I was extremely happy to read this article from the Wall Street Journal that discusses, in some depth, the crisis in mainstream Economics that has occurred because of the ongoing crash. At the outset, the nature of this academic crisis - a theoretical / philosophical crisis - is described in these words:
For decades, most economists, including the world's most powerful central bankers, have supposed that people are rational enough, and the working of markets smooth enough, that the whole economy can be reduced to a handful of equations. They assemble the equations into mathematical models that attempt to mimic the behavior of the economy. From Washington to Frankfurt to Tokyo, the models inform crucial decisions about everything from the right level of interest rates to how to regulate banks.
In the wake of a financial crisis and punishing recession that the models failed to capture, a growing number of economists are beginning to question the intellectual foundations on which the models are built.
Unfortunately, the "new ideas" that are discussed are essentially the same old stuff and nonsense, only this time being paraded around using supercomputers. This is one of the new ideas presented:
Create a richly complex, computer-based simulation of the economy like those scientists use to model weather patterns, epidemics and traffic. Given enough computing power, such "agent-based" models can include millions of individual players, who don't have to be rational or agree with one another.
So, if you are a student and enter mainstream Economics, this is the direction in which you will head. It seems "scientific" - but is actually an intellectual cul-de-sac.
The WSJ article above says that a great deal of financial support to those economists who develop "new ways to model the economy" is coming from the Institute for New Economic Thinking, funded by the billionaire George Soros. Fifty million dollars has been donated to this institute by Soros, and they have already funded 27 "new models" that are being developed.
But, is this "new thinking"? And do we really need new thinking at all?
For the student of Economics looking for real, valid knowledge, the only other way to look at things, other than this mainstream modeling approach, is the "tradition" of the Austrian School. The word "tradition" needs to be stressed - because this is most definitely not "new thinking." The unique approach to this vital science that has characterised this school of thought begins with Carl Menger (1871). In the last century, these ideas were fully developed by Ludwig von Mises - and, following him, by his two most illustrious students: the Nobel laureate Friedrich Hayek, who attended his Vienna seminars; and Murray Rothbard, who attended his seminars in New York. The Mises Institute (website here) is the best place to visit if you wish to study Austrian Economics.
The most important difference between Austrian Economics and the mainstream "modeling" approach is that the Austrians reject mathematics entirely. Their Economics is "logical." Its basic element is the "acting individual" - and not the collective. Indeed, what Austrian Economics proves beyond doubt is that nothing about The Market Economy can be quantitatively predicted, and that no government intervention with its working can be "rational." Just as central economic planning fails, so does Keynesian central banking. So, indeed, does centralised legislation - which is the democratic way by which the modern State intervenes in markets. If you acquire knowledge in Austrian Economics, you will inevitably proceed into other areas - including history, political philosophy, and law. You will gradually develop an integrated world view. You will be possessed of a "social philosophy."
Recommended read: My earlier post discussing Austrian methodology - thereby showing why the standard demand-and-supply diagram of the mainstream is a wrong way to teach the subject.