In an excellent column, Nobel prize winning economist Joseph Stiglitz took on Neoliberalism and the Economics profession that still supports it.  He points out the inconvenient fact Neoliberalism has failed with disastrous consequences and the Economics profession is preventing the emergence of a replacement.

As Professor Stiglitz puts it,

In rich and poor countries alike, elites promised that neoliberal policies would lead to faster economic growth, and that the benefits would trickle down so that everyone, including the poorest, would be better off…

We are now experiencing the political consequences of this grand deception: distrust of the elites, of the economic “science” on which neoliberalism was based, and of the money-corrupted political system that made it all possible.

The reality is that, despite its name, the era of neoliberalism was far from liberal. It imposed an intellectual orthodoxy whose guardians were utterly intolerant of dissent. Economists with heterodox views were treated as heretics to be shunned, or at best shunted off to a few isolated institutions…

Nowhere was this intolerance greater than in macroeconomics, where the prevailing models ruled out the possibility of a crisis like the one we experienced in 2008. When the impossible happened, it was treated as if it were a 500-year flood – a freak occurrence that no model could have predicted. Even today, advocates of these theories refuse to accept that their belief in self-regulating markets and their dismissal of externalities as either nonexistent or unimportant led to the deregulation that was pivotal in fueling the crisis. The theory continues to survive, with Ptolemaic attempts to make it fit the facts, which attests to the reality that bad ideas, once established, often have a slow death.

As regular readers know, the Information Matrix makes predicting when a financial crisis is likely to occur easy (after all, I used it to predict the 2007 Great Financial Crisis).  The Matrix highlights the most important externality in financial markets (opacity).  The Matrix explains what regulations are necessary to prevent a financial crisis (disclosure regulations so buyers and sellers can know what they own).  The Matrix sheds light on how to end a financial crisis (restore transparency).

Information Matrix

The Information Matrix shows opacity is the ultimate market imperfection.  A market imperfection that isn’t talked about in Econ 101.  A market imperfection the financial regulations that emerged in the 1930s focused on correcting.

The Information Matrix introduces the Black Box Problem quadrant.  This quadrant integrates behavioral and classic economics.  Behavioral economics has shown everyone likes a good story.  The difference between the Perfect Information and Black Box Problem quadrant is in the Perfect Information quadrant buyers and sellers can Trust, but Verify the story.  Here they act as the rational economic man.  In the Black Box Problem quadrant, buyers and sellers can only Trust the story as opacity prevents their verifying if it is true or not.