Philip Pilkington: At the beginning of your book From Financial Crisis to Stagnation you refer to the 2008 crisis as a ‘crisis of bad ideas’. Could you please briefly explain why you refer to the crisis in this way? Thomas Palley: A central and critical element of my book is its emphasis on the role of economic ideas in generating the crisis. This feature fundamentally distinguishes it from mainstream explanations that tend to represent the crisis in terms of surprise events and economic shocks (e.g. black swans).
My book starts with the fundamental idea that economies are made, not found. The way economies are organized and function is significantly the product of social choices, not the product of nature. Over the past thirty years we (society) have embraced a set of economic ideas that shaped economic arrangements – including the pattern of income distribution, the power of corporations and finance relative to labor, and the way in which the economy generates demand.
This shaping of economic arrangements was obviously driven by political forces acting on behalf of corporate and financial elite interests, but economic ideas also played a critical role. First, the ideas of mainstream economists provided justification for the re-shaping of the economy in ways that elite interests wanted. Second, mainstream economists put forward additional ideas that were picked up and incorporated into the policy project of corporate and financial elites. Third, the monopoly capture of economic discourse by mainstream economics served to exclude other competing economic ideas from making it on to the policy table, into classrooms, and into the public debate.
The implication of this view is the crisis is at a deep level the product of a flawed economic policy paradigm derived from a set of flawed economic ideas. Escaping the crisis means replacing that policy paradigm and the ideas from which it derives. That is a massive challenge involving both a political contest and an intellectual contest. We need to win both. One without the other will be useless. It is no good winning the political contest if you simply replace Tweedledum (hardcore neoliberals) with Tweedledee (softcore neoliberals). Likewise, it is no good winning the intellectual contest if you do not win the political contest to implement different economic policy ideas.
PP: In the book you distinguish between two sorts of alternative approaches to the crisis. One you term ‘Textbook Keynesianism’ and the other you term ‘Structural Keynesianism’. Could you briefly delineate the differences between the two approaches? Also, should it be understood that the two approaches overlap with different schools of economic thought?
TP: Textbook Keynesianism and structural Keynesianism both emphasize the significance of total (aggregate) demand for the determination of economic activity. That is what makes both of them forms of Keynesianism.
However, textbook Keynesianism sees the microeconomic structure of the economy as intrinsically healthy. If demand falls off, all that is needed is for policy to step in and temporarily fill the demand gap until private sector demand revives. That is the logic behind temporary fiscal stimulus and temporary easy monetary policy.
Structural Keynesianism argues that the economy’s underlying income and demand generating process can be structurally flawed. For instance, income distribution can become badly skewed, creating a permanent shortfall of demand. In that case, private sector demand will not revive and the solution is structural remaking of the economy’s income and demand generating process.
Textbook Keynesianism can be identified with neo-Keynesianism...
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