A fertile moment for economists

The Telegraph's Edmund Conway writes about the failure of contemporary economic thought and of "excitement" amongst the ranks of the dismal set that a new era is dawning.

Following its failure to fix the current mess, economics has tumbled into a full-blown existential crisis. The fall has been something to behold. Not so long ago, the discipline seemed omnipotent: if you wanted to fix anything from environmental ruin to welfare policy, there was only one solution: call in an economist.

But late last year, Alan Greenspan, the former Federal Reserve chief and high priest of capitalism, was forced to admit in a Congressional hearing that he had "found a flaw" in the foundations of his economic understanding. Nice euphemism.
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But in a strange way, the by-product of this financial collapse has been to free economics of this burden. In the corridors of the Bank of England and Treasury, there is a distinct whiff of excitement. For the first time in decades, economists have been able to throw away their textbooks and go back to first principles; to exhume once-sacrilegious figures such as John Maynard Keynes or Friedrich Hayek. It is unsettling, no doubt, but this is a fertile moment, an opportunity from which may be born a better model of how to run an economy.

We are already seeing the consequences. In the future, markets will be less free; there will be more regulation; the state will be more interventionist. Taxes may become more redistributive. But from the ashes of the crisis may come a new understanding of how to run an economy that is both more successful, and more stable, than the failed models of the past.

Then again, maybe if the world's money were made sound again and there were some reasonable limits on credit creation, economists could go back to doing what they were doing for the better part of the last few centuries and meet with much more success.