Awful shocks II

The 2007-08 financial crisis should have major consequences for economics and economic theory in particular. Propelled by this fierce crisis, economists should now finally see that they have propagated a completely wrong perspective on the economy and society around us.

Economists teach that the world is essentially open and that markets absorb all information that is relevant to the commodities traded in those markets. Furthermore, economic theories are not concerned with such trivialities as trust and the costs of maintaining a trustworthy institutional setting for markets. These theories assume away all costs of making transactions and the institutions to support markets. How wrong these theories are!!

The financial crisis shows that maintaining trust is of supreme importance and that without sufficient trust there is simply no trade possible. The freezing of the credit market and the collapse of the stock markets worldwide show this clearly.

So, what can economists contribute here more than some silly platitudes like the ones that I have stated them in the previous lines? Not much, to be honest. we need a new economics. As the depression-era of the 1930s brought us the Keynesian revolution, we hopefully will see a major adjustment of economic theorizing in response to the current crisis. We really need it...

A new economic paradigm should emerge and address the main questions of what exactly (economic) trust is and how we support it. This should lead to an institutional theory of economic behavior that goes beyond the limiting market view and individual selfishness as the almighty guide in economic decision making.