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03/18/2015

Economics After the Crisis, by Irene van Staveren

Irene bookA year after the fall of Lehman Brothers, The Economist's headline proclaimed the end of modern economics. What has happened since? Well... almost nothing.

Mainstream and near-mainstream economic textbooks still sell like before. And INET has supported some initiatives that eliminate the rough sides of neoclassical thought and neoliberal policy advice. Very laudable initiatives, with, for example, Wendy Carlin's work on developing a new undergraduate curriculum CORE. But students of economics are not satisfied with these minor changes, so many years after the start of the financial crisis. Their Rethink Economics petition demands more fundamental changes to textbooks.

As a supporter of every single petition, pamphlet, op-ed, and plea for pluralism in economics before and after the crisis, I decided three years ago that I should practice what I preach. The result is Economics after the Crisis, a pluralist introductory textbook published by Routledge in January 2015. It offers a tool to understand the basics of economics from four theoretical perspectives either for use in the classroom or for self-study alongside a standard course book. The theories are presented in every chapter, micro and macro. And from interdisciplinary and close to real-world experiences to mathematically in an idealized world of perfect markets and agents following the single ethical guide of utility maximization. The book presents social economics, institutional economics, post Keynesian economics, and neoclassical economics and thereby shows that almost no economic concept or tool is theory-neutral. If only this message gets across, the book will have accomplished already more than I could hope for.

The window of opportunity to reform economic teaching is almost shut. Banks pass stress tests in Europe and the US while still being too big to fail. Nobel Prizes are awarded to economists who show no effort at all in rethinking economics. And economic policies ignore the danger of continuously increasing private and public debt, while shifting the consequences of such myopia on disadvantaged groups and whole populations.

If it is not now, we may have to wait for the next crisis to change economic thinking and teaching. I truly hope that the combined efforts of critical economists, activist students, and courageous teachers will help to make the change. We cannot afford to standby any longer.

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IreneIrene van Staveren is professor of Pluralist Development Economics at the Institute of Social Studies of Erasmus University Rotterdam, the Netherlands. She was awarded the 2014 Lifetime Achievement Thomas Divine award by the Association of Social Economics.

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Regarding the crisis it seems market leaders are in denial. For example, Mr. Henry Paulson addresses China's recent stock market "correction" and the resulting government intervention (Financial Times 22 July 2015, "Let China's markets speak truth to power") with a remarkable lack of self reflection. He lists a number of problems with China's market system under the Communist Party's guidelines and yet he does not realize that his criticisms are assumptions.
He begins by noting that all equity markets are prone to boom and bust cycles but that problems arise when capital markets are underdeveloped. One wonders if he does not consider the Savings and Loan crisis of the late 1980s and early 1990s a problem, or the dot com crash of the late 1990s or the financial meltdown of 2008? He then makes the remarkable statement that the Chinese are protecting investors and that doing so is not the "best way to create a modern capital market." Does he suggest that the market crashes of the 19th and 20th centuries, including 1907, 1929 and 2008 did not create a "modern" capital market or does he mean the process is ongoing?
He assumes that the Chinese "closed" financial system misallocates and misprices capital. But then he argues that "If China is to have a well functioning and stable capital market - which can also help protect investors..." thus suggesting that intervention always creates dysfunctional markets and a lack of intervention results in "stable markets." Does he forget his substantial and unprecedented interventions as Treasury Secretary or those of Alan Greenspan, Bernanke and now Yellen? He also argues paternalistically that the Chinese need more foreign talent to serve their investors, as if western talent was immune to booms and busts in their experience and advice.
He seems confused concerning the need to protect investors, as he states, "Beijing can further protect investors by establishing a well enforced regulatory regime designed to minimize accounting fraud and market manipulation." One wonders why Paulson feels it is the role of government to protect investors, but also where does he expect them to look to develop such a regulatory regime, does he forget the Enron scandal, the demolition of Glass-Steagell and the Worldcom and more recent Libor, London Whale, and other scandals? He also recommends "transparent accounting and disclosure standards" but must have forgotten the Arthur Anderson and Lehman accounting scandals?
Chastising the Chinese by stating they should be "letting the market be the decisive factor" in July of 2015 seems like telling someone not to yet fire while standing in a burned out theater. Perhaps it is better for the Chinese to learn from our mistakes and illusions and for Mr. Paulson to reflect more on the current remains of his work that we are all living with and might have turned out better had he taken his own advice in 2008 and let "the market" have been the decisive factor then.

Niccolo Caldararo, Ph.D.
Dept of Anthropology
San Francisco State University

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