In 2008, Queen Elizabeth II went to the London School of Economics to open a new academic building. The British Monarch has made it a life’s work to avoid saying anything contentious in public, but this time she had a question for the economists: Why had they not seen the financial crash coming?
Her question went to the heart of two huge failures of modern economics: the near collapse of some of the world’s major economies; and the faith in an orthodox economic framework that offered no explanation for what was happening. The thesis of my new book Rethinking Capitalism: Economics and Policy for Inclusive and Sustainable Growth, co-edited with Michael Jacobs, is that these two failures are intimately related. The failure by policy-makers to fully understand the dynamics of the capitalist system not only leads to periodic crises; it also leads to the wrong remedies, such as the pro-cyclical austerity that has only deepened and prolonged the crisis in many countries.
Eight years on from the global financial crisis, the IMF is still describing the global recovery as “weak and precarious”. It points to modest recoveries experienced in most advanced economies characterised by “weak productivity, low investment, and low inflation”, which in turn reflect “subdued demand, diminished growth expectations, and declining output growth” (IMF, WEO, Oct 2016). Indeed, in most advanced economies investment remains below pre-financial crisis levels.