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Mariana Mazzucato, University of Sussex – How has the crisis in Greece (its cause and its effects) revealed failings of neoclassical economic theory at both the micro and the macro level?
Varoufakis: The uninitiated may be startled to hear that the macroeconomic models taught at the best universities feature no accumulated debt, no involuntary unemployment and, indeed, no money (with relative prices reflecting a form of barter). Save perhaps for a few random shocks that demand and supply are assumed to quickly iron out, the snazziest models taught to the brightest of students assume that savings automatically turn into productive investment, leaving no room for crises.
It makes it hard when these graduates come face-to-face with reality. They are at a loss, for example, when they see German savings that permanently outweigh German investment while Greek investment outweighs savings during the “good times” (before 2008) but collapses to zero during the crisis.
Moving to the micro level, the observation that, in the case of Greece, real wages fell by 40% but employment dropped precipitously, while exports remained flat, illustrates in Technicolor how useless a microeconomics approach bereft of macro foundations truly is.
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I really don't know at what level of complexity someone must settle, in order to have a viable mathematical model to predict financial crisis... How many variables do you need? Then again a lot in economics depends on 'perception'. A FinMin will never discuss devaluation of his currency, the moment he does... The currency will drop. How can a mathematical model 'predict' such behaviours?
[1] https://theconversation.com/varoufakis-in-conversation-with-...