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Q: What has surprised you most about the response of the economics profession to the financial crisis?
A: What has surprised me most has been my lack of surprise over the reaction to the crisis. The economics profession does not like to engage with phenomena out there that are of a qualitative nature. I always anticipated that the response to the crisis would be to explain it as an exogenous shock, by which I mean a shock that their own theories neither needed to respond to nor needed to accommodate.
Q: A number of economists do acknowledge that there are flaws in the mainstream DSGE models that are used so what do you think is preventing them from being improved?
A: For decades prior to 2008 I encountered a very disconcerting indifference to these problems. It was clear to me that the profession was corrupt in the sense that there was no intellectual curiosity and the flaws in their models, once exposed, were simply pushed under the carpet. Generally speaking economists behaved like a very harsh theocracy the purpose of which is to recapitulate the scriptures and reproduce their own certainties even when they knew they were flawed. As Alan Kirman once put it, their resemble captains uninterested in the seaworthiness of their vessels.
Q: A lot of the discussion has focused on the role that these models might have played in causing policymakers to misjudge the severity of the crisis, but do you think they are also playing a role in holding back a recovery?
The Capital Controversies of 1960s between economists at the University of Cambridge, England, and economists in Cambridge, Massachusetts ended up with a clear victory for the former, demonstrating that the conventional, orthodox theoretical take on capital and profit was bunk. Indeed, the Cambridge -Massachusetts ‘side’ had reluctantly to acknowledge the circularity of their argument and Frank Hahn, who was part of the neoclassical school (and who only recently passed away), wrote up brilliantly the verdict of that debate. But what happened? They just forgot about it and proceeded to use exactly the same models of production and profit functions as before.
Q: Is it possible to build up a critical mass sufficient to begin discussion of these issues among policymakers?
A: I don’t believe that it is possible to reform university economics departments. My hope is that economics as a disciple is going to lose its discursive power and that expertise in central banks and private banks are going to increasing abandon the old orthodoxy, seeking enlightenment in-house or elsewhere. Central banks have been left holding the baby as fiscal policy has become more or less paralysed by political pressures. The Fed is the only thing preventing the US falling into another depression, and you have the Bank of England providing a similar function in Britain. You are even seeing it with the International Monetary Fund. There is a growing bifurcation within these institutions between the inertia- driven policies, like the IMF continuing to impose austerity in Greece or central bank research departments continuing to rely on DSGE models, yet at the same time you have another pole of attraction pursuing a completely different, much more pragmatic approach in their research departments. Meanwhile academic economics remains moribund, trapped in dogmas of their own creation. We saw this once before in the 1940s and 1950s where the policies that effectively gave rise to capitalism’s short-lived Golden Era, in the 50s and 60s, had nothing to do with the orthodoxies that were being taught at the universities.
Q: Do you think that the research needs and extensive resources of central banks have helped to narrow the debate in academia?
A: Of course. But it’s no different to the state of in the… Middle Ages. Back then even the atheists had to learn the Bible inside out, so that they could participate in the ‘conversation’ that went on in the vestibules of power, in polite society, within the establishment more generally. Similarly those in the economics profession today must know the mainstream models inside out, regardless of whether they feel these models are useful, but try to subvert them when designing policy. It’s a ritualised process where adhering to the models’ strictures is a condition for getting ahead.
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Visiting Professor of International Economic Policy, Princeton University14 articles | View profile
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