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 3: Toward a New Sustainable Economy

Robert Costanza


Robert Costanza The 2008 financial meltdown was the result of underregulated markets built on an ideology of free market capitalism and unlimited economic growth. The fundamental problem is that the underlying assumptions of this ideology are not consistent with what we now know about the real state of the world. The financial world is, in essence, a set of markers for goods, services and risks in the real world, and when those markers are allowed to deviate too far from reality, ‘adjustments’ must ultimately follow and crisis and panic can ensue. This problem was identified as far back as the work of Frederick Soddy in the 1930s (Soddy, 1933). To solve this and future financial crises requires that we reconnect the markers with reality. What are our real assets and how valuable are they? To do this requires both a new vision of what the economy is and what it is for, proper and comprehensive accounting of real assets, and new institutions that use the market in its proper role of servant rather than as master. The mainstream vision of the economy and model of development (also known as the ‘Washington Consensus’) is based on a number of assumptions about the way the world works, what the economy is, and what the economy is for (see Table 3.1). These assumptions were created during a period when the world was still relatively empty of human beings and their built infrastructure. In this ‘empty world’ context, built capital was the limiting factor,...

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