Capitalism, Macroeconomics and Reality
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Capitalism, Macroeconomics and Reality

Understanding Globalization, Financialization, Competition and Crisis

James Crotty

The essays comprising this collection analyze the deep flaws in the methodological foundation of mainstream economic theory, and explain how these flaws make mainstream economics more ideology than sound social science. James Crotty develops alternative theories built on realistic assumptions that can explain most of the disastrous economic and financial developments of the past four decades. His work contributes to the collective creation of a solid theoretical foundation on which to build an understanding of the ‘laws of motion’ of capitalism in the post WWII era.
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Chapter 5: Structural Causes of the Global Financial Crisis: A Critical Assessmentof the “New Financial Architecture”

James Crotty

Extract

In the aftermath of the financial collapse in the USA that began in 1929, it was almost universally believed that unregulated financial markets are inherently unstable, subject to fraud and manipulation by insiders, and capable of triggering deep economic crises and political and social unrest. To protect the country from these dangers, in the mid 1930s the US government created a strict financial regulatory system that worked effectively through the 1960s. These economic and political events found reflection in the financial market theories of endogenous financial instability created by John Maynard Keynes and Hyman Minsky. Their theories generated a policy perspective supportive of the sharp shift from light to tight financial market regulation that took place after the Great Crash. Economic and financial turbulence in the 1970s and early 1980s led to both a paradigm and a policy regime shift. Efficient financial market theory and new classical macro theory replaced the theoretical visions of Keynes and Minsky, and the existing system of tight financial regulation was deconstructed through radical deregulation pushed by financial institutions and justified by efficient financial market theory. These developments facilitated the transition to a new globally-integrated deregulated neoliberal capitalism.

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