The financial crisis has been billed a “Minsky moment” in the mainstream media, turning Hyman P. Minsky into a household name. One would think that this was at long last Minsky’s moment of posthumous vindication, and in a way it was. But, oddly, a couple of post-Keynesian luminaries would have none of it. Paul Davidson, the Editor of JPKE, and Jan Kregel, senior scholar at the Levy Institute of Bard College where Minsky had spent the last of his years, were both eager to set the record straight: the current financial debacle did not qualify as a Minskyan crisis because how it unfolded differed from Minsky’s depiction of crises in his writings (Davidson 2008, Kregel 2008a). Of course, whether we think Minsky is relevant for the current crisis or not depends on what we make of him. If Minskyan work means solely his own writings and their restatement, then, Davidson and Kregel are probably right – one cannot help but focus on what is different about the current crisis. But, if instead Minskyan refers to an evolving literature that emanates from but transcends his work, their arguments miss their mark.

In issue 48 of the Real-World Economic Review, Paul Davidson (2009) rightly called for great changes to the global financial architecture, including capital control. Rightly he did so in the name of Keynes. But even one of the world’s leading Keynes scholars fails to do full justice to Keynes’s legacy. For Keynes, capital controls were means to an end: to the low long-term interest rates that he understood as the most important factor in facilitating full employment, stability and a more just distribution of income. Moreover, the theoretical understanding of the operation of an economy from which these conclusions were drawn had many other substantial practical implications that are the reverse of most conventional wisdom.
The purpose of this paper is to make a concise statement of Keynes’s policy in its broadest perspective. As the crisis that engulfs the world is addressed, it seems important to understand just how far from Keynes’s prescription the policy consensus of the past thirty or even forty years has operated. At the same time, the extent to which all prominent – present and past – interpretations of Keynes fail(ed) to capture the true nature of his conclusions must be confronted.

The cognitive disconnect between scientists’ warnings of potential catastrophe if carbon emissions continue unchecked on the one hand, and the political and economic realities of steadily increasing emissions on the other, defines the outstanding economic problem of the twenty-first century. Can economic growth continue while carbon emissions are drastically reduced? Addressing this issue necessarily refocuses attention on the meaning of economic growth itself.

...So when we say that world crude-oil production is going to peak, we do not mean that one day there will be no oil left in the ground, or that all the wells are going to be capped on the same day. We mean that at some point, the oil which is economic to extract (by whatever means) will reach its all-time high, and that sooner rather than later, there will be less and less of it produced each year thereafter.
So the more important question is not how much oil is down below, but how fast one can get it out. If you try to accelerate the extraction process too much, because near money is worth more than far money, you run the risk of reducing the amount of oil and/or gas which can be extracted over the remaining life of the well or reservoir. The foregoing is not a theory. It is economics, engineering and geology all entwined together...

This report traces the roots of the current financial crisis to a faulty U.S. macroeconomic paradigm. One flaw in this paradigm was the neo-liberal growth model adopted after 1980 that relied on debt and asset price inflation to drive demand in place of wage growth. A second flaw was the model of U.S. engagement with the global economy that created a triple economic hemorrhage of spending on imports, manufacturing job losses, and off-shoring of investment. Deregulation and financial excess are important parts of the story, but they are not the ultimate cause of the crisis. Instead, they facilitated the housing bubble and are actually part of the neo-liberal model, their function being to fuel demand growth based on debt and asset price inflation.
As the neo-liberal model slowly cannibalized itself by undermining income distribution and accumulating debt, the economy needed larger speculative bubbles to grow. The flawed model of global engagement accelerated the cannibalization process, thereby creating need for a huge bubble that only housing could provide. However, when that bubble burst it pulled down the entire economy because of the bubble’s massive dependence on debt.
The old post–World War II growth model based on rising middle-class incomes has been dismantled, while the new neo-liberal growth model has imploded. The United States needs a new economic paradigm and a new growth model, but as yet this challenge has received little attention from policymakers or economists.

Despite the creation of a myriad of Federal Reserve (Fed) special discount window facilities, unlimited swap lending to central banks worldwide, and the creation of the Troubled Asset Relief Program (TARP), there appears to be no improvement in financial market conditions. In particular, it is widely lamented that, even with massive capital injections, the banking system is not lending to support the private sector. Comparing the current government response with those to the Great Depression in the 1930s and the Japanese crisis in the 1990s reveals surprising similarities—and the absence of at least three crucial factors. The similarities lie in the initial reliance on monetary and exchange rate policy to reflate asset prices and prevent deflation in goods prices in order to restore normal functioning of the financial system. The differences relate to the absence of (1) direct measures to support bank incomes through interest rate policy, (2) an understanding of the failures of the “modernized” financial system, and thus (3) a clear design for the shape and structure of the financial system that is to replace the current one. The third factor may be the most important deficiency related to attempts to emerge from the current crisis.

Politicians and talking heads on television are continuously warning the public that the current economic crisis that began in 2007 as a small sub prime mortgage default problem in the United States has created the greatest economic catastrophe since the Great Depression. What is rarely noted , however, is that what is significant about this current economic crisis is that its origin, like the origin of the Great Depression, lies in the operations of free (deregulated) financial markets. As I pointed out in two recent articles (Davidson, 2008a, Davidson 2008b), it is the deregulation of the financial system that began in the 1970s in the United States that is the basic cause of our current financial market distress.
Yet for more than three decades, mainstream academic economists, policy makers in government and Central Bankers and their economic advisors insisted that (1) both government regulations of markets and large government spending policies are the cause our economic problems and (2) ending big government and freeing markets from government regulatory controls is the solution to our economic problems.

The long credit crunch that began in the Atlantic world in August 2007 is strange in its extraordinary scope and intensity. Mainstream discourse, referring to a ‘sub-prime’ crisis, implies that the credit crunch has been caused, rather than triggered, by a bubble in the real economy. This is at best naïve: after all, the bursting of an equally large bubble in the Spanish housing market led to no such blow-out in the domestic banking system. The notion that falling house prices could shut down half of all lending in the US economy within a matter of months—and not just mortgages, but car loans, credit-card receivables, commercial paper, commercial property and corporate debt—makes no sense. In quantitative terms this amounted to a credit shrinkage of about $24 trillion dollars, nearly double US UK. Erstwhile lenders were soon running not just from sub-prime securities but from the supposedly safest debt of all, the ‘super senior’ category, whose price by the end of 2007 was a tenth of what it had been just a year before.

On the title page of Foundations of Economic Analysis (Samuelson, 1947) quotes J. Willard Gibb’s famous line “Mathematics is a language.” While correct (there is little that is in Samuelson that is not correct), the quotation may also be misleading because it suggests that there is one mathematics. In our view there are many, and it would have been preferable to say that mathematics is many languages.
The key to the appropriate use of mathematics in economics is to find the right mathematics to use for the right problem, and not to claim more for a mathematical model than it delivers. The reality is that in economics there is no perfect mathematics, which means that to appropriately use mathematics and formal models within economics, one must continually be aware of not only the mathematical model, but also the limitations imposed on interpreting the model by the assumptions imposed by the mathematics.

The fundamental failing of modern economics, or at least of its dominant mainstream project, is not that it was unable successfully to predict the recent crisis but that it is ill-equipped to illuminate much that happens in the economy at any time.
The latter is an assessment that I have advanced and defended on numerous occasions (e.g., Lawson, 1997, 2003). Contemporary mainstream economics relies almost exclusively on certain methods of mathematical deductivist modelling; indeed it insists that formalistic modelling is the proper way to do economics. My contention, defended elsewhere at length, is simply that these methods are in fact largely irrelevant to addressing social reality, and it is the insistence that such methods be everywhere utilised that accounts for the continuing sorry intellectual state of much of the modern discipline.

By now there is little to be added to the narrative of the financial crisis and to the analysis of its proximate and remote causes. A debate on the lessons of the crisis for economics as a discipline and for its practitioners is instead only just beginning. This is the theme of this note, without much pretence to organised thought.
In the past year or so bashing economists has become a fashionable sport. 'Why didn't you tell us?' asked HM the Queen of England when visiting the London School of Economics. An Italian minister said something in Latin which translated into plain English is an injunction to economists to just shut up. Old jokes have been resurrected, sardonic books and articles on the theme written by journalists have come out. Mock trials of the profession have been organised. More seriously, some economists (Daren Acemoglu, Willem Buiter, Paul De Grauwe, Barry Eichengreen, Simon Johnson, Paul Krugman, Roberto Perotti, Pietro Reichlin, Ignazio Visco, Charles Wyplosz and more) have themselves initiated interesting and thoughtful soul searching exercises, mostly in the form of short papers and OpEd or blog columns. Recently (and after this piece had almost been completed) The Economist (July 18) devoted its main leader and two extensive briefing articles to ‘What went wrong with economics.’

The disaster which befell Iceland’s economy in early October 2008 had long been foreseeable. It reflected the collapse of the business model of the Icelandic commercial banks following their privatization, on the one hand, and the inadequacy of the concurrent economic policies of the government, on the other. However, the business and economic policy practices involved were not specifically Icelandic but reflected deep-rooted and long-standing presuppositions of mainstream economics, both methodological and analytical. These include Paul A. Samuelson’s hypothesis in his Ph. D. thesis at Harvard in the early 1940s that a real-world market economy is a “system in 'stable’ equilibrium or motion” and the notion that money is a factor of production. Neither of these presuppositions have any foundation in reason and logic.

Was Adam Smith an economist? Was Keynes, Ricardo or Schumpeter? By the standards of today’s academic economists, the answer is no. Smith, Ricardo and Keynes produced no mathematical models. Their work lacked the “analytical rigour” and precise deductive logic demanded by modern economics. And none of them ever produced an econometric forecast (although Keynes and Schumpeter were able mathematicians). If any of these giants of economics applied for a university job today, they would be rejected. As for their written work, it would not have a chance of acceptance in the Economic Journal or American Economic Review. The editors, if they felt charitable, might advise Smith and Keynes to try a journal of history or sociology.
If you think I exaggerate, ask yourself what role academic economists have played in the present crisis. Granted, a few mainstream economists with practical backgrounds—like Paul Krugman and Larry Summers in the US—have been helpful explaining the crisis to the public and shaping some of the response. But in general how many academic economists have had something useful to say about the greatest upheaval in 70 years? The truth is even worse than this rhetorical question suggests: not only have economists, as a profession, failed to guide the world out of the crisis, they were also primarily responsible for leading us into it.