Abstract
The current global context poses several paradoxes: the recovery from the 2009 recession was not a recovery; investment, normally driven by profit rates, is lagging and not leading economic activity; the crisis is global but debate involves sub-global levels; and public safety-nets, which have helped to stabilize national income, are being cut. These paradoxes can be traced, in part, to the impact of the ?truce? that followed the Keynesian-Monetarist controversy on economists? ideas about policy activism. This implicit ?truce? has removed activist macro policy from discussion, and shifted attention toward institutions as mechanisms for solving game-theoretic coordination problems. Policy activism then centers on how the ?agents? (nations) can achieve optimal use of their available resources (or optimal access to resources) at the global level; and this involves creating and fine-tuning compacts - neoliberal mechanism designs - that can capture rents and attract globally mobile capital. This approach leads economists to see the key problem in the current global crisis as fixing broken neoliberal mechanisms. However, a global economy dominated by mechanisms that feed on aggregate demand without generating it faces the prospect of stagnation or collapse.
Highlights
Randall Wright, in a retrospective assessment two decades later, observed that “Models of Monetary Economies set the agenda and the terms of discussion for monetary economics over the quarter century.” (Wright 2005, p. 2). This is true insofar as attention turned in monetary economics to the features of analytical worlds – that is, the specific deviations from Walrasian general equilibrium (WGE) that could explain the demand for money, the existence of loan markets, or for other financial phenomena
The reshaping of policy activism by economists who remained mainstream practitioners was facilitated by the increasing use of game theory as an analytical language in economics
Relief is largely unavailable for Greece, Portugal, Spain, and Ireland: for these nations, austerity measures are the only available means of working out their problems. These measures will be hard to swallow, given the higher wages and “safety net” protections of residents in stronger European Union (EU) economies. This flawed and fragile design makes all members of the Union aware of the possibility of failure, and explains the reluctance of the stronger-economy members to agree to European bonds that will be the responsibility of a fiscal union that may soon no longer exist
Summary
Understanding what has gone wrong in economic-policy thinking can be approached by dissecting Bradford J. Paul Krugman’s 2009 New York Times Magazine article decried the domination of contemporary macroeconomics by real-business-cycle, fulloptimization models, with policy implications that pertain to equilibrium worlds instead of the world we live in He acknowledged that the New Keynesian economics that arose in response to these models had become “Panglossian,” in large part because they were committed to an efficient-market view of financial markets that precluded bubbles (and the current crisis, in his view). While Federal Reserve Board members and economists had scarcely acknowledged Minsky’s ideas, their reactions when business-cycle downturns threatened financial disorder largely followed his “big bank/big government” game plan. The Southern members of the Eurozone bind themselves into ever tighter contractions; and political leaders elsewhere offer sacrifices to the gods of fiscal restraint, hoping that the angel of financial-market panic will pass over without marking their doors
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