Debunking Economics

[Sara S]

from delancyplace.com:

In today's excerpt - economist Steve Keen is unsparing in his criticism of Federal
Reserve Chairman Ben Bernanke and the currently dominant neo- classical school of
economics. He maintains that Bernanke and his colleagues were sanguine and self-congratulatory
on the eve of our recent financial crisis, did not see that crisis coming, and are
unapologetic regarding this failure. Further, Keen believes the crisis could easily
have been predicted with a proper analysis of debt, something underemphasized in
neoclassical models-and notes that almost all economists that warned of the crisis
came from outside the neoclassical school and based a significant part of their
analysis on debt growth:

"Academic economics [has] divided into roughly six camps: the dominant neoclassical
school that represent[s] perhaps 85 percent of the profession, and several small
rumps called Post-Keynesian, Institutional, Evolutionary, Austrian and Marxian
economics. ... Looking back on how neoclassical economics had remodeled both eco*nomic
theory and economic policy, the current US Federal Reserve chair*man Ben Bernanke
saw two decades of achievement. Writing in 2004, he asserted that there had been:

'not only significant improvements in economic growth and productivity but also
a marked reduction in economic volatility, both in the United States and abroad,
a phenomenon that has been dubbed 'the Great Moderation.'Recessions have become
less frequent and milder, and quarter-to-quarter volatility in output and employment
has declined significantly as well. The sources of the Great Moderation remain somewhat
controversial, but as I have argued elsewhere, there is evidence for the view that
improved control of inflation has contributed in important measure to this welcome
change in the economy.' (Bernanke 2004b; emphasis added)

"The chief economist of the OECD, Jean-Philippe Cotis, was equally sanguine about
the immediate economic prospects in late May of 2007:

'In its Economic Outlook last Autumn, the OECD took the view that the US slowdown
was not heralding a period of worldwide economic weakness, unlike, for instance,
in 2001. Rather, a 'smooth' rebalancing was to be ex*pected, with Europe taking
over the baton from the United States in driving OECD growth. Recent developments
have broadly confirmed this prognosis. 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. ...'
(Cotis 2007:7; emphasis added)

"Then, in late 2007, the 'Great Moderation' came to an abrupt end.

"Suddenly, everything that neoclassical economics said couldn't happen, happened
all at once: asset markets were in free-fall, century-old bastions of finance like
Lehman Brothers fell like flies, and the defining characteristics of the Great Moderation
evaporated: unemployment skyrocketed, and mild inflation gave way to deflation.
...

"Neoclassical economics, far from being the font of eco*nomic wisdom, is actually
the biggest impediment to understanding how the economy actually works-and why,
periodically, it has serious breakdowns. If we are ever to have an economic theory
that actually describes the economy, let alone one that helps us manage it, neoclassical
economics has to go.

"Yet this is not how neoclassical economists themselves have reacted to the crisis.
Bernanke, whose appointment as chairman of the US Federal Reserve occurred largely
because he was regarded by his fellow neoclassical economists as the academic expert
on the Great Depression, has argued that there is no need to overhaul economic theory
as a result of the crisis. Distinguish*ing between what he termed 'economic science,
economic engineering and economic management,' he argued that:

'the recent financial crisis was more a failure of economic engineering and economic
management than of what I have called economic science [...]' " (Bernanke 2010:3)

Author: Steve Keen
Title: Debunking Economics
Publisher: Zed
Date: Copyright 2001 by Steve Keen
Pages: 8-15