How the ‘Experts’ Missed the Crash: Philosophical Flaws, No Sense of History

University of Texas Economics Professor James Galbraith is a son of the great US Institutional economist John Kenneth Galbraith, and a leading non-orthodox economist in his own right. He has developed highly innovative methods to measure economic inequality that are well documented here; he is a strident critic of conventional economics; and he has been as active in the USA as an analyst of and commentator on this financial crisis as I have in Australia. His many interviews on the topic are linked from this site.

Galbraith describes himself in this interview on Yahoo Finance’s Tech Ticker as a “financial ambulance chaser”, and someone who did see this crisis coming–unlike the vast majority of the economics professsion, who–like Australia’s own RBA (central bank) Governor Glenn Stevens–not only did not see this crisis coming, but didn’t know anyone else who did.

That’s because they have been raised solely within the neoclassical approach to economics, which has dominated the academic discipline of economics since the mid-1970s. They have been trained to uncritically believe in models of the economy based on the fantasies of hyper-rational individuals (who can predict the future), markets that are always in equilibrium, and a world in which money is simply a veil over barter. They don’t listen to professional economists like myself and James who reject this entire philosophy. By and large, they don’t even acknowledge that we exist.

One excellent question that was put to James by Henry Blodget is worth quoting in its entirety. Blodget quite justifiably expressed the belief that in their training economists look at history–a statement that shows he didn’t himself do an economics degree, because one of the first subjects that neoclassical economists eliminated to make way for their obsessions with “microeconomics” and “econometrics” was economic history:

Blodget: But obviously in training economists, especially academics who go through an incredible period where they’re learning and studying history, and you look back over history where you’ve had many of these complete crashes that were unforeseen at the time. How does academia deal with that? Is the story always told that “Oh yes, but we were stupid and unsophisticated then, and now we’re smart and therefore we’ll see it”? How do people explain that?

James’s reply was:

Galbraith: That’s an excellent question, but the reality is that training in economics does not involve coming to grips with history. Economic history is barely taught in graduate economics departments, and the history of economic thought isn’t taught at all. So figures that have been fundamental to understanding phenomena like the Great Depression–or for that matter the Great Crash–are simply not in the curriculum.

Keynes, who taught my father John Kenneth Galbraith–who understood the Great Depression as well as any figure in the 20th century–… you won’t find them on the reading lists. That is in some sense the shocking commentary on the intellectual direction that the profession has taken.

There’s much more worth listening to in this interview. There is, also, hope. The fact that serious intellectuals who are critical of neoclassical economics are now being listened to by the media and the markets–though not yet governments–is a sign that, possibly, the days of the delusional neoclassical approach to economics are coming to a close.

Unfortunately, it has taken a serious economic crisis–possibly the most serious in history–to bring that delusion to its knees. But in the meantime, people trained in that delusion are still in control of economic policy, and are charged with helping overcome a problem they did not foresee, and still do not understand.

Originally published at Steve Keen’s Oz Debtwatch blog and reproduced here with the author’s permission.

One Response to "How the ‘Experts’ Missed the Crash: Philosophical Flaws, No Sense of History"

  1. CASSE   December 13, 2008 at 4:47 pm

    At the Center for the Advancement of the Steady State Economy, we hope the financial crisis will finally lead the nation to accept the fact that nothing with a material basis – including the American economy – can grow forever. The meltdown is bringing the monetary sector back down to earth, where it belongs and where it should mirror the real economy of production and consumption. This provides ecological economists with a unique opportunity to resonate with the people that there are indeed limits to growth and that, despite all the political rhetoric they’ve been exposed to for decades, we face trade-offs left and right with economic growth. Environmental protection, economic sustainability, national security, and international stability are all threatened by perpetually increasing populations and per capita production and consumption. Progressive politicians, too, will find empowerment in the burgeoning support for the CASSE position on economic growth: CASSE position has over 2,000 signatures and 50 organizational endorsements. When not only environmental organizations, but businesses, child health organizations, mutual funds, religious groups, and local governments are calling for a steady state economy, the time has come for macroeconomic policy reform – and the end of wantonly wasteful, unpatriotic consumption.Brian Czech, Ph.D., PresidentCenter for the Advancement of the Steady State