Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo
Chapter 1: Who Predicted the Crisis and What Can We Learn from Them?
Dirk J. Bezemer 1.1 INTRODUCTION The recent credit crisis and recession are seen to have discredited the mainstream economic paradigm because so many economists ‘got it so wrong’ (Krugman, 2009). Friedman (2009) linked both when he wrote about ‘the failure of the economy and the economists’. This paper takes this view as a starting point rather than a conclusion. It asks what, precisely, are the elements in the mainstream paradigm that caused many economists to misjudge the state of the economy so dramatically in the years leading up to the 2007 credit crisis and the 2008–09 recession? In order to address this question, this paper adopts an inductive approach. The research method involves scrutinizing the work of 12 economists who warned about the crisis, and to identify the common elements in their thinking. This is then contrasted with mainstream thinking. This is a new angle, as neither Krugman nor Friedman paid much attention to those economists who did not get it wrong (Galbraith, 2009). Moreover, it allows for the identification of critical elements of a more realistic economics based on the works of those economists themselves – rather than through the prism of those, like Krugman and Friedman, who did not warn beforehand that a financial crisis was brewing. Previewing the results, we will find that those who ‘saw it coming’ in their analyses emphasized financial assets, debt, the flow of funds and the overarching accounting identities in the macroeconomy as the context and constraints to economic development – elements absent...
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