. capital goods in the real-world.