Crisis, Austerity, and the Role of Economic Theory in Policy

The history of market systems reveals recurrent patterns of booms and busts over centuries, emanating precisely from the developed world. Economic historians speak of the Great Depressions of the 1840s, 1870s, and 1930s, and of the Great Stagflation of the 1970s, and course the current one which is the first Great Depression of the 21st century. The present crisis has exposed the weaknesses of orthodox economic theory which is built upon an idealized and utterly fictitious vision of capitalism characterized by optimal production and consumption outcomes and the automatic full employment of labor. This paradigm was utterly unable to recognize the build-up to the current crisis, and has failed to develop models relevant to our current circumstance. Alternative viewpoints, such as the one in this paper, have been almost entirely excluded from the conventional discourse. We need to open up a space for a more vigorous debate among competing views.