CHALLENGES TO NEOLIBERALISM

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CHALLENGES TO NEOLIBERALISM

• A. Erinç Yeldan
• Bilkent University, Ankara

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The real cause of the current global crisis lies
not on toxic assets, but on toxic economic texts
and toxic economics
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• The whole episode occurred under fanatical
  de-regulation blessed by mainstream economic
  theory.
• Rational expectations / busines cycle theories
  under perfectly competitive markets, with nice
  and smooth, convex technologies, perfect
  foresight and full information sets provided the
  ideological foundation of the theater on show
  since about the early 1980s.

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• Financialization always necessitates bubbles.
• dot.com in the early 1990s
• land estate prices late 1990s
• Current financial bubble was driven by household
  debt and private credit.
• not explicable by models of the representative
  agent, in a perfect foresight world with full
  information set, optimizing on its consumption
  path over her life cycle

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The idea of equilibrium The Savings Investment
Balance
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Subject to PC atwL rat-1
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Qf(K,L)   The producer maximizes profits (the
difference between revenues PQ and costs of
labour and capital, wL ve rK). Thus, for
producers the problem is to   Max Pf(K,L) wL
- rK
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a ? K
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• Microfoundations story where investment is
  passive and savings-driven is far from reality.
• Mathematical elegance of the Hamiltonian
  arithmetics of pleasure fails to model realities
  of the economic phenomena.
• Asset manias and bubbles are more than a
  possibility (Kindleberger)

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• steady state convergence towards a harmonious
  long run equilibrium is not observed and remains
  a fantasy

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Source Wolff and Resnick, 2006, Advances in
Marxist Theory
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Source Anwar Shaikh, Socialist Register, Fall
2010
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Lessons, lessonsfor a good listener
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• not only the domestic, but also the global
  economy is in need of management and regulation
• the business cycle is driven by shifts in the
  savings investment balance
• both the current level of economic activity and
  growth are driven from demand side with
  endogenous labor productivity growth (Kaldor)

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• policy recommendations based on static
  comparative advantage calculations are misleading
  and bad advice
• development warrants not doing more of the same
  thing more intensively, but diversification into
  producing things up in the ladder of
  industrialization (Rodrik, Ha Joon-Chang)

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• Exchange rate might be in spot market equilibrium
  but may suffer from structural misalignment
  (Edwards)
• even under flexible exchange rate regimes, the
  exchange rate may become misaligned,
• if its actual value exhibits a sustained
  departure from that rate which is compatible with
  the internal and external equilibrium.

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• over-obsession with fiscal sustainability while
  neglecting balance of payments sustainability is
  a dangerous game

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In fact,

• the source of macroeconomic instability now is
  not instability in product markets but asset
  markets, and the main challenge for policy makers
  is not inflation, but unemployment and financial
  instability.
• Akyüz (2006)

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• the argument that this time things are
  different is a statement that can only be made
  by fools that fail to take any lessons from
  history...
• Kenneth Rogoff, IMF Chief Economist, 2005