Instability May Not Be Optional (2)

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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 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.

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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.