The Financial Crisis and the Systemic Failure of Academic Economics

A paper I have just been sent by a colleague seems to be highly germane and worth a read. Systemic failure indeed! It comes from a "one week of intense discussions within the working group on ‘Modeling of Financial Markets’ at the 98th Dahlem Workshop, 2008."  The abstract reads:

"The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models."

The corresponding author is from the University of Kiel, Department of Economics, Olshausenstraße 40 D-24118 Kiel.