The crisis, conventional economic wisdom, and public policy

Abstract

This contribution, based on the presentation at the inaugural conference of the Institute for New Economic Thinking (Cambridge, April 2010), first, discusses the core building blocks of a conventional policy wisdom grounded in almost caricatural simplifications of “general equilibrium” research program. In that, intellectual conformism, interests, and ideology produced the dominant pre-crisis policy package. Second, it briefly reviews alternative streams of thought well present before the crisis that addressed major properties of actual economic systems such as asymmetric information, irrational behaviors, destabilizing speculation and herd-type dynamics. Against this background, third, it discusses some major current policy and institution-building issues, namely, the ramifications and consequences of the Too-Big-to-Fail argument; fractional reserve banking; and more generally, the inherent potential for instability and rent-extraction of “liquid” and seemingly “efficient” financial markets.

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