Time for a Copernican revolution in economics

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The glob­al finan­cial cri­sis took the vast major­i­ty of the eco­nom­ics pro­fes­sion by sur­prise. Though there were indi­vid­ual main­stream econ­o­mists — such as Robert Shiller and Joseph Stiglitz — who claim to have warned of the cri­sis, no main­stream eco­nom­ic mod­el fore­saw any­thing like what even­tu­at­ed in 2007. In fact, main­stream mod­el pre­dic­tions led to politi­cians being advised to expect tran­quil eco­nom­ic con­di­tions ahead. The OECD’s advice in its June 2007 Eco­nom­ic Out­look was typ­i­cal:

Indeed, the cur­rent eco­nom­ic sit­u­a­tion is in many ways bet­ter than what we have expe­ri­enced in years. Against that back­ground, we have stuck to the rebal­anc­ing sce­nario.Our cen­tral fore­cast remains indeed quite benign: a soft land­ing in the Unit­ed States, a strong and sus­tained recov­ery in Europe, a sol­id tra­jec­to­ry in Japan and buoy­ant activ­i­ty in Chi­na and India. In line with recent trends, sus­tained growth in OECD economies would be under­pinned by strong job cre­ation and falling unem­ploy­ment.” (OECD fore­casts gen­tle turn for glob­al econ­o­my”)

After being so dis­as­trous­ly wrong, one might expect that this mod­el­ing approach would now be sub­ject to seri­ous revi­sion. But while New Key­ne­sian DSGE mod­el-builders are start­ing to add “finan­cial fric­tions” to their reper­toire of fac­tors that pre­vent the econ­o­my from almost instant­ly attain­ing a com­pet­i­tive equi­lib­ri­um (as in New Clas­si­cal mod­els), the core par­a­digm — of an econ­o­my which, left to its own devices, will ulti­mate­ly reach equi­lib­ri­um, and in which mon­ey and finan­cial insti­tu­tions gen­er­al­ly play non-essen­tial roles — has not been chal­lenged.

Instead, the chal­lenge that is occur­ring in aca­d­e­m­ic insti­tu­tions is the sur­vival of the hand­ful of pro­po­nents of an alter­na­tive par­a­digm — one that sees cap­i­tal­ism as fun­da­men­tal­ly both unsta­ble and mon­e­tary. Before the cri­sis, econ­o­mists who fol­lowed that broad tra­di­tion — includ­ing myself — were large­ly ignored by the main­stream. After the cri­sis, the main­stream could have accept­ed that this per­spec­tive has mer­it, and made more room for it in the aca­d­e­m­ic cur­ricu­lum. But instead, what lit­tle space was devot­ed to alter­na­tive approach­es to eco­nom­ics has been reduced.

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(PS This post was writ­ten before an ami­ca­ble exchange with Tony Yates on Twit­ter over the week­end, in which we exchanged ref­er­ences on our dif­fer­ent approach­es to macro­eco­nom­ics)

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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.