Friday, May 20, 2011

The Queen of England criticizes economic models

It seems the Queen of England visited the London School of Economics a couple of years ago and listened to some discussion of the general equilibrium models used by central banks in their efforts to understand and manage entire economies. According to economist Thomas Lux, she astutely commented on the peculiarity that these models do not even include a financial sector, even though the financial industry has expanded markedly over past decades and clearly now plays an enormous role in any developed economy.

I'm hoping someone can tell me more about this anecdote, perhaps if they were present at the meeting. Lux's comments are listed in his response to an email sent out to various scientists by Dirk Helbing, seeking their views on the primary shortcomings of contemporary economic theory. The responses from those scientists hit on a number of themes - replacing equilibrium models with more general models able to include instabilities, going beyond the representative agent approximation, and so on. And, as the Queen rightly noted, acknowledging that the financial sector exists.