The New Economics. Steve Keen

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1 Why this manifesto?

      Even before the Covid-19 crisis began, the global economy was not in good shape, and neither was economic theory. The biggest economic crisis since the Great Depression began late in the first decade of the twenty-first century. Called the ‘Global Financial Crisis’ (GFC) in most of the world, and the ‘Great Recession’ in the United States, it saw unemployment explode from 4.6 per cent of the US workforce in early 2007 to 10 per cent in late 2009. The S&P500 stock market index, which had boomed from under 800 points in 2002 to over 1,500 in mid-2007, crashed to under 750 by early 2009. Inflation of 5.6 per cent in mid-2008 turned into deflation of 2 per cent in mid-2009.

      The US economy recovered very slowly, under the influence of an unprecedented range of government interventions, from the ‘Cash for Clunkers’ scheme that encouraged consumers to dump old cars and buy new ones, to ‘Quantitative Easing’, where the Federal Reserve purchased a trillion-dollars-worth of bonds from the financial sector every year, in an attempt to stimulate the economy by making the wealthy wealthier.

The crisis, and the sluggish recovery from it, surprised both the economists who advise governments on economic policy, and the academics who develop the theories and write the textbooks that train new economists. Not only had they expected a continuation of the boom conditions that had preceded the crisis, they in fact believed that crises could not occur.

      In his Presidential Address to the American Economic Association in January 2003, Nobel Prize winner Robert Lucas declared that crises like the Great Depression could never occur again, because ‘Macroeconomics … has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades’ (Lucas 2003, p. 1). Just two months before the crisis began, the Chief Economist of the Organization for Economic Cooperation and Development (OECD), the world’s premier economic policy body, declared that ‘the current economic situation is in many ways better than what we have experienced in years’, and predicted that in 2008, ‘sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment’ (Cotis 2007, p. 7, emphasis added). In the depths of the crisis, George W. Bush’s Chief Economic Advisor Edward Lazear argued that, because the downturn had been so deep, the recovery would be very strong (Lazear and Marron 2009, Chart 1-9, p. 54). He was bitterly disappointed by the actual outcome, which was the slowest recovery from an economic crisis since the Great Depression itself.

      How could economists be so wrong about the economy?

They could be excused their failure to see the Great Recession coming if the crisis were something like Covid-19, when a new pathogen suddenly emerged out of China. As long ago as 1995, Laurie Garrett declared that such a plague was inevitable (Garrett 1995). But predicting when the pathogen would emerge, let alone what its characteristics would be, was clearly impossible. However, the epicentre of the Great Recession was the US financial system itself: the crisis came from inside the economy, rather than from outside. Surely there were warning signs? As Queen Elizabeth herself put it when she attended a briefing at the London School of Economics in 2008, ‘If these things were so large, how come everyone missed them?’ (Greenhill 2008).

      Not all economists did: there were some who warned that a crisis was not merely likely, but imminent. The Dutch economist Dirk Bezemer identified a dozen, of whom I was one (Bezemer 2009a, 2009b, 2010; Keen 1995, 2007). Though these economists came from disparate backgrounds, Bezemer noted that they had one negative characteristic in common: ‘no one predicted the crisis on the basis of a neo-classical framework’ (Bezemer 2010, p. 678).

      One would expect that the failure by economists to anticipate the biggest economic event of the post-Second World War world would cause economics to change dramatically. But it hasn’t. What Bezemer called ‘Neoclassical economics’ was the dominant approach to modelling the economy before the GFC, and it has remained dominant since.¹

      The failure of economics to reform itself after such a profound empirical failure has led to strong criticism of economics from within – even by economists who have been awarded the Nobel Prize in Economics. Robert Solow, the 1987 recipient, told a United States Congressional Hearing into economics in 2010 that:

      We are in desperate need of jobs, and the approach to macroeconomics that dominates the elite universities of the country and many central banks and other influential policy circles, that approach seems to have essentially nothing to say about the problem. (Solow 2010, p. 12)

      Paul Romer, who received the Prize in 2018, argued in 2016 that economics had such a ‘noncommittal relationship with the truth’ that it deserved the label of ‘post-real’ (Romer 2016, p. 5).

These criticisms of Neoclassical economics by prominent Neoclassical economists echo criticisms that economists from other schools of thought have been making for many decades. These rival approaches to economics are very different to the specializations that exist in sciences like physics. Some physicists specialize in General Relativity, others in Quantum Mechanics, Statistical Mechanics, Newtonian physics, and so on. Each of these approaches has different perspectives on how the Universe operates, but each works very well in its respective domain: General СКАЧАТЬ