My defence of economics has posed the question: what, then, is wrong with economics?
My answer would be that the overly-strong split between micro and macro has distracted us from the fact that micro failures can have huge macro effects.
I say this because the crisis was, to a large extent, due to the failure of a handful of organizations. It was/is a banking crisis, not a financial crisis - and, I'd add, a failure of ownership structures rather than of markets.
Conventional macro forces alone don't suffice to explain the crisis.
If high debt were the main culprit, you'd expect defaults and bad debts to have risen before the recession. They did, but not by much. In late 2007, the delinquency rate on US household mortgages was less than a percentage point above its mid-90s level. The biggest rise came after Lehmans collapsed.
Nor is it obvious that the bursting of the housing bubble was to blame. US prices fell 10% between April 2006 and late 2007 whilst the economy continued to grow.
Instead, the problem was that the losses caused by the bursting of the US housing bubble were concentrated among a few organization who - we now know - were unable to bear them. Had the losses been more dispersed - as the tech burst's losses in 2000-03 were - the macro effects would have been much less nasty.
It's not just in the US where organizational failure has serious macro effects. The euro crisis can be seen as a crisis of risk-bearing - too much is concentrated in a few organizations - rather than as a debt crisis.
There are two aspects of the problem here. The obvious one is that some large firms/banks are strategically significant. Also, banks are prone to a common systems (pdf) failure. This might be due to interlinkages between them - so that a "fire sale" of assets by one bank depresses prices and so worsens others' solvency. Or it might be because if all banks follow the same strategy then anything that wipes out one will wipe out all. Just as a common environmental change - such as the disappearance of a food source - can wipe out an entire species, so it can wipe out an entire set of firms.
And here, conventional macro is at fault. It has generally presumed that the economy is smooth rather than granular, and thus that specific corporate failures can be ignored. They can't be. This failure has been compounded by the tendencies: to regard macro shocks as Gaussian;to ignore discontinuity and complexity in favour of more easily tractable models; and by the presumption that firms/banks are rationally managed.
The point I'm making here is not a partisan one. Yes, complaints about mega corporations are typically associated with the left. But they needn't be. As Xavier Gabaix has pointed out, this line of thinking can help rescue real business cycle models, because difficulties suffered by a handful of large firms can be just like adverse productivity shocks.
All this poses the question. If I'm right, how culpable are economists?
A bit of me is sympathetic. Macroeconomic thinking has to abstract from many features of the economy. A model that included all relevant features would be like Borges' map (pdf) of the Empire - perfectly accurate and perfectly useless.The problem is that in 2008, they just happened to be abstracting from important ones.
However, a bit of me is less sympathetic. I have this suspicion that the nature of macroeconomics - with its emphasis upon mathematical tractability rather than complexity - is influenced more by what can be safely inflicted upon students than by what best describes the real world.