Like me, Richard Bookstaber is a “theorist/practitioner of financial economics,” a phrase coined by Hyman Minsky some thirty years ago. Bookstaber’s work as a practitioner took him into the belly of the beast: quant trading and financial derivatives, from which — before the Global Financial Crisis — he extracted relevant lessons and offered timely warning of impending disaster in A Demon of Our Own Design (2007).

Now, in The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction, Bookstaber demonstrates how the Global Financial Crisis of 2008 is the gift that keeps on giving to those engaged in the reconstruction of financial economics. His indictment of conventional neoclassical economics, constrained into functional irrelevance by the presumption of efficient markets and the Rational Expectations Hypothesis, is comprehensive and compelling. And he makes a powerful case for the adoption of agent-based modelling techniques — computer simulations of human-driven systems — as tools for exploring the modes of behavior of systems too complex to be usefully reduced to the deterministic models still all too prevalent in academic economics.

Bookstaber identifies the inescapable reasons why mainstream economics could not in principle either anticipate the Global Financial Crisis nor provide a guide to policy-makers as they attempted to respond to catastrophe:

• Social interactions are computationally irreducible: “the only way to determine the outcome is to follow the steps of the program”

• The systemic behavior that emerges from these interactions is inherently unpredictable

• The context for making decisions is always changing, reflecting our own actions and those of others

• Consequently, we necessarily must act under conditions of radical uncertainty as to the consequences of our actions

Maps of the world that abstract from these realities — specifically the economic models that by construction cannot encompass a financial crisis — are dangerously unrealistic guides to territories where individuals doing the best they can collectively interact to produce system-shaking disaster. Much better if necessarily inelegant, Bookstaber argues, to simulate possible alternative paths through the territory in order to identify potential hidden dangers. Drawing on both practical experience and theoretical insight, his new book is an essential guide to understanding the dynamics of this world in all its rich and dangerous complexity.