Time for Change

I believe, soon we will see the most valuable economy transformations ever triggered by the 2008 financial crisis.

The positive outcome of all financial crises is that it gives us new data, facts, perspectives to create new business models and ideas, as well as transform our theoretical knowledge of economics.

Historically, the threshold events for the changes in economy thoughts were financial crises. 

During the Great Depression, said by Farmer “Keynes realized that Adam Smith’s vision of the invisible hand needed to be amended to allow for the immense human misery that occurred during this period”.

Long and protracted periods of unemployment were not consistent with classical ideas. It was time for something new.

The Great Depression caused Keynes to change (In the 1920s, Keynes was a classical economist) his views and to develop an alternative theory that would “justify policies that he believed were the right way to cure what he saw as a massive social ill. It was one thing to be sure of oneself and another to explain why state-of-the-art economic theory was wrong”.

The financial crisis of the 70’s had also shifted the economic though. Then Phillips Curve, along with Keynesian policies proved to be wrong, “Lucas persuaded many academic economists to stop working on Keynesian economics and to switch instead to the study of economic growth”- said by Farmer.

The Keynesian economics was dropped out, when the economy experienced high unemployment and high inflations. And the new understanding of economy was born: the rational expectations (which are the base of modern finance).

Then after the financial turmoil of 2008, the Keynesian economics had re-emerged: in 2009, the Fed, the ECB responded to the recession by pumping money into the economy.

As the Great Depression had a profound influence on all economists, so is the 2008 financial crisis should influence economists today. However, we don’t see so much progress with it. We still need tools to recover the economy.

In my next blog, I will argue that, in order to recover the economy, we need new models and perspectives of economics, but more importantly, we need to re-build honesty, transparency and even understanding of economic transactions not only on the macro, but also on the micro level.

The failure to face the problem of economic crime and fraud constitutes a huge barrier in the path of economic recovery. The financial system can’t be fixed until it’s cleaned up and rebuild in a transparent and honest manner.

I believe, this change will be one of the most valuable economy transformation triggered by the 2008 financial crisis.