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How could economists be so wrong about the economy?

They could be excused their failure to see the Great Recession coming if the crisis were something like Covid-19, when a new pathogen suddenly emerged out of China. As long ago as 1995, Laurie Garrett declared that such a plague was inevitable (Garrett 1995). But predicting when the pathogen would emerge, let alone what its characteristics would be, was clearly impossible. However, the epicentre of the Great Recession was the US financial system itself: the crisis came from inside the economy, rather than from outside. Surely there were warning signs? As Queen Elizabeth herself put it when she attended a briefing at the London School of Economics in 2008, ‘If these things were so large, how come everyone missed them?’ (Greenhill 2008).

Not all economists did: there were some who warned that a crisis was not merely likely, but imminent. The Dutch economist Dirk Bezemer identified a dozen, of whom I was one (Bezemer 2009a, 2009b, 2010; Keen 1995, 2007). Though these economists came from disparate backgrounds, Bezemer noted that they had one negative characteristic in common: ‘no one predicted the crisis on the basis of a neo-classical framework’ (Bezemer 2010, p. 678).

One would expect that the failure by economists to anticipate the biggest economic event of the post-Second World War world would cause economics to change dramatically. But it hasn’t. What Bezemer called ‘Neoclassical economics’ was the dominant approach to modelling the economy before the GFC, and it has remained dominant since.¹

The failure of economics to reform itself after such a profound empirical failure has led to strong criticism of economics from within – even by economists who have been awarded the Nobel Prize in Economics. Robert Solow, the 1987 recipient, told a United States Congressional Hearing into economics in 2010 that:

We are in desperate need of jobs, and the approach to macroeconomics that dominates the elite universities of the country and many central banks and other influential policy circles, that approach seems to have essentially nothing to say about the problem. (Solow 2010, p. 12)