The Current Financial And Economic Crisis: Empirical And Methodological Issues
In this paper we describe the main causes of the recent financial crisis as a result of many theoretical, methodological, and practical shortcomings mostly according to heterodox, but also including some important orthodox economists. At theoretical level, there are problems concerning teaching and using economic models with overly unrealistic assumptions. In the methodological front, we find the unsuspected shadow of Milton Friedman?s „unrealisticism of assumptions? thesis lurking behind the construction of this kind of models and the widespread neglect of methodological issues. Of course, the most evident shortcomings are at the practical level: (i) huge interests of the participants in the financial markets (banks, central bankers, regulators, rating agencies mortgage brokers, politicians, governments, executives, economists, etc. mainly in the US, Canada and Europe, but also in Japan and the rest of the world), (ii) in an almost completely free financial and economic market, that is, one (almost) without any regulation or supervision, (iii) decision-taking upon some not well regarded qualities, like irresponsibility, ignorance, and inertia; and (iv) difficulties to understand the current crisis as well as some biases directing economic rescues by governments. Following many others, we propose that we take this episode as an opportunity to reflect on, and hopefully redirect, economic theory and practice.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- L. Randall Wray, 2009. "Money Manager Capitalism and the Global Financial Crisis," Economics Working Paper Archive wp_578, Levy Economics Institute.
- James Crotty & Gerald Epstein, 2009. "Avoiding Another Meltdown," Challenge, M.E. Sharpe, Inc., vol. 52(1), pages 5-26, January.
- Eichengreen, Barry & Mody, Ashoka & Nedeljkovic, Milan & Sarno, Lucio, 2012.
"How the Subprime Crisis went global: Evidence from bank credit default swap spreads,"
Journal of International Money and Finance,
Elsevier, vol. 31(5), pages 1299-1318.
- Barry Eichengreen & Ashoka Mody & Milan Nedeljkovic & Lucio Sarno, 2012. "How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads," Working papers 21, National Bank of Serbia.
- Barry Eichengreen & Ashoka Mody & Milan Nedeljkovic & Lucio Sarno, 2009. "How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads," NBER Working Papers 14904, National Bureau of Economic Research, Inc.
- Mayer, Thomas, 1993. "Friedman's Methodology of Positive Economics: A Soft Reading," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 213-223, April.
- Andrew Mearman, 2004.
"Critical Realism in Economics and Open-Systems Ontology: A Critique,"
0401, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
- Andrew Mearman, 2006. "Critical realism in economics and open-systems ontology: A critique," Review of Social Economy, Taylor & Francis Journals, vol. 64(1), pages 47-75.
- Dow, Sheila C, 1995. "The Appeal of Neoclassical Economics: Some Insights from Keynes's Epistemology," Cambridge Journal of Economics, Oxford University Press, vol. 19(6), pages 715-733, December.
- Wynne Godley & Dimitri B. Papadimitriou & Greg Hannsgen & Gennaro Zezza, 2007. "The U.S. Economy: Is There a Way Out of the Woods?," Economics Strategic Analysis Archive sa_nov_07, Levy Economics Institute.
- Alex Viskovatoff, 1998. "Is Gerard Debreu a Deductivist? Commentary on Tony Lawson's Economics and Reality," Review of Social Economy, Taylor & Francis Journals, vol. 56(3), pages 335-346.
- Tony Lawson, 2009. "The current economic crisis: its nature and the course of academic economics," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 759-777, July.
- Sheila Dow, 2008. "Mainstream Methodology, Financial Markets and Global Political Economy-super- 1," Contributions to Political Economy, Oxford University Press, vol. 27(1), pages 13-29.
- Marc Lavoie, 2010.
"Changes in Central Bank Procedures During the Subprime Crisis and Their Repercussions on Monetary Theory,"
International Journal of Political Economy,
M.E. Sharpe, Inc., vol. 39(3), pages 3-23, October.
- Marc Lavoie, 2010. "Changes in Central Bank Procedures during the Subprime Crisis and Their Repercussions on Monetary Theory," Economics Working Paper Archive wp_606, Levy Economics Institute.
- Wynne Godley & Gennaro Zezza, 2006. "Debt And Lending: A Cri De Coeur," Economics Policy Note Archive 06-4, Levy Economics Institute.
- Dow, Sheila C, 1990. "Beyond Dualism," Cambridge Journal of Economics, Oxford University Press, vol. 14(2), pages 143-157, June.
- Paul A. Volcker, 2008. "Rethinking the Bright New World of Global Finance," International Finance, Wiley Blackwell, vol. 11(1), pages 101-107, 05.
- Hausman,Daniel M., 1992. "The Inexact and Separate Science of Economics," Cambridge Books, Cambridge University Press, number 9780521415019, May.
- James Crotty, 2008.
"Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’,"
wp180, Political Economy Research Institute, University of Massachusetts at Amherst.
- James Crotty, 2009. "Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 563-580, July.
- James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," UMASS Amherst Economics Working Papers 2008-14, University of Massachusetts Amherst, Department of Economics.
- D. Wade Hands, 2003. "Did Milton Friedman's methodology license the Formalist Revolution?," Journal of Economic Methodology, Taylor & Francis Journals, vol. 10(4), pages 507-520.
- Musgrave, Alan, 1981. "'Unreal Assumptions' in Economic Theory: The F-Twist Untwisted," Kyklos, Wiley Blackwell, vol. 34(3), pages 377-387.
- Geoffrey M. Hodgson, 1998. "The Approach of Institutional Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 166-192, March.
- L. Randall Wray, 2008.
"Lessons from the Subprime Meltdown,"
M.E. Sharpe, Inc., vol. 51(2), pages 40-68, March.
- James K. Galbraith, 2010. "The Great Crisis and the American Response," Economics Public Policy Brief Archive ppb_112, Levy Economics Institute.
- Charles A. E. Goodhart & Carolina Osorio & Dimitrios P. Tsomocos, 2009. "Analysis of Monetary Policy and Financial Stability: A New Paradigm," CESifo Working Paper Series 2885, CESifo Group Munich.
- Hausman,Daniel M., 1992. "The Inexact and Separate Science of Economics," Cambridge Books, Cambridge University Press, number 9780521425230, May.
- Jan Kregel, 2009. "Why don't the bailouts work? Design of a new financial system versus a return to normalcy," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 653-663, July.
- Barry Eichengreen, 2008. "Origins and Responses to the Current Crisis," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 9(4), pages 6-11, December.
- Backhouse, Roger E. & Medema, Steven G., 2009. "Robbins'S Essay And The Axiomatization Of Economics," Journal of the History of Economic Thought, Cambridge University Press, vol. 31(04), pages 485-499, December.
- Chick, Victoria, 1998. "On Knowing One's Place: The Role of Formalism in Economics," Economic Journal, Royal Economic Society, vol. 108(451), pages 1859-1869, November.
- Brian Snowdon & Howard R. Vane, 1999. "Conversations with Leading Economists," Books, Edward Elgar Publishing, number 1607.
- Wynne Godley & Dimitri B. Papadimitriou & Gennaro Zezza, 2008. "Prospects for the U.S. and the World -- A Crisis That Conventional Remedies Cannot Resolve," Economics Strategic Analysis Archive sa_dec_08, Levy Economics Institute.
- L. Randall Wray, 2009. "The rise and fall of money manager capitalism: a Minskian approach," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 807-828, July.
- Dow, Sheila, 2002. "Economic Methodology: An Inquiry," OUP Catalogue, Oxford University Press, number 9780198776123, December.
When requesting a correction, please mention this item's handle: RePEc:srs:jasf12:7:v:3:y:2012:i:1:p:95-123. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laura Stefanescu)
If references are entirely missing, you can add them using this form.