Zombie Economics | John Quiggin

Summary of: Zombie Economics: How Dead Ideas Still Walk Among Us
By: John Quiggin

Introduction

In ‘Zombie Economics: How Dead Ideas Still Walk Among Us’, John Quiggin exposes the fallacies of five long-held economic principles that guided policy-makers from the early 1980s until the 2008 Global Financial Crisis. The notion of ‘The Great Moderation’, which suggested the end of traditional business cycles, ultimately paved the way for mass layoffs and eroded safety nets. The Efficient Markets Hypothesis, asserting that markets could correctly set investment prices, also fueled substantial growth in the finance industry. The belief in a ‘mixed economy’ emerged as a middle ground between market liberalism and government-centric Keynesianism. Microeconomics, or the individual actions in a market, were heralded as superior to macroeconomic management by the government, with countries like the United Kingdom and New Zealand embracing these ideologies.

Killing Zombie Economic Ideas

The 2008 “Global Financial Crisis” exposed the failure of five long-held principles that guided policymakers and bankers. Despite being disproven, these principles lingered, showing the difficulty of killing popular economic theories. The economic philosophy behind these principles, known by various names such as “neoliberalism” and “market liberalism,” relied on five zombie ideas that fueled the crisis. It is crucial to eliminate these zombie ideas to avoid further damage in the future.

The Fall of the Great Moderation

The concept of the Great Moderation proclaimed that economic growth would be continuous with weak and short recessions. This was attributed to the liberation of markets, deregulation, and reduced volatility in inflation and employment worldwide. However, this idea was flawed, and it led to growing income gaps, massive layoffs, and a transfer of uncertainty and responsibility to individual employees. The Great Risk Shift resulted in the fraying of safety nets and benefits for workers, and the term “jobless recovery” characterized the post-1990 upturns. The oxymoronic idea of a continuous boom was put to rest by the Global Financial Crisis.

Rethinking Efficient Markets Hypothesis

The Efficient Markets Hypothesis (EMH) suggests that markets are all-knowing and can set investment prices accurately. However, this theory faced inconsistencies as financial crises and market anomalies cropped up. Proponents argued that the government would rescue institutions “too interconnected to fail.” The dot-com boom and bust of the early 2000s and the Global Financial Crisis further disproved the EMH. Thus, economists suggest a mixed economy that allows short-term risk-taking in private markets while entrusting the government to handle society’s longer-term, strategic interests offers a middle ground between total market liberalism and government-centric Keynesianism.

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