How Economists Contributed to the Financial Crisis
- Kamran Mofid
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Those familiar with my writings know well that in the last number of years I have been at the forefront of highlighting the serious shortcomings of modern economics, as well as the failure of the majority of the economists who teach the subject. Please note: “the majority of the economists”. Of course not all economists are to blame.
In the wise words of the Real-World Economic Review, “It is the delusional mindset of ‘neoclassical’ economists that caused the GFC (Global Financial Crisis). There are realist approaches to economics but which through power politics have been suppressed in universities and excluded from government policy making. Some practitioners of these other approaches did what neoclassical economists falsely claimed was impossible: they foresaw the Global Financial Crisis and warned the public of its approach.”
In all, for a long time now, I have been saying that the current global crises has given us a golden opportunity to ask ourselves some fundamental questions on the role of education in general and the economic, business, finance, marketing and management education in particular and to search for possible answers to these crises. Soul- searching and self-criticism should not be seen as a source of weakness, but as a source of strength, humility and the search for wisdom.
Here, I do not wish to note these writings of mine once again. They can be seen at this website (www.gcgi.info ), for example. What I wish to do however is to share with you an article by a fellow economist that I recently read, reflecting on the failures of modern economics and economists. I found this article very interesting and telling.
As I have said in the past, I hope that with this kind of articles and reflections we may begin an open dialogue with all concerned- colleagues, students and others, so that together we can prescribe a working solution.
Now I wish to present you with the gist of Prof. John T. Harvey’s article, who is a Professor of Economics at Texas Christian University.
“A lot of blame has been spread around regarding the financial collapse and the onset of the Great Recession. Greedy speculators, big banks, Wall Street executives, and Fannie Mae and Freddie Mac have all taken turns as whipping boys. But one group has largely avoided their fair share of attention: economists. They were the ones who provided the intellectual justification for the transformation of our economy over the past thirty years. They stood idly by as jobs went overseas, demand was sapped by increasingly uneven distributions of income, competition was destroyed by lax attitudes towards antitrust laws, and safeguards were discarded in the financial sector. More than that, many actually praised these events. This is not insignificant. Much of the financialization of the U.S. economy (the shift from producing goods and services to managing financial wealth that played such a central role in our collapse) could not have occurred without economists offering their tacit and open approval. Opposition would have slowed, if not stopped, these trends.
There was actually a poll among economists to determine which of their brethren they thought most responsible for our current debacle. The “winners” were as follows:
Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.
Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.
Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.
One might wonder how there could be such a disconnect between the theories employed by these economists and the real world. But, to those of us in the profession, it comes as no surprise. Some of us have been worried to death about it for years.”…