Great Transformation

Polanyi and the Great Transformation : published April 27, 2015, in Express Tribune

Dr. Asad Zaman

In a presidential address to the American Economic Association in 2005, Nobel Laureate Robert Lucas confidently pronounced that economists have solved the fundamental problem of prevention of recessions. The Global Financial Crisis (GFC) of 2008 took economists by surprise, since none of the seven major schools of macroeconomic thought allowed for this possibility. Remarkably, the US Congress set up a committee to investigate the failure of economic theory to predict the crisis. In written testimony, Solow wrote that the theories being used to make policy seemed suitable for some alien planet. Similarly, Krugman said that the profession as a whole was led astray by the beauty of mathematics, and failed to pay attention to the ugly realities. One of the central tenets of economic theory is that prices guide us to the right allocations. Instead, the overheated mortgage market deceived people into making massively wrong investments, which led to the crisis.

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