Edited by John B. Davis and D. Wade Hands
Chapter 19: The Dismal State of Macroeconomics and the Opportunity for a New Beginning
L. Randall Wray 19.1 INTRODUCTION The Queen of England famously asked her economic advisors why none of them had seen ‘it’ (the global financial crisis) coming. Obviously the answer is complex, but it must include reference to the evolution of macroeconomic theory over the post-war period – from the ‘Age of Keynes’, through the Friedmanian era and the return of neoclassical economics in a particularly extreme form, and finally on to the ‘new monetary consensus’ with a new version of fine-tuning. The story cannot leave out the parallel developments in finance theory – with its efficient markets hypothesis – and in approaches to regulation and supervision of financial institutions. Even if the early post-war ‘Keynesian’ economics had little to do with Keynes at least it had some connection with the world in which we actually live. What passed for macroeconomics on the verge of the global financial collapse had nothing to do with reality. It is difficult to see that anything taught as macroeconomics in the best-selling textbooks in 2007 will survive. It is as relevant to our economy as flat earth theory is to natural science – warranting a small footnote in the history of economic thought. In short, expecting the Queen’s economists to foresee the crisis would be like putting flat earthers in charge of navigation for NASA and expecting them accurately to predict points of re-entry and landing of the space shuttle. 19.2 POST-WAR DEVELOPMENT OF MAINSTREAM MACROECONOMICS Many authors have previously questioned the degree to which ‘Keynesian’ theory and policy...
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