What Have we Learned From the Financial Crisis? Part 2: Louis-Philippe Rochon

What follows are comments from a roundtable discussion held at the University of Ottawa on February 28, organized by Mario Seccareccia, and which featured participation from Marc Lavoie, Louis-Philippe Rochon, Mario Seccareccia, Slim Thabet and Bernard Vallageas.

This is Part 2 of 5 sequential blog entries.

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Louis-Philippe Rochon
Associate Professor of Economics, Laurentian University
Founding co-editor, Review of Keynesian Economics
Co-Director, New Directions in Post-Keynesian Economics – an Edward Elgar Publishing book series

 I have divided my talk into two sections: first, I would like to address what we should have learned from the financial crisis and, second, what we actually learned from it.  For me, there were some clear facts that emerged from the crisis that can only be ignored on pure ideological obstructionism.  While the first part is rather upbeat, the second part is utterly pessimistic.

Here is a brief list of some of the more evident conclusions we should have drawn from this crisis.  Of course, all these notions are well known to post-Keynesians; my point is that they should be now to many of our colleagues in the profession.

1)fragility of markets: markets don’t self-regulate.  The notion that markets are prone to some equilibrium position of stability is a myth, and the financial crisis has shown quite convincingly that in fact, markets are prone to some rather significant instability;

2)greed got in the way of  production. Money managers exploited workers and markets to obtain higher returns;

3)banks and other financial institutions cannot be entrusted to do the right thing.  In fact, if given the opportunity, they will exploit households (predatory lending); regulations are needed;

4) income inequality matters.  Interestingly enough, the IMF recently has sounded off on this important question.  Christine Lagarde has said that there cannot be sustained growth without first addressing the problem of inequality.  More recently, the IMF has even stated that taxing the rich does not impeded on growth. Adding this to its musings on capital control, this represents some courageous and encouraging signs;

5)we should by now recognize a bubble when we see one,

6)Complicated credit instruments are doomed to failure: credit-default swaps, hedge funds and complex derivatives all collapsed.  We need to reform or eliminate them.

Given the above, what then can we say the profession at large, and beyond, has learned from the crisis.  My answer is quite clear: nothing.

With respect to households, this is quite discouraging.  In my casual, ad hoc conversations with many so-called ‘ordinary Canadians’ (a term I despise), I am stunned at how a vast majority blame large deficits and irresponsible governments for the crisis. This is an idea that is very much ingrained in the collective consciousness.  In that sense, we, as heterodox economists, have failed miserably.  Our arguments are either not being heard, or they are and simply discarded against the convincing rhetoric of the neoliberal agenda. Indeed, the idea that the State cannot live beyond its means, like households themselves, is something that is now simply fact for the voters.

I now say voters, rather than households, because this is important.  How can we then expect political parties from advocating deficits when they know voters will reject them at the ballot boxes.  Even the New Democrats, Canada’s “socialist” party accepts the wisdom of balanced budgets.  And what can we say of the Socialist Party of François Hollande in France, which is socialist in name only.

What can I say about my colleagues in the profession? This is perhaps even more disheartening.  After all, we cannot expect households to know economic theory.  In this sense, their inability to analyze the intricacy of the crisis is not surprising.  But the same cannot be said of our colleagues.  Given their knowledge, there was some hope that the crisis would lead to the capitulation of neoclassical theory. 

This is something that has been promised for quite some time. Each generation it seems holds promise.  The capital debates, and now the crisis.  Yet, neoclassical theory has proven itself quite resilient.  Indeed, our colleagues have no interest in giving up on their theory, no matter how irrelevant its assumptions. In a way, it is the only theory they know. But even when confronted with an alternative, it is so outside their realm that they cannot even consider its validity.

I noticed this for the first time in 2009, at the Eastern Economic Association conferences. I was shocked to see how many (a vast majority) sessions were on ‘business as usual’.  Since then, sessions on the crisis are less and fewer in between.  The profession simply shrugged off the crisis and carried on.

Well, in some way, they did take note of some elements, but they are now incorporating these in their models as imperfections or shocks.  The crisis is just some shock that happened that shook the system, but that eventually, given fiscal discipline, would settle at some new equilibrium.  I predicted this in 2009: like Samuelson’s neoclassical synthesis, neoclassical theory today would simply incorporate some elements of the crisis into their DSGE models to satisfy the critics: “look, we are listening”.  Neoclasical theory is never wrong, but let’s give it some elements of realism.

Now, with respect to students, I am not holding my breath wither. In Canada at least, they are not clamming for pluralism in the curriculum. There is no equivalent of the Rethinking Economics movement in the UK. And despite my hammering them over the head for the last 7 years, only a handful of my students would be able to say something about the crisis.

This said, some would argue that there is some hope yet.  After all, we are seeing some heterodox textbooks coming out (I am working on one with Sergio Rossi for Edward Elgar, among others).  This is a good sign. But I wonder how far it will go. Such textbooks may prove popular, if done well, with some heterodox professors.  I get emails all the time asking me which textbook I use in introductory classes.  So in that sense, this may go some distance. But then, let’s remember Joan Robinson’s effort.

There is also some hope with INET, which is financing a great number of heterodox projects but also working on several other prongs in the assault against the mainstream.  This may prove fruitful yet.

But overall I remain pessimistic. I cannot see the profession changing at all. Maybe a second crisis will do the trick. But the consequences would be simply disastrous on workers. But perhaps this is what is needed.  So, to quote a famous Canadian politician, “Si j’ai bien compris, vous êtes en train de me dire : à la prochaine fois” (if I hear you well, you are telling me, see you next time).

Alain Parguez, whom we are honouring today, always insisted on the need for a revolution. After much thought, I must confess that I agree: we need a true revolution within our profession.