Prologue: Capitalism and Neoclassical Economics

Robert Lucas, the high priest of the neo classical / neoliberal mantra has allegedly told to his students at the Chicago University that "we need to spend only ten minutes on Keynes; we know it does not work".

This is not an isolated opinion but the received wisdom that is religiously upheld in the neoclassical traditions that shapes the economic policy debate. For him and the neoclassical mantra the only economic set up that can deliver economic prosperity is that of the unhindered markets. Economists of my generation and after have become well trained in the "wonders" of the free market economics and its ability to bring prosperity. Keynes’ views and analysis has largely vanished from economics classrooms, economics discourse and economic policy debates.

But contrary to this belief, as the Figure 1 clearly highlights, the effects of unhindered markets on the fortunes and welfare of the people is by no means conducive to stability and prosperity. It depicts the fluctuation of unemployment rates of four economies with different degrees of reliance on the efficiency of the market mechanisms. This pattern is similar in most of the main western economies. Apart from a relatively short period between 1945 and the 1970s marked by active government intervention and regulated markets capitalism exhibits a profound instability over time as both the productive potential and the associated employment levels fluctuate greatly. It is noteworthy that every dip in the business cycle is associated with heightened unemployment, despair and poverty for a large number of people and the size of the dip reflects the volume of despair. Although the high priests of the neoclassical doctrine view this despair with the abstract indifference of neutral statistical numbers, unemployment has both economic and human costs. It costs in terms of the lost output that could potentially be produced if these people were productively employed and it costs as they end up to the dole. It costs the government lost tax receipts and employee contributions to pension funds. But this is scarcely all the waste. There is a far greater loss to the unemployed themselves. This is first, the financial cost represented by the difference between the dole and their potential full wage and, second, the loss of both psychological and physical health and the loss of morale.

However, contrary to Lucas’ conviction that the "central problem of depression prevention has been solved" when the economy collapsed in 2008-9, the unrestricted free market policies did not deliver the expected outcomes as almost ten years after the catastrophic events of 2008 western economies especially the European Union are in a "long dragging conditions of semi-slump, or at least subnormal prosperity" similar to that of the 1920’s. Yet, the European political and economic establishment in line with the neoclassical mantra continues to pursue policies of austerity, or otherwise known as policies of internal devaluation, in the EU and Greece as the road to macroeconomic recovery.

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