Federal Reserve Chairman Benjamin Bernanke gave a speech on September 24, 2010 about the implications of the 2007-2008 financial crisis for economic science and policy. He effectively conceded that the (continuing) crisis is the outcome of policy lapses, not a failure of economic science. He is correct (“mea culpa”).
Leading and lagging economic indicators, notwithstanding Summers and Blanchard, both in the United States and Europe, are pointing to the explanation that has plagued Japan, for over 20 years: liquidity trap and the inability of economic policy to do anything of significance and, thereby, consequence to affect economic structure to return economies to full or maximum employment in a self-sustainable manner – meaning, achieving balance between the ability of governments to keep economies productive for all but a marginal segment of their populations while remaining fiscally viable.
At the present time no G7 economy is fiscally stable, and unemployment, without exception, is at least close to 10 per cent in all the world’s industrialized countries, pointing not to a failure of economics as a science, but to the competence of professional policymaking by independent central banks which supply money mostly only in exchange for government debt.
An economist named Matthew Rabin of University of California at Berkeley, a John Bates Clark award winner for the most gifted economist under 40 (stepping stone for a Nobel Memorial prize), specializes in behavioral economics, and neuroeconomics in particular, often suffusing his papers with abstruse but gratuitous mathematics.
The purpose of Rabin’s entire body of work is to understand the preferences of utility maximization of individual economic agents within the neoclassical framework to affect economic behavior to avoid herd behaviors or Keynes’ “animal spirits” (those which cause crises such as depressions) by technologically circumscribing (or controlling) people, market participants and governments to behaving “rationally”.
It takes astute observation, analysis and synthesis found in these pages of the evolution of the economics profession in relation to Robert Lucas’ work on rational expectations, Policy Irrelevance Proposition (PIP) and Information Asymmetries, Rabin’s contributions to behavioral economics at the level of the individual agent, and technical change in information and communication technologies (ICTs) to fully understand the state of affairs in crisis response.
John Maynard Keynes singular critique of Adam Smith’s classicism was social instability wrought by business cycle downturns in laissez-faire economies as a justification for the types of intervention by FDR, LBJ and European governments since World War II.
The current crisis presents a paradox – economies are both fiscally unstable despite substantial government intervention and unsustainable, noting that both the monetary (independent central banks) and tax (finance ministries) authorities in any economy are government, not private, actors, including the central banks, contrary to the beliefs of most peoples: money is supplied by governments by monopoly, not private banks.
Why is then government intervention ineffective when the G20 countries, as a group, need higher levels of real investment in their economies?
The work of Rabin and his acolytes in behavioral economics appears to be taking on the role of crisis management by stabilizing the mental response of populations since 2007-2008, a total of at least 4 years thus far, by manipulating peoples’ behaviors using Anthros rather than fixing the matter of real investment to create jobs.
The way out of the present predicament is economic policy competence and public accountability, not Keynes by technology but not policy (or behavioral modeling and control using wireless ICTs and the news media to maintain social stability in the face of government failure).