Macroeconomic Theory and its Failings

Macroeconomic Theory and its Failings

Alternative Perspectives on the Global Financial Crisis

Edited by Steven Kates

This innovative book focuses on the current global financial crisis and the inadequacies of the economic theories being used to guide policy. In so doing, it tackles the economic theories that have been used firstly to understand its causes and thereafter to contain the damage it has brought.

Chapter 8: The Coming Depression and the End of Economic Delusion

Steve Keen

Subjects: economics and finance, financial economics and regulation, radical and feminist economics


Steve Keen 1. NEOCLASSICAL FALLACIES AND THE FAILURE TO FORESEE THE CRISIS My differences with the standard neoclassical model of the economy are legion and have literally filled a book. Debunking Economics (Keen, 2001) focused on the flaws in the micro side of neoclassical economics, because that is the wellspring from which all neoclassical economic fallacies emanate. As a derivative product of a flawed microeconomics, neoclassical macroeconomics is born deformed. But it adds key weaknesses of its own. The most important of these are its obsession with equilibrium modelling, its ignorance of the role of credit and debt in a market economy, its refusal to acknowledge class divisions in economic function, income distribution and power, and lastly, in the associated realm of finance, the unjustified quarantining of finance from economics, and the reduction of uncertainty to risk. It follows that my own perception of how the economy operates is that it is a demand-driven dynamic system that normally operates far from equilibrium, in which credit and debt dynamics play the primary role in determining demand, where class differences in both economic roles and income distribution play out in cyclical and sometimes secular trends, and where finance and economic performance are inextricably linked, because uncertainty about the future means that economic actors extrapolate current trends using simple ‘rules of thumb’ that have unexpected consequences over time. My models of this system generate complex endogenous cycles, in which economic breakdown can occur when a rising level of debt overwhelms the economy’s capacity...

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