Financial Crises, Persistent Poverty, and the Terrible Simplifiers in Economics: A Turning Point Towards a New '1848 Moment'

Abstract

A key common element in persistent world poverty and in the financial and (real) economic crisis is the .terrible simplificationÿ . a theoretical overshooting into irrelevant abstractions . that has taken place in economic theory after World War II. As unlikely as it may initially sound, I shall endeavour to explain in this paper how . in spite of its apparent sophistication . equilibrium economics became .mathematized demagogueryÿ based on an extremely simplistic worldview. One element explaining the financial crisis is what Hyman Minsky called .destabilizing stabilityÿ: long periods of stability lead to increasing vulnerability. This paper argues that similar mechanisms are at work inside economics: long periods of economic progress in the core countries lead to increasingly abstract and irrelevant economic theories (.terrible simplificationsÿ). This leads to turning points towards more relevant economic theories, referred to as .1848 momentsÿ. The paper further outlines the key variables that need to be reintroduced into economic theory in order to furnish poor countries with the type of productive structures that makes it possible to eliminate poverty.

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