If you want to get a little better understanding of how economists could have failed the world so miserably in recent years, missing what was the largest financial bubble in history as it inflated under their noses, have a look at this Wall Street Journal story about their latest efforts at introspection and how new and revised “models” of the economy and its actors might prevent the next catastrophe. Yeah, right.

Economists’ Grail: A Post-Crash Model

How can we understand a world that has proven far more complex than the most advanced economic models assumed?

The question is far from academic. 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. Researchers, some of whom spent years on the academic margins, are offering up a barrage of ideas that they hope could form the building blocks of a new paradigm.

“We’re in the ‘let a thousand flowers bloom’ stage,” says Robert Johnson, president of the Institute for New Economic Thinking, launched last year with $50 million from financier George Soros, a big donor to liberal causes who has long been a vocal critic of mainstream economics. The institute so far has approved funding for more than 27 projects, including efforts by Messrs. Farmer and Tuckett aimed at developing new ways to model the economy.

Well, maybe, “let a thousand economists flounder” might be a better characterization…

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