Reader’s Guide to the Limitations of Orthodoxy

Michael Stephens | February 22, 2012

Matías Vernengo does a quick review of “Getting Up to Speed on the Financial Crisis,” which is a survey of work on the global financial crisis that will be published in the Journal of Economic Literature.  “Getting Up to Speed” is intended as a “one-weekend-reader’s guide” to the crisis.  It offers, says Vernengo, a fine selection of the relevant orthodox literature on the financial crisis.  The problem is that that such a selection only gets you so far in understanding the crisis and its roots:

The biggest problem with their paper is not the limited number of documents reviewed, which seem to be fairly representative of conventional views on the financial crisis, but the limitations of what the mainstream of the profession knows about the crisis, and worse, what the profession clearly does not know it does not know, the unknown unknowns, so to speak. And that is why ignoring heterodox and progressive contributions has been very harmful for the profession.

Vernengo points to a number of heterodox contributions that provide more comprehensive accounts of the dynamics underlying the crisis, including Wynne Godley’s (1999) “Seven Unsustainable Processes” (if you haven’t read this Godley piece, it’s worth your time).  Read Vernengo here at Triple Crisis.

Also take a look at Gerald Epstein’s follow-up, in which he quotes the rather revelatory first sentence of “Getting Up to Speed” (emphasis is Epstein’s):

“Many professional economists now find themselves answering questions from their students, friends, and relatives on topics that did not seem at all central until a few years ago, and we are collectively scrambling to catch up.” …

Note how damning of mainstream macroeconomics this statement is: the key dynamics of the crisis – massive leverage and credit expansion, fed by the shadow banking system, that contributed to a housing bubble and crash – all elements of a macroeconomic dynamics well known to more than one generation of economists trained in the economics of Keynes and Minsky.

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