The Narrowness of Mainstream Economics Is About to Unravel

Recent extreme volatility and sharp drops in US stock markets underscore the instability of capitalism yet again. As many commentators now note, another economic downturn looms. We know that all the reforms and regulations imposed in the wake of the Great Depression of the 1930s failed to prevent both smaller downturns between 1941 and 2008 and then another big crash in 2008. Capitalism’s instability has, for centuries, resisted all efforts to overcome it with or without government interventions. Yet mainstream economics mostly evades an honest confrontation with the social costs of such economic instability. Worse, it evades a direct debate with the Marxian critique that links those costs to an argument that system change would be the best and most “efficient” solution.

In economics courses these days, most US professors praise the “free market.” They insist that its outcomes (prices, incomes, interest rates, and so on) flow from self-interested individuals bargaining freely over their economic interactions (buying, selling, borrowing, lending, working, and so on). Market outcomes, they teach, are uniquely stable, efficient and, indeed, optimal in some overarching social sense (or at least in Vilfredo Pareto’s sense). The economy works well if we let markets work their magic, according to this ideology.

Good teachers explain that many assumptions are required — about social conditions that need to be in place — for free markets to have these wonderful outcomes. But the vast majority of students walk away from their economic courses with little more than free-market ideology. They walk away believing that the market works badly when governments interfere by influencing prices, incomes, interest rates and so on.

Free-market ideology took a big hit in the 1930s. That was because the years before the 1929 crash had seen that ideology in full bloom taking credit for the “Roaring Twenties.” The horrendous Great Depression that followed for over a decade after…

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