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New Economic Theory?

I've had this question the last few weeks: will this crisis give birth to some new way of thinking about economics?

The Great Depression begat Keynesianism, the crisis of the 1970s/1980s gave broader support to Friedmanism. So, will this crisis give birth to some new theory? Or are we just going to keep refining the big ideas we already have.

I had a great talk with Daron Acemoglu, a big-shot young economist about this. He says that yes, certainly, there will likely be radical new ideas.

He says that in the past few months we've learned that many of the fundamental models of economics are wrong. We've learned, for example, that it's impossible to think of a "firm" (one of the core actors in any economic model) as a unified thing. Bear Stearns and Lehman Brothers were firms. By economic theory that means they don't do things like, um, pursue short term profits that can destroy the firm.

So, he says, we'll have to develop a more complex view, one that allows for a firm to be made up of lots of individual actors with their own—sometimes catastrophically contrary—incentives and goals.

He also says the pure models of Keynes or Friedman or the Austrian School have proven insufficient to explain the current mess.

Acemoglu says we have no idea what that new theory will be or if there will be many. But we can know, for sure, that dramatic changes are on the way.