The paper evaluates the claim, made by a range of commentators but most prominently by Akerlof and Shiller in Animal Spirits, that the recent financial crisis illustrates gaps in the normative picture incorporated into standard macroeconomics that are plugged by insights due to behavioral economics. It is argued that Akerlof and Shiller's contention that we cannot understand what happened unless we supplement macroeconomic theory with social-psychological theory is convincing only after being so heavily qualified that most of the surface excitement drains out of it. However, this is argued to be compatible with the idea that each recession or depression is a unique historical episode from which specific lessons can be learned; rejection of calls for paradigm shifts does not imply that each business cycle merely offers another observation to confirm a settled and stable understanding of macroeconomic dynamics. Discussion of factors that made the recent crisis unusually dangerous - the extreme global savings imbalance and the very rapid shifts occurring in the composition of the global labor force - leads to identification of a quite specific normative recommendation. This recommendation, that wealthy and middle-income people who care about efficiency, growth and prosperity should be willing to be taxed at higher levels to fund investments in human capital development, is certainly far from novel. However, I contend that the recent events have provided a new and newly specific reason to urge it. The reasoning in question owes nothing to behavioral economics or to any new advances in empirical psychology, which are indeed argued to obscure the most important implications of the recent crisis, and of recessions in general.

David Colander, "The Economics Profession, the Financial Crisis, and Method"

In 2007-2008, the world economy came perilously close to a systemic failure in which a financial system collapse almost undermined the entire world economy as we know it. These events have led some to fault the economics profession for its failure to predict the crisis, and to ask whether the crisis will lead the economics profession to change its ways. In this paper, I will discuss these two issues, and then turn to some suggestions for institutional changes in the economics profession that might lead to better outcomes in the future.

Stan du Plessis, "Implications for Models in Monetary Policy"

Monetary authorities have been implicated in the financial crisis of 2007-2008. John Muellbauer, for example, has blamed what he thought was initially inadequate policy responses by central banks to the crisis on their models, which are, in his words, 'overdue for the scrap heap'. This paper investigates the role of monetary policy models in the crisis and finds that (i) it is likely that monetary policy contributed to the financial crisis; and (ii) that an inappropriately narrow suite of models made this mistake easier. The core models currently used at prominent central banks were not designed to discover emergent financial fragility. In that respect John Muellbauer is right. But the implications drawn here are less dramatic than his: while the representative agent approach to micro-foundations now seems indefensible, other aspects of modern macroeconomics are not similarly suspect. The case made here is rather for expanding the suite of models used in the regular deliberations of monetary authorities, with new models that give explicit roles to the financial sector, to money and to the process of exchange. Recommending a suite of models for policy making entails no methodological innovation. That is what central banks do; though, of course, how they do it is open to improvement. The methodological innovation is the inclusion of a model that would be sensitive to financial fragility, a sensitivity that was absent in the run-up to the current financial crisis.