The Conventional Wisdom

The introduction to the anomalies column in the Journal of Economic Perspectives habitually begins with the following statement: Economics can be distinguished from other social sciences by the belief that most (all?) behaviour can be explained by assuming that rational agents with stable, well-defined preferences interact in markets that (eventually) clear. An empirical result qualifies as an anomaly if it is difficult to ‘rationalize’ or if implausible assumptions are necessary to explain it within the paradigm. On this basis, much of the behaviour that led up to the financial crisis and the events that followed could be judged an anomaly of one sort or another. The near complete failure of the macroeconomics profession to predict the coming of the great financial crisis of our time, or the persistence and severity of the depression it produced, has forced macroeconomists, whether they work in academia, central banks and other official sector institutions, or the private sector, to face up to an uncomfortable truth: the analytical framework which the vast majority of us relied upon to think about the world is, at the very least, deficient in some way or may be fundamentally flawed — at least when it comes to thinking about financial stability.