By now it is clear that something is fundamentally wrong with modern capitalism. The 2008 global financial crisis showed that the system as currently constructed is neither efficient nor stable. If a slew of data hasn't already convinced us that during forty years of slow economic growth in advanced economies the benefits overwhelmingly went to the top 1 per cent – or 0.1 per cent – the anti-establishment votes in the United States and United Kingdom certainly should. The mainstream economists, central bank governors and “centrist” Blairite and Clintonite politicians who set us on and maintained this dismal course and confidently pronounced that globalization and financial-market liberalization would bring sustained growth and financial benefits for all, have been soundly discredited.
Considering the devastation wrought by misguided financial policies over the past decade in particular, one might reasonably have expected a revolution in the economics profession akin to the Keynesian one in the aftermath of the Great Depression. But we tend to forget that, back in the 1930s, as the economy sank ever deeper into depression, many economists in the US and UK stuck to laissez-faire. Markets would correct themselves, they said; no need to meddle. And even after John Maynard Keynes brilliantly articulated what was wrong, and how government actions could set things right, a great number of economists did not want to follow his prescriptions, out of ideological fear of excessive government intervention. So it is no surprise, really, that the economics profession's response to the 2008 crisis has been slow and halting.
That's the way the discipline operates. Five years before the crisis, the Nobel Prize-winning economist Robert Lucas captured the spirit of the profession when he proudly claimed that “macroeconomics … has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades”. To be clear: by that, Lucas didn't mean the problem had been solved by Keynes and his disciples, but by the followers of another Nobel laureate, Milton Friedman, in what came to be called “new classical economics” and “real business cycles” (essentially the idea that economic shocks are efficient market responses). And while many of these Friedmanite economists have stayed remarkably quiescent in the aftermath of the crisis, the ideology and sets of beliefs they pushed and that bear significant responsibility for the crisis remain alive and well.
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