Foundation for European Economic Development

 Bank Collapse

Revitalizing Economics After the Crash

On 13 November 2008, FEED launched a new appeal for funds. We asked: will the Great Crash of 2008 make economics less a branch of applied mathematics and a more relevant and useful discipline for solving real-world problems?

Nothing is inevitable. The revitalization of economics will depend on the efforts of organizations like FEED. We should grasp the moment. We need to explain to opinion leaders that meanstream economics is failing not only its students but also the global community. Its limitations are even more clear in these times of unprecedented economic crises.

Thankfully, a number of donations have already been received or promised. But we still need your help if we are going to make an impact in these turbulent times.


Click  HERE  for the best explanation of the financial crisis!

Mistaking Mathematical Beauty for Economic Truth

Please sign our plea HERE.

This plea received over 2000 signatures in little over a month after its launch in September 2009. This was already higher than all earlier appeals for the reform of economics, since and including the June 2000 petition by students at the École Normale Supérieure (France's premier institution of higher learning) protesting against the excessive mathematical formalisation of their curriculum and its neglect of economic realities. That petition received 1545 signatures and prompted the French Minister of Education to set up formal enquiry.

Paul Krugman joins a line of Nobel Laureates, including Ronald Coase, Wassily Leontief and Milton Friedman, who have argued that economists has become largely transformed into a branch of applied mathematics, with inadequate contact with the real world. On the online website, Krugman’s words are supported by Nobel Laureate Douglass North.

Mathematics is very important and useful, but it should be a servant to economics, and not its master. Real-world substance should prevail over mathematical technique. To help avoid further failings, governments in the USA, Europe and elsewhere should look into the state of economics and the way economics is taught.

Of the 2300-plus signatories of the current online appeal, 62% have PhDs, 20% are from the USA, and 10% from the UK.

As well as Nobel Laureate Douglass North, other prominent signatories include leading international academics and researchers such as Masahiko Aoki, Tony Aspromourgos, Michael Bernstein, Margaret Blair, Mark Blaug, Daniel Bromley, John Cantwell, Ha-Joon Chang, Victoria Chick, Keith Cowling, Kurt Dopfer, Gregory Dow, Ronald Dore, Giovani Dosi, Jean-Pierre Dupuy, Peter Earl, Jan Fagerberg, Olivier Favereau, Duncan Foley, John Foster, Geoffrey Harcourt, Arnold Heertje, Joseph Henrich, Stuart Holland, Will Hutton, Peter Kellner, Alan Kirman, Arjo Klamer, Mark Lavoie, Richard Lipsey, Brian Loasby, Mark Lutz, Ronald Martin, William McKelvey, Deirdre McCloskey, Stanley Metcalfe, Julie Nelson, Richard Norgaard, Luigi Pasinetti, Peter Richerson, Erik Reinert, Barkley Rosser, Kurt Rothschild, Bridget Rosewell, Robert Rowthorn, Malcolm Rutherford, Paolo Saviotti, Malcolm Sawyer, Esther-Mirjam Sent, Mark Setterfield, Gerald Silverberg, Laurence Shute, Robert Skidelsky, Peter Skott, Ronald Stanfield, Arthur Stinchcombe, Thomas Weisskopf, Sidney Winter and Stefano Zamagni.


 Signatories of this plea support the following words by Nobel Laureate Paul Krugman:

"Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy ... the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth ... economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations ... Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets – especially financial markets – that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation. ... When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly." (New York Times, September 2nd, 2009.)

See the full article by Nobel Laureate Paul Krugman HERE.

See also Krugman's later reflections on the state of the economics profession HERE.

The 2012 "Manifesto for Economic Sense"

Click HERE.

Harvard Economics Students Complain of Teaching Bias

Click HERE.

The Profession and the Crisis

"a bleak picture of the role of economists in the crisis"

Click HERE.

John Nye (George Mason University) argues that:

Mathematics has hijacked economic theory

"Economics has become boring ... The only way you can publish a non-technical article is to pray for a very long time"

Click HERE.

Gideon Rachman says in the Financial Times:

"Sweep economists off their throne"

He argues that economists should be less concerned about making predictions.

Click HERE.

Philip Mirowski on

"The Great Mortification: Economists' Responses to the Crisis of 2007-(and Counting)"

Click HERE.

The Crisis Spreads to the Eurozone

Click HERE.

Alan Kirman on "Economic Theory and the Crisis"

Click HERE.

 Queen Quizzes Economist on the Credit Crunch ...

During a visit to the London School of Economics on 5 November 2008 Queen Elizabeth II queried Professor Luis Garciano on the size of the debt problem that led to the credit crunch: “If these things were so large, how come everyone missed them?” Pressing her point, she continued: “Why did nobody notice it?” Professor Garciano replied: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.” The Queen described it as “Awful”.

Source:    (accessed 2 December 2008).

... how two prominent mainstream economists have responded:

A group of leading mainstream economists within the British Academy convened a forum on 17 June 2009 to debate the Queen's query - why no one had predicted the credit crunch. A letter summarising their deliberations is signed by Professors Tim Besley and Peter Hennessy. Clich HERE for the letter.

The letter mentions that "some of the best mathematical minds" were involved in risk management but "they frequently lost sight of the bigger picture". Many believed that risks had been safely dispersed and "virtually removed" through "an array of novel financial instruments ... It is difficult to recall a greater example of wishful thinking combined with hubris. ... And politicians of all types were charmed by the market."

In summary, they conclude, "the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."

... and why ten dissident British economists think that the Besley-Hennessy response is inadequate:

Following similar complaints by Nobel Laureates Ronald Coase, Wassily Leontief and Milton Friedman, the ten economists argue that economists has become largely transformed into a branch of applied mathematics, with little contact with the real world. The letter by Professors Besley and Hennessy does not consider how the preference for mathematical technique over real-world substance diverted many economists from looking at the whole picture.

The ten economists include professor at top universities, three Academicians of the Academy of Social Sciences, academic journal editors, a former member of the Monopolies and Mergers Commission and the Chief Economic Advisor to the Greater London Authority.

The ten economists uphold that the narrow training of economists – which concentrates on mathematical techniques and the building of empirically uncontrolled formal models – has been a major reason for the failure of the economics profession to give adequate warnings of the economic crises in 2007 and 2008.

The ten signatories also point out that while Professors Besley and Hennessy complain that economists have become overly ‘charmed by the market’, they mention neither the highly questionable belief in universal ‘rationality’ nor the ‘efficient markets hypothesis’, which are both widely taught and promoted by mainstream economists.

The ten economists call for a broader training of economists, involving allied disciplines such as psychology and economic history, as well as mathematics.

For the names of the ten signatories and the text of their letter to the Queen click HERE.


For a critique of the 10-signatory letter to the Queen by Gilles Saint-Paul (Toulouse School of Economics)

Click HERE.


Another response by Timothy J. Sinclair (University of Warwick):

"The Queen and the Perfect Bicycle"

Click HERE.

Explaining the slump:

Keynes's liquidity theory versus the efficient markets hypothesis

For an analysis by Paul Davidson click HERE.

Where is the dream team of economists to tackle the slump?

"There is no shortage of stars of yesteryear but economics today is down a blind alley"

For a Guardian article by FEED Patron Larry Elliott click HERE.

Goodbye, Homo Economicus

by Anatole Kaletsky, former Economics Editor of the Times:

"Economics today is a discipline that must either die or undergo a paradigm shift – to make itself both more broadminded, and more modest. It must broaden its horizons to recognise the insights of other social sciences and historical studies and it must return to its roots."

For the article in Prospect click HERE.

The Formula that Failed

A brilliant mathematical economist named David X. Li devised a mathematical formula that helped hedge funds and others to put numbers on complex interconnected risks. Unfortunately his formula relies to some degree on efficient market valuation and ignores radical uncertainty. In the run-up to the crash it went wildly wrong. For the full story on how mathematics misled the markets click HERE.

UK Financial Services Chairman Blames Academics - 
Among Others

In a widely-reported speech on 21 January 2009, the Chairman of the UK Financial Services Authority, Lord Adair Turner, pointed to the massive failure "shared by bankers, regulators, central banks, finance ministers and academics across the world … to identify that the whole system was fraught with market wide, systemic risk."

But Lord Turner failed to give credit to academic economists like Richard S. Dale, Hyman Minsky and Nouriel Roubini, whose repeated warnings concerning the dangers inherent in a lightly-regulated financial system went unheeded by the majority of the economics profession.

A leading economics professor has attacked:

'The unfortunate uselessness of most "state of the art" academic monetary economics'

Professor Willem Buiter, Financial Times, 3 March 2009:

"the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding.  It was a privately and socially costly waste of time and other resources."

Read the full article  HERE.

'Ivory Tower Unswayed by Crashing Economy'

For a New York Times article of 4 March 2009 on the marginalization of heterodox economics click HERE.

'The Financial Crisis and the Systematic Failure of Academic Economics'

For this 2008 article by David Colander, Hans Foellmer, Armin Haas, Michael Goldberg, Katarina Juselius, Alan Kirman, Thomas Lux and Brigitte Sloth click HERE.

What many mainstream economists teach to their students -

And why you should donate to FEED:

"rational expectations is … a ubiquitous modeling technique used widely throughout economics. …  The concept of rational expectations asserts that outcomes do not differ systematically (i.e., regularly or predictably) from what people expected them to be. ...  In their efforts to forecast prices, investors comb all sources of information …"


Thomas J. Sargent (Professor of Economics at New York University) in The Concise Encyclopedia of Economics (accessed 8 December 2008).




Economists No Longer Read (Keynes)

We are all Keynesians again

A remarkable feature of the unprecedented financial crisis that erupted in September 2008 is the doctrinal shift among world leaders. The market is no longer seen as the solution to every problem. The state has to step in to save capitalism. The US Republican Party had been the champion of free markets and minimal state intervention, yet President George W. Bush became the exponent of a huge state bale-out of the banks with a massive extension of state ownership within the financial system.

Alan Greenspan, former chairman of the US Federal Reserve, belatedly declared that he had ‘made a mistake in presuming that the self-interest of organizations, specifically banks’ would protect ‘shareholders and equity in the firms’. He had ‘discovered a flaw in the model’ of liberalisation and self-regulation (Guardian, 24 October 2008).

All UK Prime Ministers and Chancellors of the Exchequer since Margaret Thatcher have promoted market liberalisation. As late as 8 November 2005 the then Chancellor Gordon Brown spoke to the Confederation of British Industry and explained his policy on financial regulation as ‘not just a light touch but a limited touch.’

Yet everything changed with the global financial crisis. Prime Minister Gordon Brown’s package of measures including partial state ownership of banks became the global model. On 19 October 2008 the Chancellor of the Exchequer Alistair Darling announced massive government spending to kick-start the British economy. He said that the economic thinking of John Maynard Keynes was coming back into vogue.

Who were the prophets of the financial mayhem of 2008? On 7 September 2006, Nouriel Roubini, an economics professor at New York University told International Monetary Fund economists that the US was facing a collapse in housing prices, sharply declining consumer confidence and a recession. Homeowners would default on mortgages, the mortgage-backed securities market would unravel and the global financial system would seize up. These developments could destroy hedge funds, investment banks and other major financial institutions. Economist Anirvan Banerji responded that Roubini’s predictions did not make use of mathematical models and dismissed his warnings as those of a habitual pessimist (New York Times, August 15, 2008).

In October 2008 the British sociologist Laurie Taylor asked listeners of his weekly BBC radio programme to find an economist who had predicted the 2008 credit crunch and financial crisis. The nominations were scrutinised carefully and most were rejected. On 15 October 2008 the radio host announced that the most prescient prophet of the outcome of international financial deregulation since 1980 was the relatively obscure British financial economist Richard S. Dale. In his book on International Banking Deregulation, Dale (1992) had argued that the entry of banks into speculation on securities has precipitated the 1929 crash, and that growing involvement of banks in securities activities resulting from incremental deregulation since 1980 might precipitate another financial collapse. Dale’s book received a mixed review in the Journal of Finance in 1993 and slipped off the citation rankings.

Hyman Minsky (1919-1996) got some credit too. In a series of papers, Minsky (1982, 1985, 1992) argued that capitalism has an inherent tendency to instability and crisis. The key destabilising mechanism is speculation upon growing debt. Minsky gave a number of warnings about the severe consequences of global financial deregulation after 1980. Although championed by Post Keynesians, Minsky’s ideas were never popular with the mainstream. Yet on 4 February 2008 the New Yorker noted that references to Minsky’s financial-instability hypothesis ‘have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting.’

But does anyone read Keynes?

Chancellors, bloggers, newspapers and magazines may have noticed the relevance of such economists as Keynes and Minsky for today, but have they been rediscovered in departments of economics in the most prestigious universities? I eagerly await any signs of such an awakening. In the meantime we may record the neglect into which even Keynes has fallen. I tried without success to find the work of Keynes or Minsky on any reading list available on the Web of any macroeconomics or compulsory economic theory course in any of the top universities in the world. Indeed, reading lists themselves are hard to find for any of the most prestigious courses in economics. Instead, there is ample evidence of student proficiency requirements in mathematics.

Turn to the most prestigious journals in economics. By searching leading journals that have been in existence since 1950, we can ascertain how many times the aforementioned authors were cited in each decade. Table 1 shows the results. Keynes remains the most highly cited of the four authors, but his visibility in leading journals has dropped dramatically in each decade. The overall picture in leading journals of economics is one of the dramatic fall in any the discussion of Keynes’ ideas, and a relative neglect of other authors who warned of the dangers of financial deregulation.

Table 1: Number of Articles or Reviews Citing Keynes, Minsky, Roubini and Dale in Leading Journals of Economics and Finance

Source: JSTOR.  2000-9 figures are estimated from extant results.

Journals used: American Economic Review, Econometrica, Economic Journal, Economica, Journal of Finance, Journal of Political Economy, Quarterly Journal of Economics, Review of Economic Studies, Review of Economics and Statistics.

The outsider may imagine that this is simply a matter of misjudgement or prejudice. Academic economists are simply citing the wrong people. Instead of citing Milton Friedman or Friedrich Hayek they should be referencing Keynes’ General Theory. Such a perception of what has gone wrong would be mistaken. By citation measures, Keynes’s classic antagonists do little better. Take Nobel Laureate Friedman: from 1950 he was cited by an average of only 344 articles or reviews per decade, in the same list of journals. Nobel Laureate Friedrich Hayek was cited by only 139 items per decade. Nobel Laureate Gerard Debreu, a mathematical economist and pioneer of general equilibrium theory, was cited by only 24 items per decade. Mainstream economists seem to have stopped citing anyone, except the most recent pioneers of mathematical technique.

The habit of ignoring past great economists is even defended by a professor at the University of Cambridge, in the homeland of Keynes. Partha Dasgupta (2002, p. 61) writes approvingly: 'You can emerge from your graduate studies in economics without having read any of the classics, or indeed, without having anything other than a vague notion of what the great thinkers of the past had written.'

How can economists learn from the past when they do not read or reference the great thinkers that tackled preceding crises? The works of Keynes and other great economists are now recognised as highly relevant by world leaders. But an adequate rehabilitation has yet to take place within economics itself. Instead of their blinkered obsession with mathematics, economists should look at economic history and the classic works in our discipline.

Geoff Hodgson



Dale, Richard S. (1992) International Banking Deregulation: The Great Banking Experiment (Oxford: Blackwell).

Dasgupta, Partha (2002) ‘Modern Economics and its Critics’, in Mäki, Uskali (ed.) (2002) Fact and Fiction in  Economics: Models, Realism and Social Construction (Cambridge: Cambridge University Press), pp. 57-89.

Minsky, Hyman P. (1982) ‘Finance and Profits: The Changing Nature of American Business Cycles’, in Hyman P. Minsky, Can ‘It’ Happen Again?: Essays in Instability and Finance. (Armonk, NY: M.E. Sharpe.)

Minsky, Hyman P. (1985) ‘The Financial Instability Hypothesis: A Restatement’, in Philip Arestis and Thanos Skouras (eds), Post Keynesian Economic Theory (Armonk, NY: M.E. Sharpe.)

Minsky, Hyman P. (1992) ‘The Financial Instability Hypothesis’, Jerome Levy Economics Institute Working Paper No. 74. Reprinted in Philip Arestis and Malcom C. Sawyer (eds), Handbook of Radical Political Economy (Aldershot: Edward Elgar).

Article Downloads

Click HERE for a November 2008 pamphlet by Will Hutton and Philippe Schneider: "The Failure of Market Failure".

Click HERE for an article by Ugo Pagano on "Anti-Crisis Policies in Knowledge-Intensive Economies".

These articles address the limitations of mainstream economics in dealing with current developments.