The Revitalization of Economics at Cambridge: Post-2008 New Economic Thinking and the INET Institute

This podcast episode discusses the transformative impact of the 2008 financial crisis on the Faculty of Economics at Cambridge University, particularly through its partnership with the Institute for New Economic Thinking (INET). The speakers, including Bill Janeway, Sanjeev Goyal, Giancarlo Corsetti, and Pontus Rendahl, highlight how the crisis, initially a global threat, became an "opportunity" for the economics profession to engage in critical inquiry and broaden its methodological and conceptual foundations. The Cambridge-INET Institute, established in 2012, has served as an engine for this resurgence, fostering a radical spirit that challenges classical orthodoxy and encourages interdisciplinary research, bridging economics with history, sociology, computer science, and mathematics.

A key distinction made is the shift from viewing the crisis as merely a problem to be solved within existing frameworks, to seeing it as a catalyst for fundamental rethinking. The discussion revisits classic economic concepts, such as the fiscal multiplier, challenging the limitations imposed by neoclassical assumptions like Ricardian equivalence and the permanent income hypothesis. Pontus Rendahl, for instance, demonstrates how incorporating a more realistic labor market with job-based income can significantly enhance the effectiveness of fiscal policy in a deep recession, moving beyond the traditional view of the multiplier being bounded by one in a liquidity trap. This approach emphasizes the importance of real-world data and empirical analysis over abstract models.

Practical insights and recommendations include the necessity of critical inquiry and the development of new economic thinking, especially concerning conceptual foundations and methodological aspects like experiments and big data. The Cambridge-INET Institute actively recruits outstanding researchers and students to engage with these questions, fostering a conducive environment for research through postdoctoral researchers, high-profile visitors, and conferences. Furthermore, the faculty has implemented significant curriculum changes, introducing more history of economic thought, political economics, and modernizing courses like applied macroeconomics to reflect post-crisis learnings, particularly in a zero-interest rate environment.

The broader implications of this initiative extend to revitalizing one of the world's oldest and most distinguished economics faculties, moving it from a period of underperformance to a top-ranked institution. The speakers advocate for a paradigm shift in economics, suggesting that the discipline should draw metaphors from biology (adaptation under competitive pressures) rather than physics, as proposed by Alfred Marshall and echoed by Andrew Lo. The discussion also touches upon the need for new metrics beyond GDP to measure crucial aspects like social capital and social trust, acknowledging that economic activity is deeply embedded in social relationships and human motivation. The 2008 crisis is ultimately framed as a "gift that keeps on giving" to the discipline, pushing it towards greater empiricism, relevance, and interdisciplinary engagement.

"economics to become a really interesting subject again thanks to 2008"

"looked in 2008 as an opportunity not a threat"

"there has been and there remains a radical spirit in in Cambridge"

"the crisis was very bad news for the world but probably it was very good for the profession of economics"

"set up to facilitate a critical inquiry to broaden and accelerate the development of new economic thinking"

"crises are moments in which things become more open so questions that we didn't know who come up ways to look at things"

"money doesn't buy articles maybe can buy articles but it doesn't buy good research but what resources can do is it can provide you with a very conducive environment where research can flourish"

"the profession has become very substantially more empirical since 2008 in every sub discipline the proportion of articles that are actually addressing data rather than replicating abstract models has increased very substantially and that's a really good thing the world has come back into economics"

"the metaphor for economics should be drawn from biology not from physics from adaptation under competitive pressures"

"we were taken down a road of thinking of physics as the source of metaphors for economics which turned out to be and this is Andrew Lowe's professor Lowe's words a blind alley"

"Cambridge has not only not been dying it has been adapting and thriving"

"the Great Recession as the gift that keeps on giving to the discipline of economics"

"the economy is not separate from society but it's in fact a lot of economic activity is embedded in social relationships"