The July 18th issue of The Economist is focused on the economic crisis and the economic theory that failed to prevent or, for most, even foresee the crisis. The cover is telling--a book labeled "Modern Economic Theory" that is melting away, with the words "Where it went wrong-and how the crisis is changing it" beneath. That sounds like the magazine intends to investigate the sources of the crisis in modern economic theory. But does it? Only in a sort of halfway approach. There's a lead-in on "what went wrong with economics" (page 11). It claims that economics as a discipline "deserves a robust defence" and that "so does the free-market paradigm."
There is, to be quite clear, very little real justification for those statements. Both, in my view, have failed us, in that the free-market paradigm does not work. Without substantial state processes and institutions that impose restrictions on free markets--such as regulatory agencies looking out for consumers, anti-trust enforcement preventing singular companies from growing so large that they can have a systemic effect on the system--we will have skullduggery llike the Madoff ponzi scheme and market control such as that exerted by the several large banks who have essentially set anti-consumer/pro-rent policies in lockstep over the last few years, while engaging in speculative behavior and abetting tax avoidance in many cases like UBS's that are bad for the system and bad for ordinary Americans but good for greedy bankers.
What does the lead-in admit to, then (if it still thinks economic and free market theory are worth defending)? It acknowledges that the discipline is subject to three critiques:
1) it helped cause the current economic crisis
2) It failed to see it coming
3) It doesn't know how to fix it.
In my book, that doesn't leave much out. A theory that actively causes harm, can't prevent it, and can't cure it is not much of a theory.
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