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Tuesday, March 24, 2009

"Neoclassical Economics: Mad, Bad, and Dangerous to Know"

I can't say I agree with every word of this, but given what just happened to the economy and our general failure to see the signs that it was coming, it's a good time to hear alternative viewpoints about the state of the discipline:

Neoclassical Economics: mad, bad, and dangerous to know, by Steven Keen: The whole of the most recent Real World Economics Review (formerly known as the Post-Autistic Economics Review) is devoted to the question of “How should the collapse of the world financial system affect economics?”. My paper, which led volume 49, is reproduced below. ...

The most important thing that global financial crisis has done for economic theory is to show that neoclassical economics is not merely wrong, but dangerous, by Steven Keen: Neoclassical economics contributed directly to this crisis by promoting a faith in the innate stability of a market economy, in a manner which in fact increased the tendency to instability of the financial system. With its false belief that all instability in the system can be traced to interventions in the market, rather than the market itself, it championed the deregulation of finance and a dramatic increase in income inequality. Its equilibrium vision of the functioning of finance markets led to the development of the very financial products that are now threatening the continued existence of capitalism itself.

Simultaneously it distracted economists from the obvious signs of an impending crisis—the asset market bubbles, and above all the rising private debt that was financing them. Paradoxically, as capitalism’s “perfect storm” approached, neoclassical macroeconomists were absorbed in smug self-congratulation over their apparent success in taming inflation and the trade cycle, in what they termed “The Great Moderation”... [...continue reading...]

    Posted by on Tuesday, March 24, 2009 at 12:24 AM in Economics, Methodology | Permalink  TrackBack (0)  Comments (26)

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