Notice to the young generation of researchers in economics

8-April 11, was organized in Cambridge, England, the inaugural conference of the Inet (Institute for new economic thinking, created by George Soros, in response to the recent economic crisis.) It brought together many economists from all sides - in particular three Nobel laureates, George Akerlof, James Mirrlees and Joseph Stiglitz, whose work on asymmetric information and moral hazard problems have changed the discipline - and philosophers, anthropologists, mathematicians and historians. Some of the basic concepts used in economic modelling were presented on the table.

Rational expectations, which stipulate that agents are not expectations systematically biased and make the assumption that economic actors use all information at their disposal, have been at the centre of a lively debate. There are already many models that do not use the rational expectations as cornerstone. Their logic is often anchored in behavioural models described by psychologists (e.g. investors are too "optimistic" on their portfolios during certain periods to a rational assessment of the anticipated yields). The famous "animal spirits" Keynes found a new life in the recent work of George Akerlof and Robert Shiller ("the animal spirits.) ("How the psychological forces lead the finance and economy", Pearson, 2009). Danny Kahneman, a psychologist who received the Nobel Prize in economics in 2002, highlighted of fundamental bias in the process of decision of "homo economicus".

Other research releasing the hypothesis of rational expectations are based on the theory of information and studying the effect of the limits on the ability of humans to analyze the information. In particular, such a program of research on "rational inattention" was initiated by Christopher Sims, Professor at Princeton.

The role of the economic history and analyses of historical data was often mentioned as an element key, too little developed in English and American education curricula in economics. Thus the major analyses of the depression of the 1930s (from that of Milton Friedman and Anna Schwartz in the work of Ben Bernanke, current boss of the Fed, through those of the Economist historian Barry Eichengreen) are vital to understanding the current economic crisis.

But which became increasingly more clearly in the Conference is a well known simple truth of academics and researchers and struggling to find its way to an audience wider. Research in economics are far from being a monolithic block which would be of the usual dogmatic message: markets are efficient and self-adjusting. In fact, a large part of research in economics of ten or twenty last years focused on informational problems and imperfections of markets.

But, in my view, we have two problems. One has been very well described by Adair Turner, who is the head of the financial and banking regulatory agency UK (FSA): economic decision-makers, be they politicians, Bank economists, investors or regulators, tend to focus on a simplified version of an economic doctrine of the time, is slyly at the kill in the bud any non-Orthodox issue. Striking example given by Turner is the IMF report on the financial stability of 2006 that could call into question the fact that the securitization was necessarily good for financial stability, since it was distributing the risk in many institutions (sacrosanct principle of diversification of risk without thinking about the problem of moral hazard, which reduced the incentive for banks to check the quality of their assets). The second problem is that current models taking into account market imperfections are still too qualitative. They are not sophisticated enough to be truly quantified and used in a robust manner in economic policy decisions. Notice to the young generation of researchers in economics!