10/20/2010 05:12 am ET Updated May 25, 2011

Joseph Stiglitz: Economy Is In Shambles -- But So Is Our 'Economic Paradigm'

Today, not only is our economy in a shambles but so too is the economic paradigm that predominated in the years before the crisis -- or at least it should be.

It is hard for non-economists to understand how peculiar the predominant macroeconomic models were. Many assumed demand had to equal supply -- and that meant there could be no unemployment. (Right now a lot of people are just enjoying an extra dose of leisure; why they are unhappy is a matter for psychiatry, not economics.) Many used "representative agent models" -- all individuals were assumed to be identical, and this meant there could be no meaningful financial markets (who would be lending money to whom?). Information asymmetries, the cornerstone of modern economics, also had no place: they could arise only if individuals suffered from acute schizophrenia, an assumption incompatible with another of the favoured assumptions, full rationality.