Dear Queen

Last November, during a visit to the London School of Economics, Her Majesty the Queen of England asked why so few economists had foreseen the situation we now find ourselves in.

The Queen received an official response from the British Academy from Professors Besley and Hennessey, but it is not that letter I want to focus on.

The letter that has caught my attention was written by Professor Geoffrey Hodgson of the University of Hertfordshire.

Please read the entire letter. Here are few of the sections that really hit home for me:

The letter by Professors Besley and Hennessey does not consider how the preference for mathematical technique over real-world substance diverted many economists from looking at the vital whole. It fails to reflect upon the drive to specialise in narrow areas of enquiry, to the detriment of any synthetic vision. For example, it does not consider the typical omission of psychology, philosophy or economic history from the current education of economists in prestigious institutions. It mentions neither the highly questionable belief in universal ‘rationality’ nor the ‘efficient markets hypothesis’ – both widely promoted by mainstream economists. It also fails to consider how economists have also been ‘charmed by the market’ and how simplistic and reckless market solutions have been widely and vigorously promoted by many economists.

What has been scarce is a professional wisdom informed by a rich knowledge of psychology, institutional structures and historical precedents. This insufficiency has been apparent among those economists giving advice to governments, banks, businesses and policy institutes. Non-quantified warnings about the potential instability of the global financial system should have been given much more attention.

We believe that the narrow training of economists – which concentrates on mathematical techniques and the building of empirically uncontrolled formal models – has been a major reason for this failure in our profession. This defect is enhanced by the pursuit of mathematical technique for its own sake in many leading academic journals and departments of economics.

Models and techniques are important. But given the complexity of the global economy, what is needed is a broader range of models and techniques governed by a far greater respect for substance, and much more attention to historical, institutional, psychological and other highly relevant factors.

After reading this letter, I immediately thought of a statement Charlie Munger recently made in a blog interview.

"If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality."