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Post-crisis NCM Theory Adaptations: Evolutionary, Revolutionary or Cosmetic?

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Critique of the New Consensus Macroeconomics and Implications for India

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Abstract

The global crisis virtually put the mainstream New Consensus Macroeconomics (NCM) in the dock, as in the popular mind the crisis was mainly associated with the pre-crisis macropolicy framework, whose architecture was largely based on the recommendations emanating from academics and policymakers strongly committed to the NCM theology. It was widely expected that just as the Great Depression of the 1930s sounded the death knell for the Marshall–Pigou paradigm of neoclassical economics, the GFC would do something similar for the NCM. This chapter shows that this expectation has been belied, though some changes to the NCM have indeed occurred—a few on the theoretical front but more on the policy front. This entire process of mainstream persistence with a few adaptations, is best understood in a Lakatosian framework. To do this, in this chapter we take stock of how the mainstream profession reacted to the GFC—in particular what explanations were offered for its occurrence and how the major criticisms against the orthodoxy were countered.

“The belief that there is only one truth, and that oneself is in possession of it, is the root of all evil in the world”.

—Max Born, physicist

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Notes

  1. 1.

    Induction proceeds from particular experimental or observational results to universal statements such as theories or hypotheses.

  2. 2.

    Popper does not concern himself overmuch with the actual discovery/invention of new theories “…the act of conceiving or inventing a theory, seems to me neither to call for logical analysis nor to be susceptible of it…My view may be expressed by saying that every discovery contains ‘an irrational element’, or ‘a creative intuition’” (see Popper 1959, p. 7 and 8).

  3. 3.

    The other two tests were (i) the deflection of light by the sun and (ii) the gravitational redshift of light. The total solar eclipse of September 1922 in Australia afforded astronomers an opportunity to verify the solar deflection of light while the gravitational redshift of light of a white dwarf star Sirius-B was done by the astronomer Greenstein in 1971 using the powerful Hubble telescope.

  4. 4.

    We use the terms mainstream and orthodox synonymously though some authors (see Davis 2008; Lawson 2006; Lee 2009, etc.) distinguish between the dominant (conventional) professional approach to the discipline (orthodoxy) and the professionally successful areas of the discipline for which the term mainstream is preferred. Thus, evolutionary economics, behavioural economics and experimental economics are part of the mainstream though not of orthodoxy. In general, following common usage, we prefer not to pursue this distinction here.

  5. 5.

    Included in this list are three Nobel Laureates (Lucas 1995; Sargent 2011; Fama 2013).

  6. 6.

    Italics mine.

  7. 7.

    Some of the leading references from a vast literature are Rabin 2002; Schleffer 2012; Thaler 2015 (see the discussion outlined in Chap. 11, Sect. 3).

  8. 8.

    The assumption of continuously clearing markets is not strictly part of the NCM. But the NCM adherents constitute a wide spectrum of persuasions, ranging from those distinctly close to new classical thinking to those more sympathetic to the neo-Keynesian viewpoint. The assumption of continuously clearing markets is a new classical fundamental and still claims the allegiance of many mainstream economists.

  9. 9.

    On 10 March 2000, NASDAQ reached its peak at 5048, but went into a continuous side thereafter falling to 68% of its peak value on 17 September 2001.

  10. 10.

    Most of the loyalist group also strongly attacked the fiscal policy stimulus undertaken by the US Government, believing it to be ineffective at best and at worst threatening a debt overhang in the future.

  11. 11.

    Bear Sterns was bailed out but Lehman was not.

  12. 12.

    As these criticisms are discussed fully in a later chapter, we only briefly mention them here.

  13. 13.

    Dr. Pangloss is a character used by Voltaire in his satirical novel Candide (1759) to parody Leibniz’s philosophy of optimism.

  14. 14.

    The NCM is discussed fully in Chap. 4.

  15. 15.

    This is the so-called Diamond–Mortensen–Pissarides (DMP) model the details of which may be found in Hall (2003), Mortensen and Nagypal (2007), Pissarides (2009), etc.

  16. 16.

    The famous Italian novel Il Gattopardo (The Leopard) by Lampedusa depicts how the Italian aristocracy of the 1860s retained control over the peasantry by aligning itself with the new urban elite.

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    Dilip M. Nachane

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Nachane, D.M. (2018). Post-crisis NCM Theory Adaptations: Evolutionary, Revolutionary or Cosmetic?. In: Critique of the New Consensus Macroeconomics and Implications for India. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3920-8_13

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