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Ideas are long lived, often outliving their originators, and taking new and different forms. Some ideas live on because they are useful, and become more so as they develop. Others die and are forgotten. But even when they have proved themselves wrong and dangerous, ideas are very hard to kill. Even after the evidence seems to have killed them, they keep coming back in zombie form.
If we are to understand the financial crisis, and avoid the kinds of responses that set the stage for a new and even bigger crisis in a few years time, we must understand the ideas that got us to this point. My book, Zombie Economics: How Dead Ideas Still Walk Among Us describes some of the ideas that have played a role in the crisis. They are
* The Great Moderation: the idea that the period beginning in 1985 was one of unparalleled macroeconomic stability;
*The Efficient Markets Hypothesis: the idea that the prices generated by financial markets represent the best possible estimate of the value of any investment;
* Dynamic Stochastic General Equilibrium: the idea that macroeconomic analysis should not concern itself with economic aggregates like trade balances or debt levels, but should be rigorously derived from microeconomic models of individual behavior;
* The Trickle-Down Hypothesis; the idea that policies that benefit the well-off will ultimately help everybody; and
* Privatization; the idea that any function now undertaken by government could be done better by private firms.
Some of these ideas, such as the Efficient Markets Hypothesis and Dynamic Stochastic General Equilibrium belong to the realm of technical economic theory. Others, such as Privatization are policy prescriptions, derived from these abstract ideas. Still others like the Great Moderation and Trickle-down Economics, are catchphrases for claims about how the economy works, or, at least, how it worked in the thirty years or so before the current crisis.
Together these ideas form a package which has been given various names: ‘Thatcherism’ in the United Kingdom, ‘Reaganism’ in the United States, ‘economic rationalism’ in Australia, the ‘Washington Consensus’ in the developing world and ‘neoliberalism’ in academic discussions.
It is clear that there is something badly wrong with the state of economics. A massive financial crisis developed under the eyes of the economics profession, and yet most failed to see anything wrong. Even after the crisis, there has been no proper reassessment. Too many economists are continuing as before, as if nothing had happened. Already, some are starting to claim that nothing did happen, that the global financial crisis and its aftermath constitute a mere ‘blip’ which should not require any rethinking of fundamental ideas.
A simple return to traditional Keynesian economics and the politics of the welfare state will not be sufficient. It is necessary to develop both theories and policies that respond to the realities of the 21st century economy.
The ideas which caused the crisis and were, at least briefly, laid to rest by it, are already reviving and clawing their way through up the soft earth. If we do not kill these zombie ideas once and for all, they will do even more damage next time.
The book can be purchased via the Princeton University Press website.
John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He is the author of Zombie Economics: How Dead Ideas Still Walk Among Us, recently published by Princeton University Press.
for more info on John Quiggin see: http://www.bing.com/search?q=John+Quiggin&src=IE-SearchBox&FORM=IE8SRC
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