David Jacobson: I can’t help wondering why the people whose theories are responsible for the current crisis continue to be listened to by those trying to find solutions. In general terms traditional economics – the dominant economic paradigm – is more or less the only economics taught in economics departments in Ireland. In relation to micro-economics – the economics of firms as suppliers and people as consumers – this is called Neoclassical Economics. In relation to macro-economics – the economics of GNP, of interest rates, fiscal policy and unemployment – this is the New Classical Economics. Sub-disciplines in economics, like International Finance, use both micro and macro. The primary argument underlying financial markets in the period leading up to the current collapse has been that markets work, and that they work best when “unimpeded” – by which is meant unregulated. Left to their own devices, the argument went, markets will reach “equilibrium”, which is the position closest to the optimum interest of the buyers and sellers.
All this of course ignores the extent to which markets are made by key players. Think of the answers to the following questions: Who sets the rules? Who monitors and inspects to ensure that the rules are followed? Do those rules in any case favour some players? How closely are the rules followed in practice? What happens to those who do not follow the rules? What are the social consequences of great wealth in the hands of the few who successfully manipulated the rules, without prosecution? If the trust necessary for the successful operation of a banking system has broken down, how can it be rebuilt?
Only to a very small extent are these questions addressed by those working within the dominant economic paradigm. But it is just such questions that need to be answered before we can achieve a modicum of stability in the future. Either economists are going to have to look beyond the parameters of their training, or others, from other disciplines, will suggest answers. This is one case where the demand (for solutions) will successfully generate supply, at least in the long run!
Professor David Jacobson teaches at DCU