The right and left have both signed up to the myth of free market | Larry Elliott

You can’t buck the market. The turn to the right taken by politics from the mid-1970s onwards was summed up in one phrase coined by Margaret Thatcher in 1988.

This idea tended to be associated with liberal economists such as Milton Friedman and Friedrich Hayek, both of whom influenced Thatcher deeply. Both thought that left to their own devices buyers and sellers would work out the price for everything, be that a loaf of bread, a wage, or an operation in the health service.

But economists and politicians who would certainly not have classified themselves as Hayekians, Friedmanites or Thatcherites also found the idea of market forces hard to resist. The new Keynesian school believed that there might be short-term impediments – or stickiness in the jargon – and that it was the job of government to deal with these market failures. But in the long term they too thought markets would return to equilibrium.

All sorts of policies flowed from this core belief: from privatisation to curbs on trade unions; from cuts in welfare to the attempt to create an internal market in the NHS. It also justified removing constraints on capital and the hands-off approach to financial regulation in the years leading up to the banking crisis of 2008. Anybody who suggested a gigantic bubble was being inflated was told that in free markets operated by perfectly rational economic agents this could not possibly happen.

Then the financial markets froze up. This was a classic emperor’s new clothes moment, when the public realised that the economics profession did not really have the foggiest idea that the biggest financial crisis in a century had been looming. Like a doctor who had said a patient was in rude health when she was actually suffering from a life-threatening disease, it had failed when it was most needed.

Just before Christmas, I wrote a column supporting the idea for some new thinking in economics. It caused quite a stir. Some economists liked it. Others hated it and rushed to their profession’s defence.

My piece said there was a need for a more plural approach to economics, with the need for a challenge to the dominant neo-classical school as a result of its egregious failure in 2008. The argument was that a bit of competition would do economics good.

If the latest edition of the magazine Prospect is anything to go by, a debate is now well under way. Howard Reed, an economist who has worked for two of the UK’s leading thinktanks, the Institute for Public Policy Research and the Institute for Fiscal Studies, says the malaise is so serious that a “deconomics” is needed that “decontaminates the discipline, deconstructs its theoretical heart, and rebuilds from first principles”.

Reed says a retooled economics would have four features. Firstly, recognition that there is no such thing as a value-free analysis of the economy. Neo-classical economics purports to be clean and pure but uses a cloak of ethical neutrality to make an an individualistic ethos the norm.

Secondly, he says too much economics is about how humans ought to behave rather than how they actually behave. Thirdly, economics needs to focus on the good life rather than on those areas most susceptible to analysis through 19th century linear mathematics. Finally, he calls for a more pluralistic approach. Economics should be learning from other disciplines rather than colonising them.

Prospect gave Diane Coyle, a Cambridge University economics professor, the right to reply to Reed’s piece and she does so with relish, calling it lamentable, a caricature and an ill-informed diatribe.

Most modern economics involves empirical testing, Coyle says, often using new sources of data. She rejects the idea that the profession is stuck in an ivory tower fiddling around with abstruse mathematics while ignoring the real world. Rather, it is “addressing questions of immediate importance and relevance to policymakers, citizens and businesses”.

Nor is it true that the discipline requires that people be rational, calculating automatons. “It very often has people interacting with each other rather than acting as atomistic individuals, despite Reed’s charge.”

Coyle accepts that macro-economics – the big picture stuff that involves looking at the economy in the round – is in a troubled state but says this is actually only a minority field.

The point that there are many economists doing interesting things in areas such as behavioural economics is a fair one, but Coyle is on shakier ground when she skates over the problems in macro-economics.

It was after all, macro-economists – the people working at the International Monetary Fund, the Federal Reserve, the European Central Bank, the Bank of England – that the public relied on to get things right a decade ago. All were blind to what was going on, and that had quite a lot to do with their “markets tend to know best” belief system.

Policy makers did not find the works of Hayek and Friedman particularly useful when a second great depression was looming. Instead, they turned, if only fleetingly, to Keynes’s general theory, which told them it would not be wise to wait for market forces to do their work.

Reed’s argument is not just that blind faith in neo-classical economics led to the crisis. Nor is it simply that the systemic failure of 2008 means there is a need for a root-and-branch rethink. It is also that mainstream economics has been serving the interests of the political right.

Some in the profession, particularly those who see themselves as progressives, appear to have trouble with this idea. That perhaps explains why they have been so rattled by even the teeniest bit of criticism.