The Standard Economic Paradigm is Based on Bad Modeling


The Instutute for New Economic Thinking has the article The Standard Economic Paradigm is Based on Bad Modeling.

Mainstream macroeconomics finds itself in a deeply unsatisfactory state, unable to make correct predictions and incapable of providing meaningful longer-term analyses and advice. It clearly needs a major rethink.

I like this article because it uses words like reflexivity and multi-equilibrium. It does not seem to acknowledge that John Maynard Keynes work had multi-equilibrium in it, perhaps its greatest contribution.

My other quibble is that this article regurgitates one fundamental misunderstanding of the private financial system, Private banks do not create money. What they do create is promises of money. This all works well as long as not too many people want the real thing at the same time. This is what happened in the crash of 2008/2009. Too many people suddenly woke up to the fact that the private financial sector could not make good on all that it had promised. If the private financial system could have actually created money, there would not have been this reason for the collapse.

To prevent a complete financial crash without any recovery the Federal Reserve Bank of the USA and other countries’ central banks had to create money and pump it into the private financial sectors around the world..

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