Toxic Economic Theory, Fraudulent Accounting Standards, and the Bankruptcy of Economic Policy

Toxic economic theory originates from its 'schizophrenic' division into separate macro- and macro- compartments. The microeconomic market-value fallacy - by ignoring the macroeconomic repercussions - fosters the delusion that an increase in market value necessarily represents a gain in real wealth. This fallacy is responsible for fraudulent 'fair value' accounting standards and for an epidemic of 'balance-sheet myopia'. In creating an unsustainable pyramid of ever-increasing loans secured on ever-rising house-prices, it is the root cause of the current economic crisis. The macroeconomic single-gear fallacy - by disregarding the microeconomic foundations - encourages the misconception that the economy is a single-gear machine requiring no more than the lubrication of free competition for operation at its full employment potential. This fallacy is the product of a forty-year-old consensus manufactured to cover up a theoretical schism between squabbling Keynesian and monetarist sects. By inducing misplaced confidence in structural reform as the only long-term cure for unemployment, it continues to prevent a solution to the crisis. The legacy of toxic economic theory is the bankruptcy of economic policy. The accounting system (burdened by unhelpful and occasionally fraudulent standards) is hardly 'fit for purpose'; it is not reliable for assessing or comparing corporate performance and has become an almost overpowering incentive to 'short-termism'. The tax system has evolved (through a series of historical accidents) into a dysfunctional 'non-system' that obstructs the goals of economic policy. Single-gear macroeconomic policy, having failed to deliver full employment without inflation, now offers little more than a choice of evils: either single-gear 'austerity' - which jeopardises growth; or else single-gear 'growth' - which risks fuelling inflation. A Multi-Gear Strategy for Economic Recovery is outlined in the companion volume.