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John T. Harvey

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John T. Harvey

One would have thought that the financial crisis would have served as a decisive empirical test, separating the wheat from the chaff. Instead, very few schools of thought have shifted their positions. Part of the reason is no doubt because, as Einstein once said, theory determines what we see (Salam 1990, p. 99). To illustrate this point while at the same time educating students about the Greek financial crisis, this paper outlines a classroom lesson built around two competing graphical analyses of exchange rates and the balance of payments: the Monetary model and the post-Keynesian open-economy/Z–D model. Each one offers an internally consistent explanation of developments in the peripheral EU countries, but suggests a different cause and solution. The paper will show how variations in method lead members of these schools of thought to believe they are witnessing phenomena that validate their mutually inconsistent analyses.

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John T. Harvey