The lessons of the North Atlantic crisis for economic theory and policy – Joseph Stiglitz

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The world has seen a hundred financial crises in the past three decades. In this column, Nobelist Joe Stiglitz argues that we could have done much more to prevent this crisis and to mitigate its effects. Looking ahead, we can do much more to prevent the next one. This is a chance to revolutionise flawed economic models, and perhaps exit from an interminable cycle of crises.

This is the fourth of four columns sharing reflections on the recent IMF conference “Rethinking Macro Policy II: First Steps and Early Lessons”.

In analysing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last thirty years –as liberalisation policies became dominant – have given us a wealth of experience and mountains of data. If we look over a 150-year period, we have an even richer data set.

With a century and half of clear, detailed information on crisis after crisis, the burning question is not ‘How did this happen?’ but ‘How did we ignore that long history, and think that we had solved the problems with the business cycle’? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.

Markets are not stable, efficient, or self-correcting

The big lesson that this crisis forcibly brought home – one we should have long known – is that economies are not necessarily efficient, stable or self-correcting.

to read Joseph Stiglitz’ article published May 9, 2013, click on

http://www.voxeu.org/article/lessons-north-atlantic-crisis-economic-theory-and-policy

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