On the Heterodox View of the Crisis

Abstract

The crisis had at least one important silver lining. It showed the sheer irrelevance of mainstream macroeconomic theory for understanding what caused the crisis and for policy guidance in its aftermath. For a theory based on the very premise that markets work efficiently at all times the crisis simply could not have happened, and the fact that it did was an anomaly too big to ignore. The few – most notably Paul Krugman among them – who have been trying to take stock seem to have provoked a defense of the beleaguered theory by some of its true believers. Yet no real mainstream explanation of what has gone wrong has emerged and a few arguments that blame the government or the Fed for the crisis lack conviction. In this lacuna, there has been a hasty retreat to “crude” Keynesianism, yet it is too early to tell how much of a lasting influence that will have either.