Friday, September 20, 2013

20/9/2013: "Did Capitalism Fail?" by Roman Frydman and Michael D. Goldberg

Here is an essay that is a must-read, especially if you are my student in TCD or UCD:

via @ProSyn:

Did Capitalism Fail?

Few quotes setting the stage:

The Global financial crisis "was not so much a failure of capitalism as it was a failure of contemporary economic models’ understanding of the role and functioning of financial markets – and, more broadly, instability – in capitalist economies."

"These models provided the supposedly scientific underpinning for policy decisions and financial innovations that made the worst crisis since the Great Depression much more likely, if not inevitable."

A "flawed assumption – that self-interested decisions can be adequately portrayed with mechanical rules – underpinned the creation of synthetic financial instruments and legitimized, on supposedly scientific grounds, their marketing to pension funds and other financial institutions around the world."

Contemporary economists’ reliance on mechanical rules to understand – and influence – economic outcomes extends to macroeconomic policy as well, and often draws on an authority, John Maynard Keynes, who would have rejected their approach. Keynes understood early on the fallacy of applying such mechanical rules. “We have involved ourselves in a colossal muddle,” he warned, “having blundered in the control of a delicate machine, the working of which we do not understand.”

The “New Keynesian” models …assumed that an economy’s “true” potential – and thus the so-called output gap that expansionary policy is supposed to fill to attain full employment – can be precisely measured. But, to put it bluntly, the belief that an economist can fully specify in advance how aggregate outcomes – and thus the potential level of economic activity – unfold over time is bogus."

Years ago I run a series of interviews with Roman Frydman, one of the co-authors of the essay I quoted from. I should dust it out - it was recorded before the crisis hit and I recall Frydman's clear explicit warning about the build up of overconfidence on behalf of the financial system and its regulators that cut across his thinking so elegantly developed, together with Goldberg, in Imperfect Knowledge Economics ( 
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