The sketch that I gave of the onset of the crisis is a story of contagion,
interdependence, interaction, networks, and trust. Yet, as I have observed,
these notions are not features of modern macroeconomic models. A first
line of defence offered by economists to justify this, is that we are talking
about financial markets here and that these are intrinsically different from
the rest of the economy, even if the two interact. But is this really the case?
Whether we are talking about models of financial markets or of the real
economy, our models are based on the same fundamental building blocks.
The most important of these is the idea that individuals act in isolation
and the only interaction between them is through the price system. All that
we have to do, to deduce the behaviour of the economy at the aggregate,
or macro level, is to add up the behaviour of the individuals who make it
up. Furthermore, the theoretically unjustified assumption is made that the
behaviour of the aggregate can be assimilated to that of an individual