Rethinking Economics in a Changed World

• Author: Camilla Andersen
• Position: a Senior Editor on the staff of Finance & Development.

TWO AND A HALF years after the collapse of Lehman Brothers triggered the worst global financial crisis since the 1930s, some of the biggest names in economics came together at the invitation of the IMF to discuss what we have learned—and what we need to do differently.

The crisis was a wake-up call for theorists and policymakers. Economic models and policy tools—and how they are used—must adapt to changes in the global economic and financial system.

“The crisis has clearly shown both the limits of markets and the limits of government intervention. It is time to take stock and draw a first set of lessons,” Olivier Blanchard, the IMF’s Chief Economist, told more than 300 academics, journalists, and civil society activists who recently gathered at IMF headquarters in Washington, D.C., for the conference.

F&D interviewed three Nobel laureates in economics who participated in the conference: Professor Michael Spence of Stanford University, Professor Joseph Stiglitz of Columbia University, and Robert Solow, professor emeritus at the Massachusetts Institute of Technology.

Here is what they had to say on some of the most hotly debated topics in economics today.

F&D: What lessons have we learned from the crisis?

Stiglitz: At a very high level of analysis there is a realization that markets are not necessarily efficient and stable on their own. Many economists had believed that to be the case before the crisis.

Another widespread belief was that keeping inflation low and stable was necessary, and almost sufficient, for maintaining high growth and good economic performance. Clearly, that is wrong as well.

But perhaps the most striking lesson—not so much for policy but for economic analysis—is that the models that were used before the crisis neither predicted the crisis nor gave us a framework for responding to the crisis when it happened.

So in a sense, for an economist, this is a very exciting time, because it means there’s a lot of work to be done.

F&D: How has the crisis changed the thinking on monetary policy?

Spence: My takeaway of the general discussion is that inflation continues to be an important policy target, but it can’t be the exclusive focus of central banks.

If one is worried about the stability of systems as complex as our financial systems, focusing on inflation, I think, is quite clearly not enough.

Solow: The simple dependence on conventional monetary policy, not to be abandoned of course, seems to have come to its limits, and one has to move on even to direct fiscal policy or to innovative ways of dealing with money and credit.

An interesting idea with direct policy...