The 2008 Financial CrisisA Failure of (Neoclassical) Economics

Andrew Gilley

Two Representative Economists

Paul Krugman:

• Columnist for the New York Times• Mainstream (Neoclassical)

Economist

Steve Keen:• Post-Keynesian/Minskyian

Economist• Head of the School of Economics,

History and Politics at Kingston University, London.

The Role of Debt in Theory

Neoclassical: Loanable Funds Model

“…the overall level of debt makes no difference to aggregate net worth—one person’s liability is another person’s asset. It follows that the level of debt matters only if the distribution of that debt matters…” -Eggertsson and Krugman (2012)

The Role of Debt in Theory II

“The key insight about the role of debt in a capitalist society was provided by Schumpeter: in a growing economy, the increase in debt funds more economic activity than could be funded by the sale of existing goods and services alone…Aggregate demand in a credit-driven economy is therefore equal to income (GDP) plus the change in debt.” -Debunking Economics (2011) – Steve Keen

The Evidence for the Importance of Debt

The Evidence for the Importance of Debt II

Hyman Minsky

• Endogenous (internal) vs. Exogenous (external) Theory

• Financial Instability Hypothesis

• “A fundamental characteristic of our economy is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.” –Hyman Minsky (1974)

Hyman Minsky II

• “For the dominant school of neoclassical economics, depressions are a result of some external shock, not of forces generated within the system. The opposite and, in my view, vastly more plausible possibility is that the crisis happened partly because the economic models of the mainstream rendered that outcome ostensibly so unlikely in theory that they ended up making it far more likely in practice.” -Martin Wolf (2014)

A Plea for Pluralism

I. Against methodological exclusion

II. Science: goes with the evidence not tradition

III. Understanding crises and their causes is an important practical concern