The recent economic meltdown was at root not a failure of character or competence, but a failure of ideas.
Behind the cupidity of bankers, the weakness of regulators and the myopia of macro-policy stood a set of dominant ideas about the proper relationship between the state and the market. This amounted to two propositions: that markets–and in this context financial markets–were efficiently self-regulating, and that government intervention in the macro-economy should be confined to the single point of maintaining the value of money. Provided these two conditions were satisfied, a market economy would be cyclically stable and stay close to its production frontier. Collapses of the kind we have just experienced were off the radar screen. Not surprisingly, the chief intellectual casualty of the Great Recession has been this benign view of markets. As George Soros put it, “The crisis was generated by the system itself” (New York Review of Books, 4 December 2008). The economic crisis was thus also a crisis in economics. Soros has endowed a new foundation, the Institute for New Economic Thinking (INET), which held its inaugural meeting at King’s College, Cambridge, in early April.