Why the Economist class last 100 yrs got it wrong !

[icm63]

Source: http://www.debtdeflation.com/blogs/2...ally-going-on/

Rarely in human history have policy makers been so badly misled by the so-called experts.

The three key aspects of Neoclassical economics that led to its wildly inaccurate forecasts are the beliefs that:

1. A market economy always tends towards equilibrium;
2. Money impacts “nominal” variables like the rate of inflation, but has no long term impact on “real” variables like employment and GDP growth; and
3. Finance markets are rational; in particular, the level of private debt reflects rational calculations about future income, and can therefore be ignored by policy-makers.

The key aspects of the approach that I take (the “Financial Instability Hypothesis” developed by Hyman Minsky) that alerted me to the approaching danger are the propositions that:

1. A market economy is inherently cyclical;
2. Money is fundamentally credit-driven, and has impacts on real variables as well as nominal ones in the short and long term; and
3. Finance markets destabilise the real economy, because they are prone to bouts of euphoric expectations that lead to debt-financed speculative bubbles.

These very different perspectives have two key effects on the economists who hold them:

• they focus attention on very different sets of economic data; and
• they inspire mathematical models of the economy that are very, very different.

What is “a beautiful set of numbers” lies in the eyes of the beholder


Neoclassical economists focus upon three numbers:

1. The rate of economic growth (preferably above 3% per year);
2. Unemployment (which they prefer to be low, but not “too low”–the moving target for which in Australia was 4.5% until recently); and
3. The rate of inflation (which they prefer to be as low as possible, and certainly below 3%).

This is sooo correct... being accountant trained, the economists of the 1900s (1901 to 1999) who advised governments to focus on the asset side of the economies balance sheet, ignoring the liability side, at there peril !

[*T*]

Re: Why the Economist class last 100 yrs got it wrong !

Yep. Neoclassicals made some brutal assumptions, and then mistook their assumptions for reality, dishonestly failing to incorporate observations.
Equilibrium my arse.