How the ‘Experts’ Missed the Crash: Philosophical Flaws, No Sense of History

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Uni­ver­si­ty of Texas Eco­nom­ics Pro­fes­sor James Gal­braith is a son of the great US Insti­tu­tion­al econ­o­mist John Ken­neth Gal­braith, and a lead­ing non-ortho­dox econ­o­mist in his own right. He has devel­oped high­ly inno­v­a­tive meth­ods to mea­sure eco­nom­ic inequal­i­ty that are well doc­u­ment­ed here; he is a stri­dent crit­ic of con­ven­tion­al eco­nom­ics; and he has been as active in the USA as an ana­lyst of and com­men­ta­tor on this finan­cial cri­sis as I have in Aus­tralia. His many inter­views on the top­ic are linked from this site.

Gal­braith describes him­self in this inter­view on Yahoo Finance’s Tech Tick­er as a “finan­cial ambu­lance chas­er”, and some­one who did see this cri­sis coming–unlike the vast major­i­ty of the eco­nom­ics pro­fess­sion, who–like Aus­trali­a’s own RBA (cen­tral bank) Gov­er­nor Glenn Stevens–not only did not see this cri­sis com­ing, but did­n’t know any­one else who did.

That’s because they have been raised sole­ly with­in the neo­clas­si­cal approach to eco­nom­ics, which has dom­i­nat­ed the aca­d­e­m­ic dis­ci­pline of eco­nom­ics since the mid-1970s. They have been trained to uncrit­i­cal­ly believe in mod­els of the econ­o­my based on the fan­tasies of hyper-ratio­nal indi­vid­u­als (who can pre­dict the future), mar­kets that are always in equi­lib­ri­um, and a world in which mon­ey is sim­ply a veil over barter. They don’t lis­ten to pro­fes­sion­al econ­o­mists like myself and James who reject this entire phi­los­o­phy. By and large, they don’t even acknowl­edge that we exist.

One excel­lent ques­tion that was put to James by Hen­ry Blod­get is worth quot­ing in its entire­ty. Blod­get quite jus­ti­fi­ably expressed the belief that in their train­ing econ­o­mists look at history–a state­ment that shows he did­n’t him­self do an eco­nom­ics degree, because one of the first sub­jects that neo­clas­si­cal econ­o­mists elim­i­nat­ed to make way for their obses­sions with “micro­eco­nom­ics” and “econo­met­rics” was eco­nom­ic his­to­ry:

Blod­get: But obvi­ous­ly in train­ing econ­o­mists, espe­cial­ly aca­d­e­mics who go through an incred­i­ble peri­od where they’re learn­ing and study­ing his­to­ry, and you look back over his­to­ry where you’ve had many of these com­plete crash­es that were unfore­seen at the time. How does acad­e­mia deal with that? Is the sto­ry always told that “Oh yes, but we were stu­pid and unso­phis­ti­cat­ed then, and now we’re smart and there­fore we’ll see it”? How do peo­ple explain that?

James’s reply was:

Gal­braith: That’s an excel­lent ques­tion, but the real­i­ty is that train­ing in eco­nom­ics does not involve com­ing to grips with his­to­ry. Eco­nom­ic his­to­ry is bare­ly taught in grad­u­ate eco­nom­ics depart­ments, and the his­to­ry of eco­nom­ic thought isn’t taught at all. So fig­ures that have been fun­da­men­tal to under­stand­ing phe­nom­e­na like the Great Depression–or for that mat­ter the Great Crash–are sim­ply not in the cur­ricu­lum.

Keynes, who taught my father John Ken­neth Galbraith–who under­stood the Great Depres­sion as well as any fig­ure in the 20th cen­tu­ry–… you won’t find them on the read­ing lists. That is in some sense the shock­ing com­men­tary on the intel­lec­tu­al direc­tion that the pro­fes­sion has tak­en.

There’s much more worth lis­ten­ing to in this inter­view. There is, also, hope. The fact that seri­ous intel­lec­tu­als who are crit­i­cal of neo­clas­si­cal eco­nom­ics are now being lis­tened to by the media and the markets–though not yet governments–is a sign that, pos­si­bly, the days of the delu­sion­al neo­clas­si­cal approach to eco­nom­ics are com­ing to a close.

Unfor­tu­nate­ly, it has tak­en a seri­ous eco­nom­ic crisis–possibly the most seri­ous in history–to bring that delu­sion to its knees. But in the mean­time, peo­ple trained in that delu­sion are still in con­trol of eco­nom­ic pol­i­cy, and are charged with help­ing over­come a prob­lem they did not fore­see, and still do not under­stand.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.