In one word: timing.
With the demise of the neo-Marxian theories in the late Seventies and the rise of neoclassical economics in the early Eighties, a new course for economics had begun. The new models appeared to be incredibly on-point, elegant, and mathematically intriguing – aside from being politically appealing, as the Reagan and Thatcher governments might suggest.
In particular, Robert Barro, a staunch neoclassical economist, praised these last two aspects of the new economic models in his 1989 paper New Classicals and Keynesians, or the Good Guys and the Bad Guys. His theory of the Real Business Cycle (RBC), developed from the works of Ed Prescott and Finn Kydland, seemed to explain what heterodox economics (as well as the Keynesian one) failed to grasp – the economic upheaval of the Seventies.
Thus, were one to criticize the RBC or the economics policies of the UK and the US, they would be put a big, fat label saying “terrorist” on their forehead. There really seemed to be no alternative. In the Eighties there wasn’t much evidence that said new theories didn’t work. Trickle-down economics might’ve been a sham, yet President Reagan and Prime Minister Margaret Thatcher both led their respective countries to an era of apparent grandeur. The empires of the new technology were set for glory.
When glory experienced its boom, at the turn of the new century, the bust was but behind the corner. New economics started to crumble under its own weight, as it struggled to conjugate the real and the financial sectors, with the latter growing exponentially. A breakdown was soon bound to happen; yet were one again to criticize the neoclassical instances or, say, the Clinton administration, once again they would be shown the way to the closest psych ward.
This is neither speaking in hindsight, nor apologizing for heterodox economics, let alone neo-Marxian theories. History and common sense would prove much more efficient were they applied correctly – and new economists did neither. Their models were both timeless (despite their pretense of stochasticity and dynamism) and so mathematically sophisticated they managed to go beyond reality itself, creating a world of their own – that of the perfect markets and the economic übermensch, who may not be infallible, but whose fallibility hides behind his rationality, capable of evening positive and negative assumptions alike.
How, then, to pursue a path closer to the real world, full of externalities and where human assumption can be irrational or, more simply put, plain wrong? For starters, it would be good if the academe accepted other points of view, and if policy-makers applied them. Economics, after all, is a science created by the people and for the people, and as such it bears all its vices. To assume any given economic theory could frame reality in the truest manner is like a fool’s walk in a fools’ parade. In other words, it’s a dream droplet in a sea of utopias.
What is to be done is the setting up of a model mechanism that would allow for non-mainstream theories to be easily spread to the public, instead of being confined in journals of heterodox thinking, which instead would only serve the purpose of accentuating the stigma against them. The late rediscovery of Hyman Minsky is a prime example of the road that needs be taken. In his words, when economic models become so complicated that the assumption underpinning their inner workings have no connection whatsoever with reality, they also become ends in themselves. And what use is a model that is both the basis and the roof of itself? Minsky’s post-Keynesian approach proved that neoclassical models were as far from elegance and appeal as they could be: they were uncouth and poor. The clotted pipes of the financial sector, hidden though they were, could no longer be ignored.
This is why the timing for Rethinking Economics couldn’t be righter. The ongoing crisis has to be the call for change that economics needs. People have understood this for almost five years now. In her 2011 speech, IMF President Christine Lagarde clearly stated that there is an alternative [way]. What is stopping us, as the individuals who make up the world economy, then? There is actually no excuse stopping us, aside from ideological dissent. Nobody would dare show the naysayer the way to the closest psych ward, today; nobody would label them an economic terrorist; instead, it is far more likely that they would sit and discuss. Maybe reach no compromise, but at least argue.
The wall between the faucet and the pipes has crumbled down, and the plumber only needs to show up. But even a plumber needs to attend a vocational school. This is why a new new-economics must rise from the ashes of this stalemate and burn again, stronger and redder, warming the hearth of university classrooms.