John Quiggin's "Zombie Economics"

John Quiggin is professor of economics at the University of Queensland in Australia.

He applied the “Page 99 Test” to his new book, Zombie Economics: How Dead Ideas Still Walk among Us, and reported the following:

Page 99 is, I think, pretty representative of the book, which seeks to lay out the life cycle of the economic ideas that gave us the Global Financial Crisis, and which, in combination, formed a package that may be called "market liberalism" . The story of each idea begins with its birth (sometimes as a revival of older ideas) amid the collapse of Keynesianism in the 1970s to its death in the near-collapse of capitalism in 2008, to the attempts to reanimate them in zombie form as the worst of the crisis recedes. Each chapter ends with a section "After the Zombies", which aims to point to some new directions for economics.

The ideas I discuss are:

*The Great Moderation: the idea that the period beginning in 1985 was one of unparalleled macroeconomic stability;

*The Efficient Markets Hypothesis: the idea that the prices generated by financial markets represent the best possible estimate of the value of any investment;

*Dynamic Stochastic General Equilibrium: the idea that macroeconomic analysis should not concern itself with economic aggregates like trade balances or debt levels, but should be rigorously derived from microeconomic models of individual behavior;

* The Trickle-Down Hypothesis; the idea that policies that benefit the well-off will ultimately help everybody; and

* Privatization; the idea that any function now undertaken by government could be done better by private firms

Page 99 starts with an attempt to explain, as fairly as I can, one of the zombie ideas I'm criticising, the Real Business Cycle theory advocated by, among others, Nobel prizewinning economist Robert Lucas. This was the starting point for Dynamic Stochastic General Equilibrium macro models. Page 99 ends with a startling quote from Lucas in which he attempts to write the Great Depression out of economic history, part of a broader argument by Lucas that recessions don't really matter:

the Great Depression [...] remains a formidable barrier to a completely unbending application of the view that business cycles are all alike. … If the Depression continues, in some respects, to defy explanation by existing economic analysis (as I believe it does), perhaps it is gradually succumbing under the Law of Large Numbers.

With ideas like this driving much of the public debate, it is unsurprising that the Global Financial Crisis came as such a shock to so many economists.

Read an excerpt from Zombie Economics, and visit John Quiggin's website.

--Marshal Zeringue