On the Insanity of Mainstream Economics

Quoted from David McNally's excellent Global Slump (which I'll be posting about soon):

• "The central problem of depression-prevention has been solved" announced Nobel Laureate Robert Lucas, in his 2003 presidential address to the American Economic Association. Meanwhile, the originator of the Efficient Market Hypothesis, Eugene Fama, haughtily dismissed those who predicted a financial crisis, telling an interviewer "The word 'bubble' drives me nuts" -just as one of the greatest financial bubbles in history was exploding.
• One defining feature of every capitalist boom is the absurd outbreak of triumphalism that accompanies it. We live in a "new economy", pundits proclaim, a perpetual motion machine of ever-expanding economic activity. Recessions are a thing of the past... Just as such voices were heard repeatedly prior to the meltdown of 2008, so they bleated out their convictions on the eve of the Great Crash of 1929. Capitalism had "mitigated" its "childhood diseases", opined economist Alvin Hansen at the time. Not to be outdone, the month of the Great Crash, October 1929, economics luminary Irving Fisher declared, "I expect to see the stock market a good deal higher than it is today within a few months." Fisher was ever so slightly off the mark: it would be over twenty-five years before stock market prices reached those heights.
  
• Mainstream economics has no inherent capacity to make sense of full-fledged breakdowns in equilibrium. Radical political economy, on the other hand, expects economic crises. But this is because it does not expect markets to be inherently stable, efficient and rational. However, mainstream economics and its quantitative analysis ("quants") refuse to acknowledge the possibility of phenomena that violate the predictions their equilibrium generate. Indeed, after the stock market crash of 1987, two quants offered a proof that it was statistically impossible -i.e. that what had happened could not have happened!
  
• In 1998, for instance, world markets were rocked b the collapse of Long Term Capital Management (LCTM), a multi-billion dollar hedge fund that was run by two Nobel Prize winners, Myron Scholes and Robert Merton. Using Scholes's celebrated formula for derivatives pricing, LCTM made a massive bet that blew up in August 1998 when the firm lost a staggering $1.9 billion in a single month.