"In the decade since the financial crisis, not one so-called top economics department has hired a single senior professor who had accurately foretold the calamity to come. It should be evident, by this point, that this is not accidental." -- Book review of Money and Government: The Past and Future of Economics, by Robert Skidelsky (Yale University Press, 2018) (Quoted in Ian Welsh's blog.)
Neoclassical economics, the fashion of economic thinking currently informing the public policy decisions of the ruling class, folds the classical economists' three factors of production (capital, labor, land) into two (capital and labor), so it ignores the monopoly aspects of land ownership.
Neoclassical economics gets at least a propaganda victory by the kind of willful ignorance forced on the public, particularly ignorance of the potential to make the economy more productive by paying attention to the effect of land as a productive input.
Elizabeth J. Phillips (née Magie; 1866–1948) invented the precursor to today's Monopoly, The Landlord's Game to illustrate the position of land in those productive inputs, and the effects of Henry George's proposed land tax. In the Monopoly version of the game, there's only one winner; everyone else, in effect, declares bankruptcy. Ms. Phillips proposed an alternative set of rules ("Prosperity") that let everyone win. You can still get the rules for Prosperity online, but Monopoly is the game in popular distribution. Neoclassical economics gets at least a propaganda victory by the kind of willful ignorance forced on the public, particularly ignorance of the potential to make the economy more productive by paying attention to the effect of land as a productive input.
Neoclassical economics also ignores money and credit, asserting that the real economy is, in effect, a system of barter, effectively ignoring economic history. Anthropologist Caroline Humphrey concludes that "No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing."
So it's no surprise that neoclassical economics did not predict an event at the confluence of credit and land--the subprime mortgage meltdown--because those factors do not appear in their calculations.
Finally, American economic thinking historically includes Simon Patten’s (1852 – 1922) teaching at the Wharton Business School — which asserted government-subsidized public infrastructure was a fourth factor of production. The neoclassicals want to suppress this bit of history, and paint government as only a meddler in markets. But historically, only societies with states, and their regulatory infrastructure have had markets. No state; no market.
How does a state create a market? Imagine the king wants to employ 10,000 troops to defend the borders. Training, housing and feeding this enormous number of soldiers would be a logistical nightmare. So the king pays his troops with the official currency (let's call it "crowns"), and demands the rest of the population pay a tax...in crowns. This means people want get their hands on the soldiers' pay, and make a market to serve them, and everyone else, in the process. It's also equally obvious that the state has to regulate that market, if only to specify what makes a legitimate "crown," and how credit arrangements can work.
So some fairly bizarre neoclassical assertions guide current public policy, reminding me of a stage hypnotist I saw once at the state fair. He put a dozen people in a trance, told them to take off their right shoe and hold it in their hand. Then he told them when they woke, they wouldn't be able to see whatever was in their right hand. He snapped his fingers to wake them, and asked them what happened to their right shoe. People were looking under their chairs, around the back of the stage, etc. while clearly holding their shoe in their hand. The crowd laughed, but I wondered how often we're holding the shoe we're looking for.
That's the state of play in economics, currently. The economists with the ear of the public policy makers are walking around with their shoe in their hand, wondering why these irritating people opposing their policy solutions are telling them to wake up.
It's Simpler Than It Looks