the crisis and the culpability of macroeconomic theory
It is the ideas at the heart of modern macroeconomics which provided the intellectual justification of the economic policies of the past 10 to 15 years. They bear a direct responsibility for the serious nature of the crash.
The dominant paradigm in macroeconomic theory over the past 30 years has been that of rational agents making optimal decisions under the assumption that they form their expectations about the future rationally - the rational agent using rational expectations, or RARE for short.
The specific problem is the way in which RARE economics deals with risk and uncertainty. It is this which is at the root of the crises, both for the discipline of economics and, much more importantly, for the economy itself.
RARE macroeconomics provided the intellectual underpinning for a world in which situations involving risk led to it being systematically underestimated, and in which situations of genuine uncertainty were not recognized for what they were.
It is only by ignoring completely any aspect of RARE macroeconomic theory that the authorities managed to avoid a crisis on the scale of the Great Depression. Effectively, they threw the last 30 years of mainstream macro into the trash can.
It surely now is time to scrap once and for all this RARE view of the world. Central banks should ditch their DSGE models. Funding agencies should no longer support RARE proposals.
These arguments are developed in a paper written for the British Academy of Social Sciences and available on my website http://www.paulormerod.com