Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo
Chapter 8: Epic Recession and Economic Theory
8. Epic Recession and economic theory Jack Rasmus In a gathering a few weeks ago in Cambridge, UK, economists and financial practitioners met to begin the attempt to forge a new paradigm for economics. That gathering, the inaugural session of the Institute for New Economic Thinking, held 8–11 April 2010, reflected the view that ideas follow changes in real events – at least economic ideas and qualitative shifts in real events. The real change, of course, is the global financial crisis that, after nearly three decades of periodic, partial eruptions and temporary containment, imploded globally in late 2007. The implosion precipitated in turn a major contraction in non-financial sectors of the global economy in 2008. That contraction still continues to evolve in the wake of the cataclysmic economic events of 2007–09. However, prevailing mainstream economic theory continues to fail to predict the evolution of such events, just as it failed to predict their origins and eruption. With a lag behind both the financial and real events, it has now become increasingly clear that the old post-1945 paradigm of economic thought has also collapsed. That paradigm collapse is not just a matter of the discrediting of ‘efficient market hypothesis’ (EMH). The collapse of EMH is just one expression of a more fundamental crisis at the root of contemporary economic theory in both of its major wings, which this writer has called ‘Hybrid Keynesianism’ and ‘Retro-Classicalism’. The crisis is ultimately the consequence of that paradigm’s faulty theory of price, a too...
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