Abstract
This article examines, in the light of recent events, the origins of the difficulties that current
macroeconomic models have in encompassing the sort of sudden crisis which we are
currently observing. The reasons for this are partly due to fundamental problems with
the underlying General Equilibrium theory and partly to the unrealistic assumptions on
which most financial models are based. What is common to the two is that systematic
warnings over more than a century in the case of finance and over 30 years in the case of
equilibrium theory have been ignored and we have persisted with models which are both
unsound theoretically and incompatible with the data. It is suggested that we drop the
unrealistic individual basis for aggregate behaviour and the even more unreasonable
assumption that the aggregate behaves like such a ‘rational’ individual. We should
rather analyse the economy as a complex adaptive system, and take the network structure
that governs interaction into account. Models that do this, of which two examples are
given, unlike standard macroeconomic models, may at least enable us to envisage
major ‘phase transitions’ in the economy even if we are unlikely to be able to forecast
the timing of their onset