By R. Taggart Murphy
Introduction
Out in the academic cemetery to which avatars of market fundamentalism thought they had consigned their intellectual and political opponents, one can hear today the unmistakable scrape of coffin lids opening. And climbing out of their graves are the bodies of those who contend that the reductionist assumptions of neo-classical/ rational choice orthodoxy are not simply inadequate but flawed in the most fundamental sense.
The reason may seem obvious: the financial catastrophe of last year and the failure of so many established thinkers to see it coming. But there is more dogging the luminaries of mainstream finance and economics than the simple inability to have read the tea leaves properly – to their blindness, for example, in the face of the rise in U.S. housing prices to the point they no longer bore any relation to the earnings streams of much of the American population or to the fantastic assumptions about default rates built into the business models of too many Wall Street houses. To be sure, a few non-mainstream analysts did get these things right before the fact — Nouriel Roubini, for example, or Michael Lewis. But it was in the way the crisis took the entire policy establishment by surprise that we see signs of broader, systemic conceptual failure. Policy makers in Washington, London, Frankfurt and Basel were, after all, advised by intellectuals and analysts privy to the most supposedly up-to-date thinking about markets, about finance, about economic reality. That they could get things so very, very wrong points to deliberate, self-induced myopia over the complexity of and interrelationships among economic and political realities – a myopia that surely contributed to the worst economic crisis since the Great Depression.
So the world suddenly seems more receptive to those who contend that economic life is not all about interchangeably autonomous “actors” maximizing their utility, but that institutions matter, that culture matters, that history and place matter – and above all that power matters. Signs of this are everywhere. Frightened politicians have been reaching for the old Keynesian tool chest in their efforts to stave off economic meltdown. John Kenneth Galbraith with his notions of the “notoriously short memories of financial markets” and the overweening pricing power of large corporations is acquiring a new patina of respectability. Thorstein Veblen’s Theory of the Leisure Class and Anthony Trollope’s novels are being dusted off for offering better insight into the rapacious behavior of Wall Street than back issues of the Journal of Finance. And here and there in “respectable” publications, one even encounters the visage of Karl Marx: intellectual grandfather of the suspect discipline of sociology, proponent of dialectical materialism and the class struggle, and prophet of the demise of a capitalism hoisted on the petard of its own contradictions.
Veblen (left) and Marx
Thus for writers and analysts on the left, the recent economic events hold out the tantalizing promise of an end to the marginalization they have endured since the fall of the Berlin Wall. But for all their understandable schadenfreude at the sudden advent of an era in which it is scarcely possible to keep a straight face while uttering the words “efficient markets hypothesis” – not to mention “Washington Consensus” – does Marxist scholarship actually have anything to say that illuminates our present predicament? It is one thing to invoke Keynesian fears of liquidity traps at a time when it is obvious that waves of credit creation by the Federal Reserve and the Bank of Japan are barely moving the real economy of production and trade. Or to concede that regulators had become captives of those they were charged with regulating and that all the complex, formula-driven instruments that were supposed to diversify risk had done exactly the opposite. Or even to acknowledge that financial markets are more akin to herds of cattle driven alternately by greed and fear than the smoothly humming, risk-distribution machines of modern finance theory; that they can and regularly will overshoot with catastrophic consequences for the real economy – and that governments need proactive and deliberately intrusive oversight to head that off.
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