Monday, April 11, 2016

competing stories about inequality and why they matter


paecon |  This paper examines several mainstream explanations of the financial crisis and stagnation and the role they attribute to income inequality. Those explanations are contrasted with a structural Keynesian explanation. The role of income inequality differs substantially, giving rise to different policy recommendations. That highlights the critical importance of economic theory. Theory shapes the way we understand the world, thereby shaping how we respond to it. The theoretical narrative we adopt therefore implicitly shapes policy. That observation applies forcefully to the issue of income inequality, the financial crisis and stagnation, making it critical we get the story right.

This paper explores competing stories about the role of income inequality in the financial crisis of 2008 and the ensuing stagnation. At one level, the paper is a purely analytical exercise. At another level, there is a deeper purpose regarding exposing the neoclassical monopoly in economics that has destroyed pluralism and distorted economic debate and policy making.

An open-minded pluralistic economics demands representation of all economic theories that provide a logically coherent explanation of the economy consistent with the facts as we know them. But that is not how economics is practiced owing to the neoclassical monopoly. 

Pluralism is not just important as an intellectual aspiration. It is also important in practical terms for delivering sound economic policy. Theory shapes how we understand the world, which in turn influences how we respond to events. Theory is a form of story-telling, and the stories we tell shape our understanding of the economy and economic policy. That means the stories we tell are critical.