delanceyplace.com 4/18/12 - debunking economics

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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 eco­nomic theory and economic policy, the current US Federal Reserve chair­man 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 ex­pected, 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 eco­nomic 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. Distinguish­ing 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)