As I noted in my previous post, neoclassical economics made it an item of faith that capitalism was inherently stable, and dismissed arguments to the contrary as no more than left-wing propaganda. My favourite statement of this perspective came from the pen of Nobel Prize winner Ed Prescott, who was one of the key players in introducing the concept of “rational expectations” into economics. Not only was capitalism inherently stable, he claimed in 1999, but it was so stable that we can reliably expect the economy to double the standard of living every 40 years. Marx and his ilk were simply wrong:
“The Marxian view is that capitalistic economies are inherently unstable and that excessive accumulation of capital will lead to increasingly severe economic crises,” Prescott said. “Growth theory, which has proved to be empirically successful, says this is not true. The capitalistic economy is stable, and absent some change in technology or the rules of the economic game, the economy converges to a constant growth path with the standard of living doubling every 40 years.“
About 15 years later, after the dot.com bubble and burst, the subprime bubble and burst, the apparently never-ending ‘Great Recession’ in the US and Europe’s second Great Depression, the alternative argument that capitalism is indeed inherently unstable is looking somewhat better than Prescott’s Panglossian vision.