Home > Uncategorized > On the vital importance of understanding international financial architecture

On the vital importance of understanding international financial architecture

from Asad Zaman

Part 1: Power/Knowledge – How Macro Theory is shaped by the Powerful

Why Understand Macro? If we understood macroeconomics, we would be able to understand the reasons for the major economic events currently going on all around us. For instance, increasing inequality, effects of austerity, Brexit, inequities of post-Bretton Woods dollar based financial system, impacts of emerging economy of China on global finance, and many other questions of vital importance for conduct of economic policy. Unfortunately, standard courses in Advanced Macroeconomics currently being taught at leading universities throughout the world are worse than useless for this purpose. Many leading economists have admitted that we need to replace the “entire edifice” of contemporary macro, that our leading models are strongly in conflict with everything we know about reality. For one sharp critique, see David Romer “The Trouble with Macroeconomics”, where he says that theorists completely ignore the strong disagreement between their theories and reality, and are content to build mathematical models which have no relation to the real world. Leading macro textbooks teach student how to do advanced mathematical manipulation, but teach nothing about the events going on around us, which is why economists were taken by complete surprise when the Global Financial Crisis occurred. According to all the macro models in use then (and which continue to be used today) such an event was impossible.

Textbooks teach Myths About Macro: It is not just that what is taught in the textbooks is irrelevant. It is actually misleading, and we can argue that it is deliberately so. Learning the truth about how the economy works would be harmful to the rich and powerful who benefit enormously from the myths that are taught in modern macroeconomics textbooks, and widely believed throughout the world. Many, many myths taught as realities could be listed, but perhaps the central one among them is the “Neutrality of Money”. According to this widely believed myth, money plays no important role in the economy, except to affect the price level. If we double the quantity of money, the prices will be double and there will be no other effects on the real economy. In other words, “money is a veil” and we have to see through this veil in order to understand the workings of the real economy.

Suppression of Keynesian Knowledge: read more 

  1. May 13, 2018 at 5:18 pm

    “Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects.”

    When markets are left alone (i.e., not regulated by an uncorrupted government), then there is room for all kinds of fraud and corruption by, for example, the banks who before the last Great Recession loaned money for mortgages that they knew could not be repaid, then they packaged those mortgages into derivatives that were sold to pension funds and others. When the derivatives became worthless, the pension funds lost money and the banks obtained gigantic profits. There is a whole huge shadow banking system ( https://www.investopedia.com/terms/s/shadow-banking-system.asp ) in play right now that will probably give birth our next big financial crisis.

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