In the aftermath of the global financial crisis, economists (and policymakers) are not just re-examining the age-old question of what the appropriate state-market balance should be, but also the economics discipline itself. The crisis was not just an economic crisis, it also precipitated a crisis in economics.
The neoclassical faith (and hubris) in free markets generally producing efficient and welfare-enhancing outcomes has been significantly eroded by the crisis. Policymakers would do well to adopt a more empirically-grounded and eclectic, and a less dogmatic and orthodox view of economics and its policy prescriptions. Context and history often matter more than the universalistic assumptions and prescriptions of standard economics.
This module takes an inter-disciplinary, practitioner-oriented perspective to study economics after the crisis and its policy implications. It aims to do this by integrating three conceptual paradigms. First, the course will examine the role of governments through the lens of market failures. Using case studies from a variety of domains, we look at the ways in which governments address the main market failures of monopoly power, externalities, asymmetric information and collective action problems. The role of the state in regulating, stabilising, enabling and legitimising markets will also be examined in detail to establish the principle that functioning markets require a greater degree of government activism than neoclassical economics has tended to acknowledge.
Second, through the lens of psychology and behavioural economics, the course will look at how economic agents “fail”. Instead of assuming that citizens are the rational, optimising, interest-maximising agents found in economics textbooks, behavioural economics starts with the more realistic assumption that people’s decisions are shaped more by their cognitive complications and limitations. Our rationality, self-control and self-interest are all bounded in ways that have important implications for the way governments craft policies, especially those intended to change behaviours. A growing body of research shows a number of situations in which individuals act in ways that run counter to the predictions of standard economics. We are affected by imperfect self-control, anchoring and framing, loss aversion, the availability bias, the saliency effect, the endowment effect, choice overload, and our poor grasp of probability. This segment of the course will also use a variety of policy examples to show how policymakers can harness the insights of behavioural economics to produce better policy outcomes.
In the same vein, we look at how governments too can fail. Market failures and people’s cognitive limits suggest the need for government activism and paternalism. But often, this prescription underestimates the possibility of leaders and policymakers pursuing goals and interests which conflict with those of citizens. In addition, policymakers themselves suffer from cognitive biases and blunders, while bureaucratic organisations often exhibit inertia and an aversion to change that cannot easily be explained by rational choice models.
Third, we introduce key ideas from complexity economics such as “bounded agents”, system dynamics, networks, evolution and emergence. This part of the course examines the characteristics of complex adaptive systems and explains why traditional economic approaches – relying on assumptions of rational agency and individual optimisation, stable and predictable causal relationships, linearity, and the view of the economy and society as “engineered” systems – do not work in dealing with complexity.
Throughout the course, we apply one or more of these conceptual frameworks to study and analyse a number of policy domains: finance and financial crises, industrial policy, population ageing and inequality.