Processes vs. mechanisms and two kinds of rationality

GUSTAVO MARQUÉS

Real World Economics Review

World Economics Association

Año: 2014 p. 10 - 24

1755-9472

The contribution of standard mainstream economics to the development of the global financial crisis that began in 2007 has been analyzed in several recent papers. Some authors have denied that mainstream economic theory has had any responsibility in its occurrence and have argued that it could not have been predicted or anticipated. Colander (2010) argued that the actual economic system is so complex that available current models (?DSGE models?) are not sophisticated enough to detect the imminence of such a crisis. In fact, according to him, the situation is even worse because it would not have been possible to foresee the crisis even if the profession had been provided with more sophisticated mathematical models. The problem lies then not in standard economic theory per se but in the nature of economic phenomena. In opposition to this interpretation, some authors have pointed out that the prevailing view of financial systems has much of the responsibility for the occurrence of the crisis. Haring (2013), to quote a recent testimony, argues that conventional textbooks in the field offer a distorted treatment of the nature of money and the process of its creation, and hide the close relationship between central banks and private banks. In particular, the current literature does not mention the fact that most of the money created comes from private commercial banks1. Even more troubling is the hypothesis of efficient markets, which in conjunction with rational expectations theory makes impossible (by hypothesis) the occurrence of crises, inducing a wrong analysis of the role of liquidity and ignoring the conditions that can lead to a crisis. Standard economics were not well fitted to appraise the health of the global economy.?Why did the majority of economists fail to foresee the Global Financial Crash of 2008?? We can now answer this question quite simply as follows. The majority of economists were members of the Neoclassical School. They therefore accepted the core of the neoclassical paradigm, namely equilibrium theory.