Macroeconomic Theory and its Failings
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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.
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Chapter 1: The Ordinary Economics of an Extraordinary Crisis

Peter J. Boettke and William J. Luther


Peter J. Boettke and William J. Luther INTRODUCTION It is amazing how the economics profession succumbs to mass hysteria in times of adjustment. Why do we even talk of ‘depression economics’? Do the lessons of economic science drastically change in times of recession? Would it make sense to talk of ‘depression physics’ or ‘depression biology’? If economics is indeed a hard science, its claims – like those in physics and biology – must be universal. Admitting that institutions matter does not transform the principles of economics. Those principles transcend time and place; but the manifestation of those principles in action are context dependent. The basic teachings of economics do not go out the window when governments engage in fiscally irresponsible behavior, pursue expansionary monetary policy, and regulate (or even nationalize) industries. In fact, it is the teachings of economics in that context that allow us to predict the results of such a policy path. Extraordinary times call for ordinary economics. A HISTORY OF IDEAS That most modern economists cannot articulate ordinary economics should come as no surprise. Ordinary economics has been out of fashion for some time. While not lost entirely, it has taken a back seat in recent years to model jockeying and equilibrium theorizing. This was not always the case. And, with some luck, the economics discipline might turn once again to a more process-oriented approach. Until then, we must rely on the classics and a handful of scholars who have kept the tradition of ordinary economics alive. The body...

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