History

INET Berlin 2012 - back home again. On stage, it’s been a huge amount of claims, assertions, and arguments about what went wrong, about what exactly happened, about why this time was different, about what will certainly happen, and about what remains deeply uncertain, about what “we” shall do about it, about what “we” could do better.

The title of the conference, “Paradigm Lost,” is an obvious combination of two references.

The ongoing eurozone crisis has prompted many to argue that monetary union withoutfiscal union was bound to fail.

Leading thinkers from outside the developed countries look to the future, spotlighting the pitfalls and opportunities thatawait us.

Albeit the majority of the profession either ignores Minskyís Financial Instability Hypothesis (FIH) or considers it plainly wrong, at least since the mid-80’s a few influential economists —who have certainly not embraced any unorthodoxcredo —have grown more receptive to this idea and eager to incorporate it in their models, even if diluted and sometimes disguised in order to make it more palatable to the conventional “representative” macroeconomist

In the seemingly never-ending aftermath to the economic crisis that began in 2007, there is little disagreement that financial markets are characterized by instability rather than stability.

I think I am on the track of what ‘New Economics’ is, and one could roughly sum up two days of presentations in two diagrams:

Lunch was just interrupted Bill Janeway standing up to announce that this morning he decided to give $25m to INET and the board will fund-raise this up to $100m over ten years, but then George Soros added $50m in unconditional funding for INET.

Taking a long‐run view from economic history, I make three points about instability in financial markets. First, I argue that economic historians have a relatively good understanding of the proximate causes of financial crises.

“Natural rate theory” has dominated interpretations of economic trends and policy prescriptions over many decades. European-type welfare state institution were claimed to cause a compressed wage distribution that distorts otherwise well functioning labor markets.

Many models of economic growth exclude materials from the production function. Growing environmental pressures and resource prices suggest that this may be increasingly inappropriate.

The topic of this session of the INET conference is a question: does the effectiveness of fiscal policy in stabilizing an economy depend on the underlying economic context in which the policy is implemented?

The present paradox, as ecological economist Bill Rees is fond of putting it, is simple yet profoundly troubling: “The ecologically necessary is politically infeasible, but the politically feasible is ecologically irrelevant.”

The effectiveness of fiscal stimulus in promoting economic recovery appears to depend upon many factors.

What creates instability in financial markets? How does the weight of debt, the structure of expectations, or radical uncertainty contribute to instability?