Just as Fred Goodwin and Gordon Brown are finding it hard to say 'Sorry, we got it wrong', so are a lot of academic economists. Privately, many top macro guys (and gals) may be thinking to themselves "Oops", but to admit in public that your life's work struggles to explain the biggest crisis in a century is a step too many for some.
One route is to keep tweaking the model till it seems to fit the facts. Another is to discard the conventional wisdom and adopt a new approach altogether. This is what Professor Willem Buiter seems to be advocating in an article, The unfortunate uselessness of most ’state of the art’ academic monetary economics
Buiter may never win the Nobel Prize in Economics, but he is usually thought-provoking (and sometimes wrong). In this piece, he is criticising complex dynamic macro models based on assumptions of market clearing, forward-looking behaviour by rational individuals, and - most importantly for the analysis of asset markets - a benign auctioneer at the end of time who ensures that speculative bubbles never get out of control. His answer seems to be that we should build in from the start market incompleteness and non linearities to model the positive feedback underlying financial instability.
It's not a new idea, but will it lead to a paradigm shift? Who knows? If there's one thing more difficult to predict than financial markets, it's changes in intellectual fashion.
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