‘Ideas, like markets, tend to overshoot themselves’. This remark was made by a delegate at the Institute of Ideas’ Post-G20 Public Summit on the future of the economy last weekend. It is true that our fast-paced over-sensationalised media tends to run away with stories about greedy bankers and irresponsible bonuses when the real story behind the financial crisis is far more complicated. The summit was welcome because it recognised the bigger economic picture, and asserted the need for deeper changes in our economies.

The first session, ‘Demystifying the Crisis’, reminded us that the roots of our financial problems are not just micro-economic – they are about more than bad incentives and failed regulators. Richard Portes, economics professor at the London Business School, argued that the current crisis is founded on an unsustainable global imbalance; our consumerist, debt fuelled bubble was only made possible by the high saving rates of emerging economies, particularly China. If we want to address this crisis, he argued, we will have to address the vulnerability that comes with the vast majority of consumption taking place in the West, whilst the vast majority of production takes place in the East.

In another session on behavioural economics, a space was opened up to question the less conventional economic explanations that also contributed to the crisis: the collective herd mentality of the city that defies the logic of ‘rational economic man’. Perhaps, this explanation runs, individual bankers did not make irresponsible decisions out of the greedy self-interested desire for profit, but because they were caught up in a culture that systematically ignored risk at its own peril. If this is true, then changing salaries and bonuses is unlikely to prevent another crisis – stronger intervention is needed to guard against collective irrationality.

Other conventional ideas were also shaken up. Warwick Lightfoot, economist and former special advisor to then Chancellor Nigel Lawson, turned the widespread assumption that the crisis was simply a failure of free markets on its head. The West’s loose monetary policy he argued, was responsible for flooding the world with liquidity and encouraging the accumulation of debt. By allowing the banks to expand their operations without a high level of capital reserves to back them up, central bankers – particularly Greenspan – must also take responsibility for their role in the crisis. 

In the afternoon, delegates moved on to a debate about whether the state could solve these problems. Frank Furedi, author and sociology professor at the University of Kent, unsurprisingly didn’t think so. The role of the state he argued, was not to save the economy but to help diversify it and make it more productive. But panellists divided on what a more productive economy would look like. For the economist Phil Mullan a stronger economy meant a more productive one, less dependent on financial services. And for some highly passionate members of the audience, this meant a return to the production of things that you can ‘drop on your foot’ – an almost religious zeal for manufacturing that Richard Portes dismissed as irrational. Instead, Portes argued that we should embrace our comparative advantage in services and leave the production of more tangible goods to those who can make them cheaper.

Overall the debate was lively, informed and original. Ideas were not given the chance to overshoot themselves; they were challenged, reformed, shot down and improved. The challenge for the organisers now is to take this debate to a wider audience. The financial crisis taught us that it is dangerous to leave decisions about our economy to self-appointed ‘experts’. To hold politicians and business leaders accountable, the public needs to be educated, informed and engaged in a high level of economic debate. It’s time to take the battle of ideas out of the conference hall, and on to the streets.