Deepening Crisis in Economic Theory: Some Reflections

The world economic crisis (since 2007), has exposed the inadequacy of the mainstream Macroeconomic theory to explain the socio-economic processes of which current financial and economic crisis has been the outcome. It warrants reconsideration of the basic premises on which such economic theory is based upon. Secondly, the explanatory power of the pure (partial) economic theory under the assumption ‘other things remain equal/unchanged’ (i.e. provided there were no changes in the social and political environment) is being questioned. Corresponding research methods based on structural-functional approach with extensive use of statistical methods are also subject to debate among the social scientists, the world over.

Evolution of economic theory has passed through five distinct phases: Classical political economy approach, Marxian approach, Neo-classical approach, Keynesian approach and Post-Keynes approaches. Mainstream economic theory taught the world over is dominated by the post-Keynes Neo-classical approach. Such a theory is premised on the underlying assumption that free market provides the ‘most efficient’ mechanism (through the operation of invisible hand) for optimal allocation of resources, optimal allocation of goods and services among consumers and most efficient factor pricing ultimately (in long run)! The state may take corrective steps for short-term disequilibrium through monetary policy and fiscal policy measures and allow market forces to have a free play. The economic history of various countries the world over confirms that market by itself cannot ensure full employment and depression of the 1930s and the current economic crisis provide the required evidence. Emerging inter-personal and inter-regional inequalities on the one side and environmental degradation on the other warrant pose a serious challenge to the social scientists to open up and consider afresh.

It has been argued that political economy approach to social sciences has better explanatory power than the neo-classical theory which is based on neo-liberal paradigm and state has to play a crucial role in providing stability in short as well as long run.