Stephen Foley: Who’s really to blame? It’s the economists, stupid

US Outlook Forget Wall Street. Occupy the University of Chicago.

It is five years since a respected economist called Ben Bernanke, the chairman of the Federal Reserve, said that the problems in the US subprime mortgage market were likely to be "contained". This, you may have noticed, turned out not to be the case.

In the intervening period of catastrophic market failure, deep recession and anaemic recovery (in the US, and double-dip in the UK), public ire has been turned on the bonus-hungry bankers whose actions exacerbated the crisis.

Far too little anger has been turned on the people who built and validated the deranged intellectual framework that prevented bankers, and the rest of us, from seeing what was happening.

It is hard to turn economists into bogeymen, these bumbling, mumbling professors at a pay grade a thousand rungs below the bosses of Wall Street. But a lot of the over-complexity of finance can be traced to a faith in economic models whose flaws are baked in at the level of academic economics.

Actually, it is not just the University of Chicago school of economics, although that is where the movement to unfetter markets drew much of its intellectual justification. Throughout the profession, vast assumptions were made about people being rational and well-informed actors out to maximise their economic potential (we are much nicer, and weirder and more human than that) in free and fully efficient markets (which cannot exist).

These traditional models from the economics profession laid the shaky foundations of our house of cards. So why has there been no revolution?

Actually, there are stirrings. Last November, students at Harvard staged a walkout from the class of Gregory Mankiw, whose Principles of Economics is a standard textbook in universities. Critiquing, tweaking and updating the models is not enough, the students said; there is an imperative to encourage much more radical thought. Radical thinking has some big money backers. George Soros, the hedge fund titan, set up the Institute for New Economic Thinking, whose conference in Berlin this month was a hive of debate on ethical and ecological principles that don't normally form part of the academic economic debate. There were talks on the causes of instability in financial markets and the existential question of "what can economists know?"

Last weekend, the New School in Manhattan featured several of the more radical advisers to Mr Soros's institute at a symposium on the ideas of leftist economist Duncan Foley (no relation), where it was argued we need a fundamental discussion about what a market is. In fact, there are thousands, maybe millions, of markets, each different and all evolving.

Maybe economics should think of the world more like a biologist thinks of an ecosystem and less like a physicist looking for unbending laws of gravity.

These are the debates that could refashion our complex and unstable financial system over the next generation. The young, radical thinkers who can shape these debates will find themselves with more political power than anyone holding a placard outside Goldman Sachs.

Forget the bankers. It's the economists, stupid.