The failure of Neoclassical Macro and the Monetary Circuit Theory Alternative

They instead have a superficial, textbook appreciation of their school of thought, which makes it appear coherent. But in fact deep research, often done by neoclassical economists, establishes that the theory is incoherent. I outline one essential aspect of this–the Sonnenschein-Mantel-Debreu conditions–and show that they are a “proof by contradiction” that market demand curves can have any shape at all, and therefore that even a single market can’t be modeled by a simple aggregation of the behavior of rational agents–let alone an entire economy. And yet DSGE models treat the entire economy as a single agent (or at best two, whose tastes can be aggregated into demand functions that obey the “Law of Demand”, in contradiction of the Sonnenschein-Mantel-Debreu results).

I then show the statistical power of the Credit Accelerator explanation of the Great Depression and the Great Recession, outline my Monetary Circuit Theory approach, and show that it can simulate both the Great Moderation and the Great Recession.