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Archive for July 20th, 2010

Given the confused political debates surrounding the financial reform bill, one thing is clear: more people should read Yves Smith’s ECONned. I highly recommend it to any reader interested in the crisis. The book includes an excellent description of the shadow banking system, the environment that allowed it to flourish, and the role it played in causing the crisis. And she provides something of an international perspective, which is completely lacking from the vast majority of descriptions I have read.

But most important and impressive is how she evinces the role that neoclassical theory and financial economics played in causing the crisis. Through examples, she makes a strong case that markets (especially financial) do not necessarily have a propensity towards equilibrium. This, of course, strikes at the heart of mainstream economic theory.

The only deficiency with making this argument is that economists pride themselves on the mathematical nature of their work, and so advocating a non-mathematical alternative (whether better or not) will likely fall on deaf ears within the profession. It seems that the best alternative for those of us who want to build an alternative economic theory is to still use math, but in a different way or a different type of math, to acheive a more useful alternative.

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