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From Financial Crisis to Stagnation

By Thomas Palley

Marshall McLuhan, the famed philosopher of media, wrote: “we shape our tools and they in turn shape us”. His insight also applies to the economy which is shaped by economic policy derived from economic ideas, and it is the theme of my recent book which argues the global economic crisis is the product of flawed policies derived from flawed ideas.

Broadly speaking, there exist three different perspectives on the crisis. Perspective 1 is the hard-core neoliberal position, which can be labelled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and the Chicago school of economics. Perspective 2 is the soft-core neoliberal position, which can be labelled the “market failure hypothesis”. It is identified with the Obama administration, half of the Democratic Party, and the MIT economics departments. In Europe it is identified with Third Way politics. Perspective 3 is the progressive position which can be labelled the “destruction of shared prosperity hypothesis”. It is identified with the other half of the Democratic Party and the labour movement, but it has no standing within major economics departments owing to their suppression of alternatives to orthodox theory.

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  1. I don't mean to be always the ominous black bird (self-directed pun intended), but I the prescription weak.

    Don't get me wrong: I believe Palley's thesis is quite descriptive and helps explain a lot, too.

    I like everything he proposes (i.e. the prescription). To take workers from the box and put the corporations within.

    The weakness I mention is this: who is gonna do that?

    1. Ominous black bird's critiques are fine here. Look I don't think Tom would disagree with you that there is a problem with how you get there. For starters political parties on the left have to rebuild their connection with organized labor, and then with the new social movements (in the US the occupy movement comes to mind, and in Spain the Indignados, and so on). May not seem likely now, but 10 years ago who would have said that Peronism in Argentina, that had turned neoliberal in the 1990s, would again make a 180o shift and promote national development with social inclusion (including higher wages and a reduction of unemployment from Spanish levels, e.g. above 20%, to the mid-single digits). The prescriptions are what are needed from an analytical point of view, but I don't think there is naïveté about the difficulties involved in getting there.


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