The Credit Crisis and Recession as a Paradigm Test

Abstract

This paper contributes to the debate on what economics can learn from the credit crisis and recession. It asks what are the elements in the mainstream paradigm that caused many economists to misjudge the state of the economy so dramatically in the years leading up to the 2007 credit crisis and the 2008-2009 recession. It scrutinizes the work of twelve economists who warned of the crisis and identifies, as the common elements in their thinking, financial assets, debt, the flow of funds and behavioral assumptions on uncertainty, bounded rationality and non-optimizing behavior. These are then contrasted to mainstream thinking. The conclusion is that economics, if it is to be relevant to reality, should stop neglecting money, wealth and debt, and turn away from an individualistic view and toward a systemic view of the economy.

Keywords:

• credit crisis
• paradigms
• prediction
• recession