Robert Johnson — Finance for Real People and the Real Economy

Ironically, it is the false reassurance provided by our prevailing economic theories that has proven to be a significant destabilizing force. Based on the simplistic deterministic assumptions of equilibrium and stability these theories promised a golden future in the age of finance. Unfortunately, they also turned out to be absurd.

As Nobel Laureate and INET Advisory Board member Joseph Stiglitz recently noted, “Academic economists played a big role in causing the crisis. Their models were overly simplified, distorted, and left out the most important aspects. Those faulty models then encouraged policy-makers to believe that the markets would solve all the problems.” 

In other words, tired orthodox economic theories led to the creation of bad maps of financial behavior. And those maps led to excessive leverage, inadequate regulation, and toxic complex securities. So it was all but inevitable that our ship would eventually slam into the rocks, as it did in 2008.

Read it at LesEchos
Finance for Real People and the Real Economy

by Robert Johnson | Executive Director. Institute for New Economic Thinking