The limits of mainstream economics

Last week, I was at a lecture by one of the top economists in Germany, whose presentation was completely demolished by the first participant from the floor, who said that he was amazed that the entire presentation had nothing on the shadow financial system which is many times the size of the economy as described in the presentation; and that, if the shadow economy had been taken into account, none of the presentation's conclusions stand.

Interestingly, the presenter had absolutely nothing to say in relation to the participant's statement, beyond small-facedly conceding.

Raghuram Rajan is one of the top economists in the USA, famous for his book, “Fault Lines: How Hidden Fractures Still Threaten the World Economy” - which, you might imagine, has more to say on the subject.

Instead, he focuses on what he sees as the three big challenges that led to the economic crisis and still threaten the health of the global economy:

1. credit creation outpacing the American population's income growth,

2. the commitments to building up external savings with exports by many emerging markets, and

3. the fragility associated with the resulting large capital flows.

Again, nothing on the shadow financial system and its pro-cyclicality.

I haven't heard a top economist from India or another developing country in the last week, but I would guess that the situation is no better there.

Till mainstream economists learn to take the shadow financial system into our discipline, mainstream economics will continue to be irrelevant to real life. Sphere: Related Content