THE REBIRTH OF ECONOMIC THOUGHT FROM THE ASHES OF THE CRISIS

By Alain Faujas and Adrien de Tricornot

[This article published on 4/12/2010 is translated from the German on the Internet, http://www.nachdenkseiten.de/wp-print.php?p=5134.]

In the train of the Nobel Prize for Economics awarded to Milton Friedman in 1976, the neoliberal-monetarist dogma gained global acceptance as the mainstream of economic thought. The change of dogmas introduced with the awarding of the Nobel Prize was first converted into economic policy in industrial countries by Margaret Thatcher (1979-1990) and Ronald Reagan (1981-1989). The American president announced the state was “the problem” for the functioning of the economy. State action could not solve economic problems.

Battle against inflation, independence of the central banks, deregulation, flexibility of the labor market etc. were the new slogans of the conservative (counter-) revolution that were also adopted by the World Bank and the IMF. The Washington Consensus formulated by officials of the US Treasury Department together with representatives of the World Bank and the IMF demanded total market opening, reduction of public and social budgets, abolition of existing regulatory institutions and export orientation as the economic-political priorities.

Since the conversion of neoliberal prescriptions (as from 1815-1929) led to grave financial crises (Latin America, Far East, Russia etc), the opposition of renowned economists also raged. These economists were also distinguished with Nobel Prizes (the French Allais, the Indian Amartya Sen and the Americans Stiglitz, Krugman, Ostrom and Oliver). The criticism and thought of these economists was acknowledged through the state-economic intervention practiced in the current worldwide economic crisis.

The classical-neoclassical model of markets controlling themselves – through the self-interest of rational economic subjects – was an “obvious” truth (in public perception). This was also true for the neoclassical notion of money as a “veil” whose quantity could influence the price level but not production.

The latest reality of economic crises thoroughly destroyed the neoclassical thesis. The crisis showed its limitation and conditionality. Therefore economists today raise fundamentally new questions. Starting from Keynes’ theoretical economic conception, the recently named chief economist of the IMF, Oliver Blanchard and other economists develop more realistic and rational economic-political models than the neoliberal utopia. Christian Walter, economic researcher at the research center for the analysis of financial risks (Cefra) in Lyon, says neoclassicism in its models referred to economic-financial risks and tries to narrow down those risks with the help of probability models. In the 1920s, Keynes referred to the fact of complete uncertainty of economic development that could not be grasped by the probability calculus. Walter argues that Keynes in chapter 12 of his “General Theory” encouraged economic action through creation of a stable environment of social agreements (“conventions”).

New lines of academic thought based on this Keynesian approach will doubtlessly be more important in the future. However the hegemony of the praxis and theory of neoliberal economic policy oriented in “calculated risk” must be first broken. The recent international regulation agreements on the banking system, the insurance system and business management were still based on the risk-thinking or on models of rational conduct of neoclassicism and completely faded out the fact of insecurity emphasized by Keynes. The regulations actually agreed on rules for the pathogenic gambling that was the cause of the crisis.

According to Walter, the states were afraid of questioning their economic-political strategies despite their blatant failure. The main obstacles for a political change are the political power relations. The shrinking back of the British government from the pressure of regulating hedge funds and the vacillations in debt cancellation assistance for Greece through the pressure of the German government are examples.

Veroniques Riches-Flores, chief economist of the Societe Generale, has also outlined a new economic policy affecting social conditions. In any case, the economic policy of price stability priority propagated globally for 20 years broke down in the economic crisis. State action must now have priority for economic demand, promotion of structural growth, overcoming the crisis of inherited debts and regulation of the markets. The questioning of German economic policy by the French minister of finance and economics Christine Lagarde goes in the same direction: “Germany has been a model of supply-oriented economic policy. Today we tell Germans: create demand!”

Economic-political doctrine also changes worldwide through the stronger state economic policy of threshold countries. According to Riches-Flores, neoliberal ideology must be limited and accept its limits as the economic belief of yesterday. The new economic thinking must be more just to the dynamic of the real world.

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