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Crisis and the Failure of Economic Theory

The Responsibility of Economists for the Great Recession Giancarlo Bertocco, University of Insubria, Italy
Economists have rightly been criticized for not having foreseen the crisis that exploded in 2007–2008. As Giancarlo Bertocco eloquently argues, responsibility does indeed rest heavily on their shoulders. By developing a theory which excluded the possibility that a catastrophic crisis could ever happen, the economics profession has justified decisions and behaviours that caused the Great Recession. This book presents an alternative theoretical approach built on the lessons of Marx, Keynes, Schumpeter, Kalecki, Kaldor and Minsky, which highlights the structural instability of a capitalist economy and the endogenous nature of the current crisis.
Extent: 264 pp
Hardback Price: $125.00 Web: $112.50
Publication Date: 2017
ISBN: 978 1 78536 534 8
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  • Economics and Finance
  • Money and Banking
  • Post-Keynesian Economics
Economists have rightly been criticized for not having foreseen the crisis that exploded in 2007–2008. As Giancarlo Bertocco eloquently argues, responsibility does indeed rest heavily on their shoulders. By developing a theory which excluded the possibility that a catastrophic crisis could ever happen, the economics profession has justified decisions and behaviours that caused the Great Recession. This book presents an alternative theoretical approach built on the lessons of Marx, Keynes, Schumpeter, Kalecki, Kaldor and Minsky, which highlights the structural instability of a capitalist economy and the endogenous nature of the current crisis.

This fascinating book has several distinctive features. It begins by highlighting the limits of traditional economic theory and reveals the contradictions found in mainstream explanations as to the origins of the crisis. The author goes on to argue that economists not only failed to foresee the crisis but actually ignored the warning signs of instability that emerged during the Great Moderation. Bertocco presents an original interpretation of Keynes’s argument that underlines the importance of Schumpeter’s theory of credit in order to explain the relationship between money and crisis which characterizes a Keynesian monetary theory of production. Finally, he demonstrates that the nature of the crisis has important policy consequences and proposes a specific set of measures that take into account its structural nature.

The comprehensive analysis and enlightening theoretical approaches will make this book vital reading for economists, policymakers and students seeking a clear understanding of the nature of the current crisis and the structure of the neoliberal economic system in which we live.
‘Mainstream economists could not see the Global Financial Crisis coming because their theories rule out the possibility of crisis. Their ex post apologies rely on stories of black swans with fat tails and compare the crisis to an unpredictable but inevitable earthquake. Professor Bertocco relies, instead, on the analyses of Schumpeter and Minsky to understand the forces that plunged the global economy into crisis almost a decade ago. The crisis was foreseeable, it could have been prevented, and policymakers could have mounted a more effective response – if they had adopted a Schumpeterian–Minskyan analysis.’
– L. Randall Wray, Bard College and Levy Economics Institute, US

‘Giancarlo Bertocco’s Crisis and the Failure of Economic Theory is an old-fashioned volume, and all the better for that. The author identifies a major historical episode of malfunctioning in the advanced capitalist world, asks what light mainstream economic theory throws on it, and explains clearly its approach and structure, and why with these attributes failure was inevitable. He then sets about developing an alternative approach and structure that not only illuminates what happened but also suggests how it may be avoided in the future. He sets out honestly and clearly the limitations and imponderables in his contributions, acknowledges in a scholarly manner the many sources of his ideas, and discusses the likely political constraints within which more relevant and enlightened policies will have to be pursued. Painting on such a broad canvas in a deep manner calls to mind the great names of our discipline–Adam Smith, Karl Marx, Maynard Keynes. Readers may not agree with the details of Giancarlo Bertocco’s book, but they will be challenged to absorb the ideas from his narrative and hopefully to build on them.’
– G.C. Harcourt, University of New South Wales, Australia
Contents: PART I THE CRISIS AND THE MAINSTREAM THEORY 1. A Brief Description of the Crisis 2. The Mainstream Economists and the Crisis 3. The Limits of the Mainstream Theory PART II AN ALTERNATIVE THEORETICAL APPROACH 4. Keynes and the Monetary Theory of Production 5. Finance and Risk 6. Savings Decisions, Wealth and Speculation 7. Money and Crisis PART III THE ENDOGENOUS NATURE OF THE CRISIS AND THE POLICIES FOR A GOOD LIFE 8. The Endogenous Nature of the Subprime Crisis 9. Overcoming the Crisis: Which Policies? Index