THE global financial crisis was caused by the actions of bankers and other players in the financial markets. But they operated in a regulatory framework set by governments. And both governments and bankers took advice from economists.
So, what part did economists play in the global catastrophe? How did they get it so wrong?
It's not reasonable to expect economists to have predicted the size and timing of the crisis with any accuracy. After all, seismologists don't predict the time and place of earthquakes.
But it is reasonable to expect economists to be aware that the financial system was on an unsustainable path that could lead to calamity and to have warned about it. With a few honourable exceptions, they failed to warn us. Why?
Well, if I were to judge the motives of economists the way they judge the motives of the rest of us - that is, to look for the monetary incentive, since most economists are oblivious to the existence of non-monetary motives - I'd say they found it more profitable to facilitate the boom than to warn about it.
The plain truth is that the bankers and other financial players wanted to do all the deals they did and make all the money they did. They certainly didn't want governments and regulators to inhibit their freedom to do those deals.
So they spent a lot of money lobbying governments and regulators, no doubt making generous contributions to campaign funds. They were generous in the consultancy fees they offered to academics who were saying the sort of things they wanted to hear.
But, though economists keep forgetting it, man doesn't live by bread alone. And I doubt that financial gain is the main reason they failed to blow the whistle.
Most people want the security of knowing they're acting according to a plan, a vision of how things fit together, rather than just stumbling around in the dark. They want beliefs about how the world works, and they want those beliefs to be consistent with the beliefs of the people around them. They want to believe they're doing something worthy, not just scrabbling for a buck.
Hence the surprising influence of theories, models, ideology; call it what you will. That's as true of bankers, politicians and regulators as it is of economists. As Keynes famously put it: ''Practical men are usually the slaves of some defunct economist.''
So, why did so few see the train wreck coming? Because they all believed in a theory that said train wrecks couldn't happen. To go against that theory took strength of intellect and moral courage few people possessed.
What brought the economists undone was the foundational assumption of their ''neo-classical'' model - that people always act ''rationally'', that is, with well-informed, careful calculation - and the more recent elaboration of the neo-classical model as it applies to financial markets, the ''efficient-markets hypothesis''.
This hypothesis holds that financial markets always accurately price financial assets (such as shares and bonds) given all the publicly available information. This implies that asset price bubbles can't exist and sudden crashes don't happen. It also implies that markets are perfectly self-correcting, that government interference in markets is unnecessary and probably damaging and, indeed, that the business cycle doesn't exist.
Now, if you're not an economist you're entitled to be incredulous at this point. Major sharemarket crashes have happened many times, going right back to the South Sea Bubble of the 1700s. The Great Depression and many subsequent severe recessions leave no doubt that markets can get themselves into serious trouble and that the economy moves in cycles of boom and bust. Indeed, a whole branch of economics - macro-economics - is devoted to trying to counter the cycle.
So, how could so many economists put their faith in a model so at variance with the real world? Well, leaving aside the small fact that the model promoted conclusions convenient to the financial markets' pocketbooks, ''the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth,'' to quote Nobel Prize-winning economist Paul Krugman.
Academic economists were seduced by the vision of a perfect, frictionless market system. They stuck with those hopelessly unrealistic assumptions because they were needed to make the maths work - to allow the academics to make economics more scientific, ''formal'' and ''rigorous'' by doing their analysis using equations rather than words. Economist practitioners tended to go along with the academic mainstream because of their desire to be orthodox rather than heretical.
Professor Geoff Harcourt and nine other British and Australian academics wrote to the Queen last month, saying they agreed with the complaints of three Nobel Prize winners - Ronald Coase, Milton Friedman and Wassily Leontief - that ''economics has turned virtually into a branch of applied mathematics, and has become detached from real-world institutions and events''.
''What has been scarce,'' they wrote, ''is a professional wisdom informed by a rich knowledge of psychology, institutional structures and historical precedents.''
