A Critique of Conventional Economic Wisdom
May 24-26, 2012
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The international financial crisis brought the world’s economy down to its knees and placed economics as a discipline in crisis, the depth of which may be paralleled only by the aftermath of the Great Depression. Consequently, the debate about the current state of economics has greatly re-intensified since at least 2008, and ranged in scope from the basics of what we traditionally teach in undergraduate and graduate economics courses to the very core of economic theory and policy choices.
A review of the literature would in our judgment reveal that while the debate is warranted and long overdue, it has revolved around reforming conventional economic wisdom. To reform the latter is to maybe tinker with one thing here, possibly change another there, or even plausibly introduce new elements or considerations into what already exists.
In this paper, we argue that to limit our efforts to reforming conventional wisdom, keeping in mind the pains we undergo in the process, is missing out on the historic opportunity that has opened up to truly redirect economics toward the right track of realism. This redirection will require in the least reflection on the epistemology of economics, thought about the philosophy that underlies economic theory, and consideration of an interdisciplinary approach that may lead to incorporating advances in related disciplines. It is only after we restudy these fundamentals that we must reexamine the roles of markets and mathematics in economic analysis.
This paper is predominantly theoretical. It relies on reexamination and analysis of existing theories, principles and fundamentals. What has been taken for granted in economic analysis becomes subject to question in this paper.
Economics, macroeconomics, economic theory, economic policy, international financial crisis, international economic crisis, economic science.
Economics is in crisis. Contemporary conventional economic wisdom did not see the international financial crisis coming. Apart from issuing a warning here or sounding the alarm there, no economists had forecast the crisis, as was exclaimed by Queen Elizabeth during a visit to the London School of Economics in 2008.
This great and grave failure led former BIS chief William White (2009) to title a piece written for IMF’s Finance and Development in December of 2009, “Modern Macroeconomics is on the Wrong Track.” For his part, MIT’s economic historian Peter Temin (2011) opened an interview with The Straddler saying, “In my opinion, macroeconomics has lost its way.” Columbia’s Joseph Stiglitz (2010) was not as diplomatic when he wrote, “Economics is in a sorry state of affairs.” Meanwhile, Harvard’s Larry Summers (2011) summed up the observation, the problem and the solution all in one sentence as he stated, “Even though economics knows a fair amount, it has forgotten a fair amount that is relevant and it has been distracted by an enormous amount.”
Yes, economics is in crisis and conventional economic wisdom has been subject to question, debate and discussion, extensively since the outbreak of the financial crisis back in 2007, and alternatively in circles deemed marginal to the mainstream since long before that. One must note that it is rare for economists to agree on something. Yet, they do seem to converge toward the notion that something must be done about economics as we know it. Departing from this notion, various economists have proposed critiques of various aspects, elements and dimensions of conventional economic wisdom ranging from the purely theoretical...