ABSTRACT
When the global economic system began to slide towards recession in 2007, most professional economists were caught flat-footed. This chapter examines two sets of ideas, each of which lies at the heart of modern economics, and both of which are implicated in the discipline’s failure to anticipate the Great Recession. It identifies the eighteenth-century roots of these two ideas and explores their lasting legacy, which persists even as economic conditions have changed since the eighteenth century. The chapter argues that while neither set of ideas is exclusively responsible for modern economists’ inability to anticipate financial crises, the combination of the two is—and continue to be—detrimental to the discipline’s efforts to predict and analyse such events. Bubbles in financial markets may well not be departures from the norm or improbable events but constitutive features of these markets.
