If you are or you advise a person in authority in the private or public sectors, you should know now not to take the advice of economists on faith. They have received far too easy a ride as the accepted vessels of economic knowledge. ask a few enquiring questions, and see whether those vessels ring hollow. When the time comes to appoint advisers on economic matters, quiz the applicants for their breadth of appreciation of alternative ways to ‘think economically,’ and look for the heterodox thinker rather than just the econometric technician.
(Keen, 5, 6)
‘no one saw this coming’
In a paper with the mocking title of ‘“No one saw this coming”: under standing crisis through accounting models’ 5 (Bezemer 2009, 2010, 2011), Dutch academic Dirk Bezemer trawled through academic and media reports looking for any people who had warned of the crisis before it happened, and who met the following exacting criteria:
Only analysts were included who:
• provided some account of how they arrived at their conclusions.
• went beyond predicting a real estate crisis, also making the link to real sector recessionary implications, including an analytical account of those links.
• the actual prediction must have been made by the analyst and available in the public domain, rather than being asserted by others.
• the prediction had to have some timing attached to it. (Bezemer 2009: 7) Bezemer came up with twelve names: myself and Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Jakob Brøchner Madsen and Jens Kjaer Sørensen, Kurt Richebächer, Nouriel Roubini, Peter Schiff, and Robert Shiller.
He also identified four common aspects of our work:
1 a concern with financial assets as distinct from realsector assets,
2 with the credit flows that finance both forms of wealth,
3 with the debt growth accompanying growth in financial wealth, and
4 with the accounting relation between the financial and real economy.
(Ibid.: 8)
If you have never studied economics before, this list may surprise you:don’t all economists consider these obviously important economic issues? As you will learn in this book, the answer is no. Neoclassical economic theory ignores all these aspects of reality – even when, on the surface, they
might appear to include them. Bezemer gives the example of the OECD’s ‘small global forecasting’ model, which makes forecasts for the global economy that are then disaggregated to generate predictions for individual countries –it was the source of Cotis’s statement ‘Our central forecast remains indeed quite benign’ in the September 2007 OECD Economic Outlook. This OECD model apparently includes monetary and financial variables. However, these are not taken from data, but are instead derived from theoretical assumptions about the relationship between ‘real’ variables – such as ‘the gap between actual output and potential output’ – and financial variables. As Bezemer notes, the OECD’s model lacks all of the features that dominated the economy in the leadup to the crisis: ‘There are no credit flows, asset prices or increasing net worth driving a borrowing boom, nor interest payment indicating growing debt burdens, and no balance sheet stock and flow variables that would reflect all this’ (ibid.: 19).
How come? Because standard ‘neoclassical’ economic theory assumes that the financial system is rather like lubricating oil in an engine – it enables the engine to work smoothly, but has no driving effect. Neoclassical economists therefore believe that they can ignore the financial system in economic analysis, and focus on the ‘real’ exchanges going on behind the ‘veil of money.’ They also assume that the real economy is, in effect, a miracle engine that always returns to a state of steady growth, and never generates any undesirable side effects – rather like a pure hydrogen engine that, once you take your foot off the accelerator or brake, always returns to a steady 3,000 revs per minute, and simply pumps pure water into the atmosphere. To continue the analogy, the common perspective in the approaches taken by the economists Bezemer identified is that we see finance as more akin to petrol than oil. Without it, the ‘real economy’ engine revs not at 3,000 rpm, but zero, while the exhaust fumes contain not merely water, but large quantities of pollutants as well.
As the financial crisis made starkly evident, neoclassical economists were profoundly wrong: the issues they ignored were vital to understanding how a market economy operates, and their deliberate failure to monitor the dynamics of private debt was the reason why they did not see this crisis coming – and
why they are the last ones who are likely to work out how to end it.
