Between Simplicity and Complexity: Had 2008 Witnessed a Failure of Economic Simplicity?

There are essential differences between treating the economy as a complex entity versus a simple one, and consequently, between using what is known as “complexity economics” and “simplicity economics.” Hayek’s and Keynes’s approaches in the 1930s, although contrarian on many levels, were both part of the “complexity” tradition. In contrast, Keynesianism of the 1950s, Monetarism of the 1960s and also Hayekian libertarian economics of the 1970s and 1980s, belong, in my view, to the “simplicity” tradition. The advantages and disadvantages of complexity and simplicity contributed to the rise and fall of different analytical trends between the Great Depression and the Long Recession. Hence, that perspective suggests possible reasons for the rapid disappearance of complexity theories and for the simplicity theories the tended to rise in their place. If true, this may help us better understand the present dismal state of macroeconomics both before the recent Long Recession and, in particular, the deficiencies in macroeconomics theories after 2007-08. The standing of macroeconomics theory in the years after 2007–08 was obviously weaker than during the decades before the crisis. The astonishment that engulfed the profession at the start of the Long Recession focused not only on the failure to predict the meltdown scenarios of September 2008, but also the almost complete shock in the profession that “It” could threaten again.