ECONOMISTS have not had an easy time explaining why they failed to predict the financial crisis. When Queen Elizabeth II asked a group of scholars “Why did nobody notice it?” during a visit to the London School of Economics and Political Science in 2008, Her Majesty was voicing a widespread concern.

Academics have since faced revolts within their own departments, with students demanding — and in some cases obtaining — fresh curriculums, lighter on mathematical abstractions and more rooted in real-world events.

Lord Desai, an emeritus professor at the LSE, shares these criticisms. In Hubris, the Labour politician explains how in his 50 years as an economist he has “witnessed the change in the culture of academic economics. It abandoned empirical habits of studying the economic reality and became wedded to aprioristic reasoning”.

Desai’s pamphlet is an impassioned plea for economists to look beyond the so-called ‘neoclassical paradigm’ — the body of theory, rooted in the assumption that people make rational decisions and interact in smoothly functioning markets, which has dominated the profession since the second world war. He wants his colleagues to look for insights in other schools of thought including Marxism, and Friedrich Hayek’s Austrian school.

The book is a useful primer for those interested in learning more about how the economics profession has developed. It correctly blames the failure to foresee the crisis on unrealistic macroeconomic models, which aim to simulate the behaviour of an economy as a whole. Like ancient doctors, who tried to explain the causes of diseases while knowing nothing about germs or bacteria, academics sought to describe the functioning of developed economies while ignoring the financial sector and the risks it contained.

Desai’s own explanation of the great recession is a complex blend of unorthodox economic doctrines. He resurrects the early 20th-century theory of long economic cycles from Russian economist Nikolai Kondratiev, saying that underlying demographic and technological forces meant the global economy was bound to peak around 2007. To this he adds a dash of Marx and Hayek, as well as Thomas Piketty, whose blockbuster study Capital in the 21st Century argued that inequality has shot up in the past four decades.

Yet this explanation is too ad hoc to be of much use to anyone who wants to predict the future. As the author admits: “It would be a challenge to build a formal econometric model which can encompass these elements.”

Economic systems are too complex for academics and forecasters to predict precisely what will happen

The book’s proposal on how to respond to the crisis is also unconvincing. Together with other economists, including Kenneth Rogoff of Harvard University, Desai signed a letter in 2010 pressing Britain’s politicians to embark on a programme of stringent austerity.

In Hubris, he sticks to his guns. The crisis, he insists, was the result of excessive borrowing by families and businesses. Cutting taxes or increasing government spending (as some economists suggest) would solve nothing, merely adding to the pile of debt. Desai also thinks the economic data for now appears to have vindicated his view: the growth spurt in the UK in the past two years proves its chancellor, George Osborne, was right to press ahead with a programme of budget consolidation.

However, Desai is wrong to argue there is no room for fiscal expansion during a so-called balance sheet recession. In fact, there is a strong case for governments to step in to support growth when families and corporations are busy paying back their debts. Nor is it possible to state with certainty that the government’s austerity plan led the UK to recover: indeed, it is equally plausible that growth would have been faster had the coalition opted for a less abrupt programme of fiscal consolidation.

Economic systems are too complex for academics and forecasters to predict precisely what will happen. Hence, Desai is right to advocate more humility for his profession.

But for this very reason, Hubris cannot show us how to avoid the next crisis.

It merely provides an opinion — an engaging but not an entirely convincing one.

Published in Dawn, Economic & Business, April 27th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play