In it, Dirk J Bezemer of Gronington University attempts to show that certain contrarian economic models — and economists — anticipated the credit crisis and the ensuing recession. In contrast, mainstream economic models, and by extension most economists, did not.
We’ll save you the suspense and present you with Bezemer’s list of analysts ‘who saw it coming’ right away. Click to enlarge.
The entire paper itself, however, and its potential implications for the supremacy of certain economic models makes for interesting reading.
Here’s Bezemer on the purpose of the paper:
[The analysts presented in the table above] belie the notion that ‘no one saw this coming’, or that those who did were either professional doomsayers or lucky guessers. But there is a more important, constructive contribution. An analysis of these cases allows for the identification of any common underlying analytical framework, which apparently helps detect threats of instability. Surveying these assessments and forecasts, there appears to be a set of interrelated elements central and common to the contrarians’ thinking. This comprises a concern with financial assets as distinct from real-sector assets, with the credit flows that finance both forms of wealth, with the debt growth accompanying growth in financial wealth, and with the accounting relation between the financial and real economy.
These are what Dirk Bezemer calls accounting or flow of funds views of the economy. They have certain Austrian School characteristics, like a distinction between financial wealth and real assets, as well as the separate representation of stocks and flows, and modelling the financial sector separately from the real economy. Those are in contrast to traditional neoclassical economic models which tend to focus on equilibriums, according to Bezemer.
A graphical representation of the two systems is below, which demonstrates the idea pretty well. While stuff like finance and real estate feature prominently in the accounting/flow of funds schematic — they are entirely absent from the traditional model:
An economic model that pays little or no attention to the finance and real estate sectors that were the cause of the financial crisis, would presumably have not been much use in predicting it. Thus, Bezemer concludes we need to start looking more at that accounting model of economies:
This research programme would have as its central tenet that we need to understand how dynamics in accounting relations underpin and shape our economies. The underlying reason is that economic relations and transactions in modern economies are embedded in the double-entry accounting framework. All transacting is predicated on economic agents extending credit to each other, and credit (whether trade credit or bank credit) is fungible with money. Money is not just a unit of account; it is the reflection of relations of debit and credit, and thus money itself is an accounting concept (Wray 1998, 2004). Having a monetary economic system predicated on accounting relations and the regulations that shape them, implies that an accounting lens is indispensable in the analysis of financial stability. This is the accounting dimension of the ‘significance of the monetary context of economic behavior’ also researched in heterodox economics (Fontana and Gerard 2002). More specifically, the balance sheets of firms, households and governments, and the regulations in the economic system on what sorts of balance sheets are being allowed, co-determine what forms new credit flows can take, how much there can be of it to different sectors (e.g. to the FIRE sector versus the real economy), and consequently how the economy will evolve. These will not be the only factors shaping the economy, but neither can they be fully abstracted from, as is current practice in much of economic research. In sum, there seem to be important contributions that accounting researchers can make to economics – rather than just the other way round, as is sometimes suggested