August 27, 2015

The heterodox perspective becomes dominant

Comment on BC on ‘Quick thoughts on the stock market and the economy’


I agree with your analysis. My perspective, however is different. You say financial crises are the nature of capitalism. The Nature-argument implies — intentionally or unintentionally — that things have to be accepted as given like the law of gravity. This, however, is not true for institutions like the financial sector of any regional/national economy.

We know that orthodox economics is a scientific failure. Therefore, the familiar explanations of how the economy works cannot be taken at face value. Heterodoxy has to do better. This implies that we do not ask: does the stock market work as the efficient market hypothesis assumes? but: do we need a stock market? And if so, how can we make sure that it functions without negative externalities?

As you say, the market economy can only exist as growing economy. On the other hand, it cannot grow much longer. The core problem is how to achieve the transition to a stationary or even shrinking economy without a self-reinforcing downward spiral. This is the actual situation of China, but under the broader perspective it is the situation of the world economy.

Neither Walrasian nor Keynesian theory can deal with the situation. My point is: we have a lot of good descriptions of what goes on in the world economy — and yours is one of it — but we still lack a comprehensive theory that includes some ideas for a soft transition of the world economy after expansion has run its course.

China's chance is that it invents the new sustainable economic order and the appropriate institutions. This presupposes to rethink theoretical economics from the ground up. Hence, Chinese economists are by nature heterodox. Why are we still discussing local pseudo-issues like DSGE, rational expectations, Lucas’s mathiness, or McCloskey's silliness? That has become rather boring, to say the least.

Egmont Kakarot-Handtke

Connects to 'Quick rethinking of the stock market'. For the long run perspective see the working papers 'Mathematical proof of the breakdown of capitalism' and 'Beginning, crises, and end of the money economy'.