Abstract
As the financial crisis of 2008 clearly demonstrated, those who possess the Panglossian belief that free markets with flexible prices produce socially optimum solutions are wrong. The fear of the loss of liquidity of derivatives of mortgage-backed debt obligations on financial markets led to a severe global economic crisis that threatened banking systems globally.
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Notes
- 1.
Nobel Prize winner Lucas (1981, p. 287) has boasted that mainstream theory axioms such as the ergodic axiom are “artificial, abstract and patently unreal.” Like Nobel Laureate Samuelson, Lucas insists such unreal assumptions are the only scientific method of doing economics. Lucas states that “Progress in economic thinking means getting better and better abstract, analogue models, not better verbal observations about the real world” (Lucas 1981, p. 276). Unrealistic assumptions make the problem more tractable mathematically, and with the aid of a computer, the analyst can then statistically predict the future. Never mind that the prediction might be wrong.
- 2.
Yet the Great Depression of the 1930s was preceded by a real-estate monetary value market bubble and a stock market nominal bubble. Moreover, the Great Recession of 2008–2010 was preceded by a dot-com monetary bubble and a sub-prime mortgage real-estate bubble. How is this possible?
- 3.
In mainstream macroeconomics, contracts are always made in real terms as no agent is suffering from “the money illusion.”
- 4.
In place of the rejected ergodic axiom, Keynes argued that when crucial economic decisions had to be made, decision makers could not merely assume that the future can be reduced to quantifiable risks calculated from already existing market data.
For decisions that involved potential large spending outflows or possible large income inflows that span a significant length of time, people “know” that they do not know what the future will be. They do know that for these important decisions, making a mistake about the future can be very costly, and therefore, sometimes putting off a commitment today may be the most judicious decision possible.
Our modern capitalist society has attempted to create an arrangement that will provide people with some control over their uncertain economic destinies. In capitalist economies, the use of money and legally binding money contracts to organize production, sales and purchases of goods and services permits individuals to have some control over their cash inflows and outflows and therefore some control of their monetary economic future.
Thus, as the biographer of Keynes, Lord Robert Skidelsky (1992, p. 223) has noted, for Keynes “injustice is a matter of uncertainty, justice a matter of contractual predictability.” In other words, by entering into nominal contractual arrangements, people assure themselves a measure of predictability in terms of their contractual cash inflows and outflows, even in a world of uncertainty.
- 5.
President Obama has indicated that he would adopt policies to double US exports by the year 2014 by making US industries more competitive. At whose expense?
- 6.
See Adelman (1991).
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Davidson, P. (2014). The “Overleveraged” Crisis of 2008 from the Standpoint of Keynes’s Monetary Theory of Capitalism. In: Anderson, D. (eds) Leveraging. Springer, Cham. https://doi.org/10.1007/978-3-319-06094-1_3
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