The Great Recession of 2008-9 was the deepest and longest capitalist economic slump since the Great Depression of 1929-32. Yet, the official strategists of economic policy in all the advanced capitalist economies did not see it coming; then denied it was taking place; and afterwards were unable to explain why it happened. The vast majority of mainstream economists (both the neoclassical or Keynesian wings) failed to forecast it too.
Afterwards, a bitter dispute has broken out between these two wings on which theoretical model best explained the Great Recession. This paper argues that neither wing has an adequate explanation because both theoretical models are: obsessed with the actions or motivations of individual economic agents; refuse to provide empirical evidence from history (thus have models lacking in any predictive power); and focus only on flaws in the financial sector for the causes rather than the wider capitalist production process.
These failings also apply to a greater or lesser degree to many heterodox economic explanations, ranging from the behavioural or ‘animal spirits’ versions of the Keynesian model, the Minsky ‘financial instability’ supporters, to the Austrian ‘excessive credit’ school.
This paper argues that the Marxist model of capitalism best explains the Great Recession, rooted as it is in the inherent flaws in the capitalist production process and then its indirect impact on the financial sector. This reveals how the proximate causes are related to the ultimate.
The methodological lessons for economists from the Great Recession are: 1) turn to the aggregate and away from the individual in forming economic theory; 2) provide empirical evidence that can be tested and retested; and 3) look at the big picture, not one sector of the capitalist economy.