Sprott Money News Ask the Expert – November 2016 Steve Keen Video
The economic and financial crisis has been caused by unenlightened self-interest and fraudulent behaviour on an unprecedented scale. But this behaviour could not have grown so large were it not for the cover given to this behaviour by the dominant theory of economics, which is known as “Neoclassical Economics”.
Though many commentators call this theory “Keynesian”, one of Keynes’s objectives in the 1930s was to overthrow this theory, but instead, as the memory of the Great Depression receded, academic economists gradually constructed an even more extreme version of Neoclassical economics than that against which Keynes had fought. This began with Hicks’s “IS-LM” model, which is still accepted as representing “Keynesian” economics today, but which was in fact a Neoclassical model derived two years before the General Theory was published:
The IS-LM diagram, which is widely, but not universally, accepted as a convenient synopsis of Keynesian theory, is a thing for which I cannot deny that I have some responsibility… “Mr. Keynes and the Classics” (Hicks 1937) was actually the fourth of the relevant papers which I wrote during those years… But there were two others that I had written before I saw The General Theory… “Wages and Interest: the Dynamic Problem” (Hicks 1935) was a first sketch of what was to become the “dynamic” model of Value and Capital (Hicks 1939). It is important here, because it shows (I think quite conclusively) that that [IS-LM] model was already in my mind before I wrote even the first of my papers on Keynes. (Hicks 1981, pp. 139-140; emphasis added; see also Keen 2011)
As it grew more virulent, neoclassical theory encouraged politicians to remove the barriers to fraud that were erected in the wake of the last great economic crisis, the Great Depression, in the naïve belief that a deregulated economy necessarily reaches a harmonious equilibrium: