There was once a physicist, a chemist and an economist who were marooned on a desert island. Luckily they had plenty of tins of food but unfortunately no tin opener. The physicist immediately started to do calculations about the strength of sunrays etc hoping to find a way to burn the tins open. The chemist being more practical started searching; looking for substances and material that he hoped he could use to explode open the tin cans. The economist just looked at all this activity with bemusement. “ Why don't we just assume we have a tin opener”
This is a well-known story and like all such stories it has power because it contains a hint of something that is true. What is very interesting about the current economic and financial crisis is to investigate the theoretical underpinnings of the various economic theories and models that have been used by the political and economic establishment to justify and explain policies that over many years are now proving to be so ruinous and why even now as we all look at the news on the TV and newspapers we see no real wisdom and nothing so aptly described as headless chicken running around.
And when one does that (I mean investigate the theoretical underpinnings of economic theories) one finds that this little story is actually no exaggeration at all. The theories of both the Neoclassical school of economics (the political right) and the post-Keynesian school (the political left) both assume away anything that is awkward and so neither predicted the crisis nor now can do anything other than deny its seriousness.
Both the Neoclassical and the post-Keynesians both assume that money and credit play no part in their understanding of how the economic system works. That’s right – no part at all. The Neoclassicals see money as the oil of a perfect market system that will always yield the best results by assumption. While the post-Keynesians see money and credit as the essential and painless fuel that can power anything that you need.
So what are the lessons of all this? Well one is to understand that the conventional wisdom is normally far from the truth. Another is that the academics or high priests who support this wisdom will have been bought by the vested interests that benefit from the conventional wisdom. Right now it is the bankers but governments will be involved somewhere down the line as the government is the biggest academic funder by a country mile. And it really helps if you have the Nobel committee on your side.
No, there is no alternative but to think for yourself and to know that any opinion you hold has to be tentative and ideally deeply unfashionable. And if any opinion becomes too popular such as the scientific truth of man-made global warming or that mental difficulties are illnesses that require medication to cure it, then you know it will be wrong.
And if you have an hour or so, do view this
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