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The failure of the new macroeconomic consensus: from non-ergodicity to the efficient markets hypothesis and back again

Published Online:pp 4-21https://doi.org/10.1504/IJPP.2011.039572

The subprime crisis raised some fundamental questions about the usefulness of mainstream economics. This paper considers the shortcomings of the new neoclassical synthesis and the new macroeconomic consensus in analysing the causes and consequences of the crisis. It demonstrates that the major problem was the assumption that the future could be modelled in terms of Knightian risk (as in the rational expectations and efficient markets hypotheses). It is shown that the near collapse of the banking system in the advanced countries was due to a rapid increase in uncertainty. Suggestions are made for the future development of financial macroeconomics using the insights from behavioural economics.

Keywords

subprime mortgages, financial crises, financial macroeconomics, consensuses, new consensus, ergodicity, uncertainty, behavioural economics, USA, United States, efficient markets, mainstream economics, neoclassical synthesis, Knightian risk, rational expectations, Frank Knight, banking systems, banks, advanced countries, public policy, economic policies, alternative paradigms