When failure becomes success

Posted: 17 September 2010 in Uncategorized
Tags: , , ,

It is by now a constant refrain: modern mainstream economics is a failure.

The latest version is by Michael Hirsh [ht: Nick Krafft, RWER], writing for Newsweek.

“The whole intellectual edifice has collapsed,” the former Fed chairman told Congress that fall. Economists said they would have to come up with new theories for how markets worked, in particular how the financial system functioned and interacted with the “real” economy. “Large swaths of economics are going to have to be rethought on the basis of what happened,” Larry Summers, the presidential adviser who doubles as a world-renowned economist, told me in an interview shortly after Barack Obama took office.

Two years on, that rethinking has barely begun, and only with the most painful reluctance by economists. Meanwhile, policy and political debates still driven by outdated economic theory have been racing out of control, bitterly dividing the nation. Whether the arguments are about stimulus, financial reform, health care, or jobs, the discussions in Washington tend to be dominated by simplistic black-and-white views that are little different from the conceptual framework that prevailed before the collapse: markets always work better than governments. Advocates of government spending are socialists. Champions of markets are laissez-faire ideologues or slaves of Wall Street. And never the twain shall meet. A vast new regulatory framework has been set in motion, but many experts say it has done little to change the way Wall Street or the real economy functions, and there is no new economic theory underlying it.

On one level, Hirsh (as well as the many others who have leveled the charge) is absolutely right. Neoclassical economists failed to see the onset of the current crises; they have had little to offer in terms of understanding how the crises occurred even after the fact; and they certainly haven’t had much in the way of good policy advice to solve the problems of unemployment, poverty, and inequality. As Hirsh writes, “The way they squabble mulishly to defend now-indefensible positions is itself evidence of how flawed those rational-actor models are.”

On another level, mainstream economists have succeeded. Not only have they maintained their hegemony within the discipline; their models and policy advice have kept the discussion confined to tinkering with the existing set of capitalist institutions. In terms of policy: a bail-out of Wall Street and a mild set of financial reforms, a small stimulus program, and an expansionary monetary policy. And intellectually: a rediscovery of Keynes and an allowance of behavioral approaches to finance. They haven’t proposed even the public works programs and financial reorganization of the New Deal, let alone an honest debate about capitalism itself.

In this sense, the continued failure of mainstream economists has become a success for capitalism.

Comments
  1. […] macroeconomics, when examined from an alternative perspective, have actually succeeded. As I wrote back in 2010, the failure of neoclassical macroeconomists were apparent to many: […]

  2. […] macroeconomics, when examined from an alternative perspective, have actually succeeded. As I wrote back in 2010, the failure of neoclassical macroeconomists were apparent to many: […]

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