Like John Harvey, I do think that the economics profession bears an important part of the blame for the state the world is in. To a failure of most economists to recognize the fragility of the financial system, I would add slowness in developing monetary policy tools powerful enough to counteract the aggregate demand effects of any elevation of risk premia. Beyond that, what I would add to John Harvey’s discussion is:
1. The word “model” itself has become a reflection of the problem. Logic and reasoning behind a given argument are partly dismissed by saying “You didn’t have a model.” This really means “You didn’t have a [very particular type of] model.” And the limitation to that very particular type of model is often exactly what is interfering with understanding of a problem.
(In passing, let me say that I am not impressed with the realism of the models currently being used in polite circles with great frequency to model financial frictions.)
2. John Harvey is too enamored of heterodox schools. By the nature of heterodoxy, many economists who “think outside of the box” will be sui generis, not belonging to any school at all. (If they are really good, they may eventually they gather disciples who then constitute a school. But they may not belong to any school when they first break out of the mold.)
3. I see the blogosphere as a partial antidote to the dysfunctionality of the economics journals. If one includes the robust and wide-ranging discussion of the real world and real-world policy in the economic blogosphere, things look much better. From that angle, the dysfunction in economics overall can be reduced if more and more people take the blogosphere seriously.