John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the
. University of Queensland
The Zombie ideas brought the global financial system to the brink of a meltdown. What is necessary to provide an alternative?
We need both new theories and new policies. The new theories should start with more realistic models of economic behavior and should go beyond the limitations of approaches based on aggregating the decisions of rational agents. In the context of macroeconomics, that means taking phenomena like ‘trust’ and ‘confidence’ seriously. For financial economics it means accepting that markets are and always will be incomplete and potentially unstable.
The policy implications include the need for a revival of Keynesian approaches to macroeconomic management and a ‘narrow banking’ approach to financial regulation, in which core financial institutions are only permitted to deal in a tightly prescribed range of financial instruments.
One problem seems to be that the zombie ideas are not only hypothesis, but mostly vague statements. So your objections could be dismissed as a rhetorical assessment. How do you deal with it?
The problem is not so much vagueness as strategic ambiguity. When I criticise strong versions of the efficient markets hypothesis, I frequently get the response “no one ever believed that, we just meant that you can’t consistently beat the markets”. But when you look at the policy proposals based on the EMH, they only make sense if you believe the strong versions.
What is your take on current considerations of readopting a new gold standard to guide currency developments word wide?
This seems to me to be a counsel of despair. The gold standard allowed the emergence of the Great Depression and the business cycles of the 19th century. There’s no reason to think it would perform any differently today.
Thank you very much.
John Quiggin is prominent both as a research economist and as a commentator on Australian economic policy. He has published many research articles, books and reports in fields including risk analysis, production economics, and environmental economics. He is the best-selling author of “Zombie Economics”. (November, 2010).