We have just lived through the worst financial crisis since the Great Depression, and all the economic commentary we hear about the state of the global economy is superficial drivel.
The state of the economics profession is so lamentable that one would not be surprised if there were another recession soon. It took a global crisis for anyone to point to the dismal state of the dismal science. The heroes of the mainstream economics profession and supporters of free markets and financial regulation were forced to admit mistakes. The bail-outs and recovery programmes have been multibillion-dollar lessons that mainstream economics is unrealistic. Economists such as Keynes and Minsky came to the fore again to explain the crisis. It is time that the economics perspectives of nonmainstream economists are given an ear.
Unfortunately, mainstream economists around the world have been hell-bent on purging academia of ‘nonorthodox' economists over the past three decades. Economics courses were turned into recitations of neoclassical faith reinforced by endless drills of mathematical equations and repetitious econometrics exercises. In order to produce the free-market faithful, economics programmes were purged of courses on the history of economic thought and economic history. In developed countries, and in far too many developing countries, development economics is not taught. The financial crisis shows that we require an active State, more regulation – not free markets – and insights into financial markets instead of blind devotion to them. At this time of need, we find that orthodox economists have created a global shortage of heterodox economists.
Most economics students are still studying unrealistic neoclassical economics. They are taught the efficient market hypothesis and to have faith in financial markets' ability to work efficiently and price assets correctly. They are taught that markets are perfect and that State intervention in markets causes problems. They are taught that markets and economies are in a state of equilibrium and that outside factors and events cause instability. They are usually not exposed to ideas by people such as Keynes and Minsky, who explain that capitalist economies are inherently unstable. They showed that an increasingly unregulated and growing financial sector leads to economic instability. In other words, the normal functioning of financial markets leads to cycles of booms and busts and instability in economies.
Even in countries such as South Africa, where unemployment is a huge problem, students in mainstream economics courses would learn an economics where economies do not have involuntary unemployment. Many of the mainstream economic models assume full employment. It is an economics where student are led to believe that unemployed people choose not to work.
Mainstream economics courses would have presented the deregulation of financial markets and inadequate regulation of new financial instruments as unproblematic. In fact, they would have presented these developments in financial markets as positive. They would have taught students that it is wrong to regulate your financial markets. They would have ignored the macroeconomic instability and other risks associated with uncontrolled capital flows into and out of economies. They would have ignored the threat of contagion.
In fact, they would have blamed financial crises on poor economic policies. Their theory, which is besotted with financial institutions, would not have allowed them to understand that deliberate misbehaviour by financiers and their financial institutions would lead to crises. They would assume that financial instruments like derivatives promoted efficiency in financial markets. They would have missed the fact that a great number of derivatives contracts were used to avoid rules and regulations and for speculation.
Today, we know the lessons of the crisis but economics students are still learning the same economics that was taught before the crisis. We are setting up a whole new generation of economists to be shocked when their economies are devastated by a financial crisis.