From Financial Crisis to Stagnation by Palley Thomas I

Author:Palley, Thomas I. [Palley, Thomas I.]
Language: eng
Format: epub, pdf
Publisher: Cambridge University Press
Published: 2012-02-26T22:00:00+00:00

Conclusion: Theory on the Fly

Chapters 6 and 7 have been long and difficult chapters that explore the plethora of hypotheses invented to explain the crisis. Crisis explanation has become a cottage industry among neoliberal economists because how the crisis is explained is of critical importance as it will influence what happens next. If neoliberalism is to remain the dominant frame for economic theory and policy, there is a need for an explanation that exculpates it.

Chapters 6 and 7 showed that neoliberal explanations do not add up in terms of theoretical coherence or consistency with the evidence. However, the sheer number of hypotheses makes the task of exposing this failing difficult.

The plethora of hypotheses also illustrates a feature of neoliberal economics that can be termed “theory on the fly.” Every time there is a new observation requiring explanation, up pops a new theory that is accepted without regard to whether it fits the larger body of evidence.

This process of theory on the fly has parallels with Ptolemaic astronomy. Every time an observation appeared that was inconsistent with the Ptolemaic geocentric universe, another planetary epicycle was added to explain away the anomaly. Metaphorically speaking, neoliberal economists are now adding new epicycles to defend their Ptolemaic model of the economy. This process is reminiscent of Keynes’s (1931) remarks about Hayek’s book, Prices and Production, in which Hayek sought to explain the Great Depression:

This book, as it stands, seems to me to be one of the most frightful muddles I ever read .... And yet it remains a book of some interest, which is likely to leave its mark on the mind of the reader. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam.

The same can be said of the new neoliberal consensus about the crisis.

The great challenge is how to get other theories on the table. The problem is not that there are no other theories; it is that they are excluded from the room. That leads to concerns about the sociology of the economics profession – a subject that is taken up in Chapter 11.

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