Remember the neocons after the Iraq war went bad? Many long-standing critics of mainstream economics — they are getting a large audience now — are arguing that the financial crisis has placed economists close to the same position.

To be more specific, a subset of mainstream economics is in the dock. This subset, microeconomics, studies economic actions of individuals and firms in a market. The financial crisis, as should be obvious, is at one level an outcome of individual/firm market actions. There’s a macroeconomics (study of economic variables in the aggregate; government spending, total private investment, central bank policy) aspect to the crisis, too. Questions like whether interest rates were too low or whether government policy helped misallocate credit are among the macroeconomic debates going on. But post-crisis, mainstream macroeconomics is not being charged with having a theoretical framework that’s “fundamentally useless”.

That description came recently from James Galbraith, well-known economist son of the hugely more famous John Kenneth Galbraith. Galbraith Jr was speaking for many who have a deep suspicion of microeconomics that, roughly put, loves market and math.

Most economists will dismiss his statement as being as wrong as it is strong. But that would be a sub-optimal strategy. True, the framework is not useless. It is extremely powerful, in fact. But these economists owe a few explanations.

Of the many questions being asked by serious people who aim to improve mainstream economics, two are critical. One question is on market, the other on math.

The Market Question. Everyone who has read something on the financial crisis knows that at the heart of it was widely distributed risk that came from widely distributed financial assets that were created — engineered — from simpler financial assets. Mainstream economics has provided brilliant theoretical proofs that distributing risks is a smart thing in a market.

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