The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. JM Keynes
Ideas are long-lived. They often outlive their originators, and, even when they have proved themselves wrong and dangerous, they are very hard to kill.
Before the global financial crisis ideas like the Efficient Markets Hypothesis and the Great Moderation were very much alive. Their advocates dominated mainstream economics and their influence, acknowledged or not, guided the thinking of the practical men and women whose decisions created a financial system in which tens of trillions of dollars of interlinked obligations were built on a foundation of speculative, or entirely spurious investments, and a global economy in which both households and nations lived far beyond their means.
Today these ideas appear to be defunct. Commentators who were proclaiming, a year or two ago, that the business cycle had been tamed, and replaced by a Great Moderation in economic activity, have admitted their error or, more commonly, moved on to talk of other things. The claim that financial markets make the best possible use of economic information, and can never be subject to irrational bubbles, is rarely made, and usually hedged with all kinds of qualifications and escape clauses.
But habits of mind and thought are hard to change, especially when there is no ready-made alternative. The ideas that brought the global financial system to the brink of meltdown, and have already caused thousands of firms to fail and cost millions of workers their jobs, still underlie the thinking of those who are trying to respond to the crisis and, to a large extent, of the commentators and analysts who assess those responses. These ideas are neither alive nor dead; rather, they are undead, or zombie ideas. Hence the title of this book.
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. This book describes six ideas that have played a role … Some of them, like the Efficient Markets Hypothesis and Micro-based macroeconomics belong to the realm of technical economic theory. Others, such as privatisation and central bank independence are specific policy prescriptions, ultimately derived from these abstract ideas. Still others like the Great Moderation and Trickle-down economics, are catchphrases that incorporate a set of claims about how the economy works, or 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 State, economic rationalism in Australia, the Washington Consensus in the developing world and “neoliberalism’ in academic discussions. Most of these terms are pejorative, reflecting the fact that it is critics of a dominant theoretical or ideological framework who feel the need to define it and analyse it. Politically dominant elites don’t see themselves as acting ideologically and react with hostility when ideological labels are pinned on them. From the inside, ideology usually looks like common sense. The most neutral term I can find for the set of ideas described by these pejoratives is ‘market liberalism’, and this is the term that will be used in this book.
The book is organised in a way that I hope will help readers to understand how market liberalism depends on ideas that have failed the test of the global financial crisis, and which, if they continue to influence policy, will ensure a repetition of the crisis. Each chapter starts with a section describing the beginnings of the idea, followed by a section on its theoretical and policy implications. The next section describes the failure of the idea. In most cases, problems were evident well before the current crisis, but those who pointed them out were dismissed or ignored. The final section, entitled “What next”, looks at alternative ideas that may point to an alternative to market liberalism. The final chapter, “Economics for the 21st Century” looks more generally at the kind of policy ideas that will be needed in the light of the failure of market liberalism. A simple return to traditional Keynesian economics and the politics of the welfare state will not be sufficient. It is necessary to develop both economic theories and policy programs that respond to the realities of the 21st century economy.
Back to Start for an outline of the book