This is a useful collection of essays on the current crisis. It examines why the economics profession failed either to predict or to remedy the crisis.
Alan Greenspan, the former chairman of the USA's Federal Reserve, admitted in October 2008, "those of us who looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief ... This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed." On the theory, the 2008 crisis could not happen.
In a superb essay, Paul Davidson, Emeritus Professor of Economics, University of Tennessee, writes, "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." The deregulation followed from the theory of efficient markets, the basis of all conventional economics. According to this theory, always and everywhere, "government economic policy is the problem, the free market is the solution."
The efficient market theory is based on the assumption that the future is known, by calculating from past statistics. But the world is not just risky but also uncertain.
Davidson writes, "Keynes' liquidity theory can provide the explanation. Keynes presumes that the economic future is uncertain. If future outcomes cannot be reliably predicted on the basis of existing past and present data, then there is no actuarial basis for insurance companies to provide holders of these assets protection against unfavourable outcomes. Accordingly, it should not be surprising that insurance companies such as AIG that have written policies to protect asset holders against possible unfavourable outcomes resulting from assets traded in these failing securitized markets find that they have experienced billions of dollars more in losses than they had actually estimated."
We need an industrial strategy. As Christopher Bliss, retired Professor of International Economics at Oxford, points out, "For an economy so wedded to imports the scope for import substitution is large."