The Creative Destruction of G8 Economics

 13th July 09 - by Steve Keen, of the West Sydney University Australia   Adbusters 

The most important thing that the global financial crisis has done for economic theory is to show that neoclassical economics is not only wrong – it’s dangerous. 

Neoclassical economics has contributed directly to the crisis by promoting a faith in the innate stability of a market economy, a false faith that has actually increased the financial system’s tendency to instability. Touting the dubious claim that all instability in the system can be traced to market interventions rather than the market itself, neoclassical economics championed the deregulation of finance and the dramatic increase in income inequality. Its equilibrium vision of the functioning of finance markets has led to the development of the very products that are now threatening the existence of capitalism itself. 

At the same time, neoclassical economics was distracting economists from the obvious signs of an impending crisis: the asset market bubbles and the mounting private debt that was financing them. Paradoxically, as capitalism’s “perfect storm” began to gather, neoclassical macroeconomists were absorbed in smug self-congratulation over their apparent success in taming inflation and the trade cycle, a feat they like to call the “Great Moderation.” In 2004 Ben Bernanke, now the Chairman of the Federal Reserve, said: 

“The low-inflation era of the past two decades has seen not only significant improvements in economic growth and productivity but also a marked reduction in economic volatility, … a phenomenon that has been dubbed the ‘Great Moderation.’ Recessions have become less frequent and milder, and … volatility in output and employment has declined significantly … The sources of the Great Moderation remain somewhat controversial, but … there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy …” 

It is all very well to have economic theory dominated by an innate faith in the stability of markets when those markets are forever gaining – either by growth in the physical economy or rising prices in the asset markets. In those circumstances, neoclassical dissenters who align themselves with the post-autistic economics movement (paecon) can rail about the logical inconsistencies in mainstream economics all they want. During the good times, the government, business community and most of the public ignore their concerns because they don’t appear to matter. Dissenters are, in fact, often dismissed as critics of capitalism or proponents of socialism because it seems to neoclassical economists – and to those outside academia – that they are attacking capitalism itself and not economic theory. “You think markets are unstable? Shame on you!”
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