by From John Komlos and current issue of RWER We are at the cusp of a new era. The 21st century did not begin in earnest until 2008, signifying a seismic break with the past in ways far too numerous to mention. To be sure, the Dot-Com bubble could have served as a lesson for the vulnerability of Wall Street and that it desperately needed vigilant oversight, but the economy emerged from that short recession relatively unscathed, and the warning sign was misunderstood. Sure, myriad of astute observers had warned for a very long time that neoclassical economics harbors dangerous elements and is merely an exercise in logic “in which social reality is neglected… This neglect is debilitating…” (Lawson, 1997, p. xii). However, it was not until the embarrassing financial crisis of 2008 that the
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from John Komlos and current issue of RWER
We are at the cusp of a new era. The 21st century did not begin in earnest until 2008, signifying a seismic break with the past in ways far too numerous to mention. To be sure, the Dot-Com bubble could have served as a lesson for the vulnerability of Wall Street and that it desperately needed vigilant oversight, but the economy emerged from that short recession relatively unscathed, and the warning sign was misunderstood. Sure, myriad of astute observers had warned for a very long time that neoclassical economics harbors dangerous elements and is merely an exercise in logic “in which social reality is neglected… This neglect is debilitating…” (Lawson, 1997, p. xii). However, it was not until the embarrassing financial crisis of 2008 that the recognition became pervasive that the real-existing economy has “fallen short of any conception of a ‘good economy’—an economy offering a ‘good life” (Phelps, 2015). It was humiliating, since it revealed for the whole world to see that the “emperor had no clothes” despite the immense amount of hubris that afflicted influential academic economists (Appelbaum, 2019; Chang, 2010; Fourcade, 2015; Keen, 2001).
The realization was prompted by at least five earth-shaking policy blunders supported by conservative economists such as Martin Feldstein, Milton Friedman, Friedrich Hayek, Glenn Hubbard, and Gregory Mankiw (Feldstein, 1986, 1989, 1993, 2017). These mistakes converged in a conjunction, fostering the rise of populism, which was a “response to a political failure of historic proportions” (Sandel, 2018). The neoliberal mistakes included:
- a) supporting the Reagan-Thatcher economic policies that were supposed to initiate a new era of prosperity and “mass flourishing” (Jones, 2012). Instead, they magnified inequality not seen since the Robber Barons ruled the economic landscape at the turn of the 20th century and fostered the formation of an oligarchy (Atkinson, 2015; Bartels, 2016; Collier, 2018; Freeland, 2012; Johnston, 2003; Komlos, 2019a, 2020b; Levitsky and Ziblatt, 2018; MacLean, 2017; Mann and Ornstein, 2012; Posner, 2011). Neoliberal economists ignored the crucial role of power in the economy and the political system (Leonard, 2019; Piketty 2020). The immense wealth of the 1% combined with the lack of countervailing power for the rest of society meant that laws and institutions were shaped so as to magnify the privileges of the wealthy (Boushey, 2019; Rajan, 2019). They also neglected that the benefits would accrue mainly to the top 1% of the income distribution and lead to the “hollowing out” of the middle class (Komlos, 2018; Lazonick, 2015; Temin, 2017; Warren 2007; Wolff, 2017). Trickle-down economics was a sham: nothing reached the masses (Komlos, 2019a; Stiglitz, 2011). No wonder they turned against the elites and supported a strongman who promised to “drain the swamp” in Washington, D.C.
- b) Globalization was supposed to be good for Americans. Mainstream economists “parrot[ed] the wonders of comparative advantage and free trade and… consistently minimized distributional concerns…” (Rodrik, 2016a, 2018). In reality, globalization was not Pareto optimal. It had winners and losers with devastating social, political, and demographic consequences: it created the Rust Belt, left millions hopelessly destitute, encouraged the disparagement of the political elite, and the fraying of the social contract that left many with nothing to grasp onto except a bottle, the trigger, or a hypodermic needle (Autor et al., 2020; Case and Deaton, 2020; Chang, 2008; Editorial Board, 2020; Koh, Parekh, and Park, 2019; Komlos, 1988; Krugman, 2000; Pierce and Schott, 2020; Reich, 2015, 2018; Rodrik, 2011; Stiglitz, 2006, 2017; Woolf and Schoomaker, 2019).[1]
- c) Greenspan and Bernanke believed in the neoclassical dogma that deregulation would increase efficiency (Mirowski, 2013).[2] Worrying was superfluous in the era of the “Great Moderation” (Bernanke, 2004). In fact, Nobel Prize winning macroeconomist Robert Lucas had declared earlier in his presidential address to the American Economic Association that the “central problem of depression-prevention has been solved, for all practical purposes” (Lucas, 2003). Following in Lucas’ and Bernanke’s conceited footsteps, Olivier Blanchard, then chief economist at the IMF, and one of the more influential conventional macroeconomists, suggested literally minutes before the Meltdown that “The state of macroeconomics is good” and incomprehensibly, retained this judgement in the published version of his essay, even after the failure of macroeconomics and macroeconomists was obvious (Blanchard, 2009).[3] On the contrary, in spite of all the sophisticated analysts, deregulation and negligent oversight led to an immense financial crisis that added to the political destabilization, as well as to the continual fraying of the social contract (Foroohar, 2019; Minsky, 1982; Kakutani, 2018; Keen, 2017; Komlos, 2014; Krugman, 2009; Schiffrin, 2011; Shiller, 2000, 2008).
Paul Krugman thought that the problem was not only the failure to predict the crisis: “More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy” (Krugman, 2009). In fact, as late as 2007 Bernanke revealed that he had no understanding of systemic risks that had proliferated in the financial sector:
“Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits…. We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system” (Bernanke, 2007).
No wonder the Financial Crisis Inquiry Commission also blamed the Federal Reserve and its chairmen: “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble… To paraphrase Shakespeare, the fault lies not in the stars, but in us…. the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not” (Financial Crisis Inquiry Commission, 2011, p. xvii).
- d) Technological change was supposedly the mainspring of human progress, but, instead, it brought us Facebook, Russian trolls, white nationalists, and other extremists and contributed meaningfully to the destabilization of the political system (Foroohar, 2019; Komlos, 2016c; McNamee, 2019; Zuboff, 2019). In addition, it accelerated the devaluation of the skill set of a substantial number of workers that led to downward social mobility and fostered the feeling of abandonment for many and especially the less educated and less skilled white men.
The mainstream did not learn from history that all such major technological transitions were accompanied by social and political turmoil. For instance, the transition from feudalism to capitalism and from an economy dominated by the agricultural sector to one dominated by industry were characterized by revolutions and upheavals. Why should the transition from an industrial economy to a post-industrial knowledge economy dominated by information technology and finance be different?
- e) The mainstream was encouraging the economy to be run at full throttle so that when the Covid pandemic hit there was little slack to take up. The economy was far from being a black-swan robust society (Taleb, 2006). 40% of U.S. adults did not have $400 cushion on hand to meet an unexpected expense (Board of Governors, 2018, p. 21).
In fact, practically no consequential society-wide prediction of neoliberal economists turned out to be near target as far as the real world was concerned. It should be obvious that they have outlived their usefulness (Skidelsky, 2020). “This failing in the West’s economies is also a failing of economics” (Phelps, 2015). No wonder there has been an outpouring of criticism urging for a reformation of the canon (Bertocco, 2017; Boyle and Simms, 2009; DeLong, 2011; Fullbrook and Morgan, 2019; Piketty, 2020; Rifkin, 2019; Rodrik, 2016b; Saez and Zucman. 2019; Sen, 1977; Stiglitz, 2012, 2017).[4] And no wonder that the “deplorables” revolted. Flawed economic theory has led to economic policy mistakes which led to a dysfunctional political system and fraying of social cohesion. “Like the triumph of Brexit in the UK, the election of Trump was an angry verdict on decades of rising inequality and a version of globalization that benefits those at the top but leaves ordinary people feeling disempowered” (Sandel, 2019). The neoliberals failed and did so miserably (Komlos, 2017; Peters, 2019). read more
[1] Mankiw, then chairmen of the president’s Council of Economic Advisers, revealed his ideological commitment when he justified the outsourcing of jobs, saying that it is “probably a plus for the economy in the long run” (CNN, 2004; Marglin, 2011, @1:52 minutes). He forgot that in the long-run populism might just get the upper hand, even if we are not dead, as Keynes intimated.
[2] The dogmatic and careless nature of Bernanke’s mindset is revealed by how cavalierly he dismissed Minsky’s views on the fragility of the financial sector. Bernanke stated disparagingly that “Hyman Minsky (1977) and Charles Kindleberger (1978) have in several places argued for the inherent instability of the financial system, but in doing so have had to depart from the assumption of rational economic behavior” (Bernanke, 1983). In other words, if you are a true believer, alternative viewpoints can be dismissed without any consideration whatsoever.
[3] This is the kind of hubris that prompted David Graeber of the London School of Economics to suggest that, “Mainstream economists nowadays might not be particularly good at predicting financial crashes, facilitating general prosperity, or coming up with models for abating climate change, but when it comes to establishing themselves in positions of intellectual authority, unaffected by such failings, their success is unparalleled” (Graeber, 2019).
[4] On the 500-year anniversary of Martin Luther’s challenge to the established church, a group belonging to the organization Rethinking Economics and to the New Weather Institute posted “33 Theses for an Economics Reformation” to the entrance of the London School of Economics (Simms, 2017).