Adam Smith is generally thought to be the father of economics. The reason for that is his book The Wealth of Nations, published in 1776. This book reached a number of startling, almost miraculous, conclusions. Among these was that the pursuit of self-interest, at the level of an individual household or firm, resulted in aggregate outcomes which could be optimal for society as a whole. In other words, the Invisible Hand was benign and benevolent. Competition was good. Greed was good.

On Smith’s shoulders, the fundamental theorems of welfare economics were built. These formed the theoretical bedrock of 20th century economics. Out of these foundations were constructed optimising models of the economy with aesthetically beautiful properties – dynamic, stochastic general equilibrium models. These typically embedded an equilibrium which was unique, stationary and efficient. And they typically embodied expectations which were ordered and rational. The dynamics of the resulting socio-economic models were classically Newtonian, resembling the damped harmonic motion of Newton’s pendulum.

Not surprisingly, the mathematical techniques used to derive and solve these models were also a straight lift and shift from theoretical physics. And, to complete the physics-envy, economists’ methodological approach was explicitly deductive. That enabled macro-economics, as a fledgling (and perhaps rather self-conscious) discipline, to be built on optimising foundations. These gave the impression of rigour and solidity. Micro-founded models were not only simple and beautiful, but also more suitable for policy analysis care of the Lucas critique.

In the light of the financial crisis, those foundations no longer look so secure. Unbridled competition, in the financial sector and elsewhere, was shown not to have served wider society well. Greed, taken to excess, was found to have been bad. The Invisible Hand could, if pushed too far, prove malign and malevolent, contributing to the biggest loss of global incomes and output since the 1930s. The pursuit of self-interest, by individual firms and by individuals within these firms, has left society poorer.

The crisis has also laid bare the latent inadequacies of economic models with unique stationary equilibria and rational expectations. These models have failed to make sense of the sorts of extreme macro-economic events, such as crises, recessions and depressions, which matter most to society. The expectations of agents, when push came to shove, proved to be anything but rational, instead driven by the fear of the herd or the unknown. The economy in crisis behaved more like slime descending a warehouse wall than Newton’s pendulum, its motion more organic than harmonic.

In this light, it is time to rethink some of the basic building blocks of economics. And in this rethink we could do worse than return to Adam Smith. For just prior to the Wealth of Nations, Smith had produced a rather different book. It was called The Theory of Moral Sentiments and was published in 1759. In it, Smith emphasizes cooperation, as distinct from competition, as a way of satisfying society’s needs. It places centre-stage concepts such as reciprocity and fairness, values rather than value.

Experimental research makes clear the importance of these concepts when studying decision-making in socio-economic systems. Fairness and reciprocity, rather than self-interest, emerge from the simplest imaginable games of human interaction. The “Ultimatum Game” is one in which a money offering – say, £100 - is shared between two parties, with one party taking the lead in the offer and the second choosing to accept or reject that offer. The twist comes in the fact that, if the offer is rejected, both parties receive nothing.

So what offer should the first party make? The self-interested rational expectations solution – if you like, Smith 1776 vintage – is to offer the lowest amount possible, such as £1. Why? Because it would be irrational for the second party to reject that offer because doing so makes them worse off. Yet reject it they do, consistently so, in experimental trials.

The reason is that the offer violates the second party’s sense of fairness – in other words, Smith 1759 vintage. And for that reason, the offer made by the first party is very rarely the lowest-possible, self-interested one. Typically, it is closer to a sharing of the spoils.

Reciprocity and fairness are centre-stage. The same has been found in numerous other socio-interactive games. These confirm we are a co-operative species every bit as much as a competitive one. This is hardly a surprising conclusion for sociologists and anthropologists. But for economists it turns the world on its head.

The good news is that there are signs economics may be going back to the future. If the Wealth of Nations was the book for the 20th century, the Theory of Moral Sentiments may be the book for the 21st. Smith is being rediscovered in his true colours – as political scientist, sociologist and moral philosopher. This is evidenced in the upsurge in interest in integrating the insights from other disciplines into economics: history, psychology, anthropology, evolutionary biology, sociology and neuroscience, to name but six.

This, and the intrigue and pain of the crisis, has added to the lustre of economics as a discipline. This is reflected in the record number of applications to universities. This renewed interest, at grass roots level, offers the discipline a real opportunity; it is the silver lining to the dark cloud created by the financial crisis. But it is an opportunity that can only be seized if the grass roots are adequately fed and watered. And that is where the economics curriculum comes into the picture.
Four years ago, George Soros set up the Institute for New Economic Thinking (INET) to stimulate a refresh and reset of the economics discipline and, within that, economics teaching. Two years ago, Gregory Mankiw’s undergraduate economics class at Harvard walked-out at the narrowness of the curriculum. Here in the UK, Wendy Carlin from UCL is leading a project to reform the economics curriculum among a number of UK universities, with sponsorship from INET. These are all encouraging steps in the right direction.

But change, to be durable, needs also to come from the next generation. That is why this report, from the Post-Crash Economics Society at the University of Manchester, is so very welcome. It suggests a groundswell, not just of interest but of concern, among the student population about the current shape of the economics curriculum among UK universities. Although the most prominent example of student activism on this front, it is by no means the only, with more than half a dozen universities also part of what appears to be an increasingly vocal movement.

The agenda set out in this Report is exciting and compelling. While not exhaustive, it begins to break open some of the economics discipline’s self-imposed shackles. Some of this is discovery of the new – for example, in the area of evolutionary, neuro and behavioural economics. But a large part is rediscovery of the old – or, in some cases, dusting down of the neglected – for example, in the area of institutional economics, economic history and money and banking.

The proposed methodology is pluralist. It is also cross-disciplinary. It combines deductive and inductive methods. For economists, data-mining – the ultimate in inductive methods – remains a dirty word. For many other professions these days, it is a potential goldmine. This methodological blindspot is one economists need quickly to eradicate.

Employers of economists, like the Bank of England, stand to benefit from such an evolution in the economics curriculum. Answering effectively public policy questions of the future requires an understanding of the past. It also requires eclecticism in the choice of methodology, a knowledge of political economy, an appreciation of institutions, an understanding of money and banking. A revamped economics curriculum could serve these needs, and hence those of public policy, well.

The power of economics is that it affects real lives in real ways; it matters. And it is because it matters and because it affects us all that the profession, still fledgling, needs to be in a perpetual state of renewal. The crisis is bringing about that renewal. Reports such as this, if acted on wisely, would help make that renewal permanent and on-going. I hope it is acted on and wisely.