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

Authors: Nigel F.B. Allington, John S.L. McCombie, Maureen Pike

Addresses: Ecole de Management, Grenoble Ecole de Management, 12, rue Pierre Semard – BP 127 – 38003, Grenoble Cedex 01, France. ' Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridge, 19 Silver Street, Cambridge, CB3 9EP, UK. ' School of Accounting, Finance, and Economics, Oxford Brookes University, Wheatley, Oxford, OX33 1HX, UK

Abstract: 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.

DOI: 10.1504/IJPP.2011.039572

International Journal of Public Policy, 2011 Vol.7 No.1/2/3, pp.4 - 21

Published online: 14 Jan 2015 *

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