Apologies for not having any new posts for a while but I’ve been working on a paper covering the various arguments by different schools of economics to explain why the Great Recession of 2008-9 took place.
What is revealing is that mainstream economics (and by that I mean the economic theories of the official strategists of economic policy and dominant schools of neoclassical economics and Keynesianism) have been shown to completely nonplussed by the advent of the financial crisis and the ensuing Great Recession.
So over the next few weeks, I shall outline the different ideas of the various schools, both mainstream and the non-orthodox, including the Marxist school.
Given its depth and duration, the Great Recession must be one of the most important case studies for explaining the processes of the capitalist economy. So how robust were the various schools of economic theory in predicting and explaining the nature of the largest and longest slump in capitalism since the Great Depression?
The short answer is that economics as a science has egg on its face over the Great Recession. Most economists did not predict the oncoming of the slump and in hindsight have struggled to explain what happened and its cause or causes.
We can categorise the economics profession into various schools, with the main division between ‘mainstream’ and ‘heterodox’. Taxonomy, of course, will have its exceptions, as Darwinians will be the first to proclaim in the field of biology.
In the mainstream, we have two great schools with sub-divisions. The first is the neoclassical (and by this we should distinguish from the 19th century classical economists of Smith, Ricardo, Malthus, JS Mill and, of course, Marx).
The neoclassical school is what Marx called ‘vulgar economics’. This school is ideologically committed to a belief in the ‘free market’ as a starting assumption rather than as a scientifically objective view of economic organisation.
The neoclassical can be sub-divided into the Walrasian general equilibrium analysis; the traditional monetarists (a la Milton Friedman); and the modern ‘Chicago school’ of ‘efficient market’ theorists.
Within the mainstream, there is also the Keynesian school, which rejects the microeconomic categories of the neoclassical school as relevant to macroeconomic forces. It is divided again. There are the neo-Keynesians with their synthesis with neoclassical equilibrium theory, namely that slumps are really a product of ‘sticky’ factors of production, particularly wages. For neo or New Keynesians, slumps are exogenous to the economic model.
And there are Keynesians who concentrate on other aspects of Keynes’ theory; that slumps are the result of the lack of ‘effective demand’, which in turn is induced by ‘liquidity preference’ in the financial sector or is a product of the irrational movements of ‘animal spirits’ among entrepreneurs and the behaviour of consumers (this wing of Keynesianism has now migrated into ‘in-vogue’ so-called behavioural economics).
The divisions between the mainstream Keynesians and the neoclassical school have become very heated in the aftermath of the financial crash and the Great Recession. But both are still firmly agreed on a market-based system as the only viable form of economy.
Then there are eclectics who sit astride both the major mainstream schools and cherry pick what they want to use. They particularly include the frontmen and women of the official bodies of monetary and fiscal policy like the central bankers (Alan Greenspan, Ben Bernanke or Mervyn King) and economists within government like Larry Summers.
The non-orthodox schools of economics can also be divided between those who look to the more radical aspects of Keynesian thought: namely the irrational behaviour of markets and the inherent instability of the financial sector (Hyman Minsky et al) as the benchmarks for the economic crisis: and the Marxist school that looks to the inherent instability of capitalism as a whole, namely in its non-financial sector just as much as, if not more than, the financial sector.
The Marxist school can be sub-divided between those who see the cause of capitalist crisis in ‘overproduction’ and/or ‘underconsumption’; or in profitability. Once again some sit astride these various heterodox schools and cherry pick – so much for accurate taxonomy here.
Tomorrow, I shall deal with what the official leaders of capitalist economic policy said before, during and after the Great Recession. It’s pretty pathetic.
Don’t forget, much of the arguments on the Great Recession are in my book, available at lulu.com item 6079458.