Over the last two centuries there has been a growing acceptance of social and political liberalism as the desirable basis for societal organisation. Economic theory has tried to accommodate itself to that position and has developed increasingly sophisticated models to justify the contention that individuals left to their own devices will self-organise into a socially desirable state. However, in so doing, it has led us to a view of the economic system that is at odds with what has been happening in many other disciplines. Although in fields such as statistical physics, ecology and social psychology it is now widely accepted that systems of interacting individuals will not have the sort of behaviour that corresponds to that of one average or typical particle or individual, this has not had much effect on economics. Whilst those disciplines moved on to study the emergence of non-linear dynamics as a result of the complex interaction between individuals, economists relentlessly insisted on basing their analysis on that of rational optimising individuals behaving as if they were acting in isolation. Indeed, this is the basic paradigm on which modern economic theory and our standard economic models are based. It dates from Adam Smith’s (1776) notion of the Invisible Hand which suggested that when individuals are left, insofar as possible, to their own devices, the economy will self-organise into a state which has satisfactory welfare properties. Yet this paradigm is neither validated by empirical evidence nor does it have sound theoretical foundations. It has become an assumption. It has been the cornerstone of economic theory although the persistent arrival of major economic crises would seem to suggest that there are real problems with the analysis. Experience suggests that amnesia is prevalent among economists and that, while each crisis provokes demands for new approaches to economics, (witness the birth of George Soros’ Institute for New Economic Thinking), in the end inertia prevails and economics returns to the path that it was already following.
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