The rebirth of true economics.

If the recession is remembered for anything but misery, it will be remembered for reinventing the nature of economics. It was announced on Tuesday that George Soros will start the Institute for New Economic Thought (INET).

The financial crisis exposed the failings of modern economics bogged down so much by mathematical models that it could no longer take account of reality. When policymakers and politicians looked to economists last year for advice, it proved futile. Economists could only conclude that our crisis was impossible because their theories say that the situation could not exist. The economists who believe in the vigorous use of orthodox mathematical models are from the 1980s. Their theories are in line with the Thatcher-Reagan ideals.

The first ideal is known as "rational expectations". This means that capitalist economies with competitive labour markets do not need to be interfered with by the government.

The second ideal is the notion of "efficient markets" which assumes that resources will always be allocated efficiently when the market is competitive.

Lastly, there was the belief that economics was no longer a descriptive study of human behaviour, but had to be expressed using algebraic formulae. If not, it was irrelevant.

These ideas could cover up income inequalities and huge bonuses in the city as vast impersonal scientific forces rather than being a political issue. This way of thinking prevents economists from accepting that the markets and the world are by its very nature, unpredictable and not consistent.

But now, with INET, there is an opportunity to revert back to original thinking that explains reality to offer solutions. INET is not shackled to the confines of mathematical models. The great economists of the 20th century, Keynes and Adam Smith did not speak only through complicated maths, but were still able to uncover some of the greatest theories. INET will bring back this thinking.

(Précis from The Times, Wed 28th Oct 09)