261
to Friedman and only gradually
adopted more free market
economic policies.
Rethinking free markets
Although monetarism and the
liberalization of markets may have
helped to make markets more
efficient through the 1980s and 90s,
some economists were uneasy
about the sustainability of these
policies. As early as 1974, US
economist Hyman Minsky (p.301)
had warned of the inherent
instability of financial institutions.
An acceleration of the “boom and
bust” cycles seemed to confirm
his hypothesis. Deregulation
encouraged risky borrowing,
which led to the collapse of firms
and banks. Other economists
challenged the efficiency and
rationality of the market, arguing
that the “scientific” models of the
economy were based on the wrong
sciences: new ideas in mathematics
and physics, such as complexity
theory and chaos theory, were
perhaps better analogies, and
behavioral psychology could
better explain the actions of
“economic man” than economists’
standard notion of rationality.
Meanwhile, younger economies
were developing, especially in Asia,
where reforms were transforming
the Chinese and Indian economies.
A new economic bloc emerged to
rival the West, in the form of the
BRIC nations (Brazil, Russia, India,
and China). The prosperity of these
new economic powers stimulated
a renewed interest in so-called
development economics since other
countries remained locked in
poverty by crippling debt andpolitical instability. At the same
time the technology that had
brought economic prosperity now
posed an economic threat in the
form of global warming and climate
change, which needed to be dealt
with at an international level.
In the first decade of the 21st
century a succession of financial
crises rocked the Western
economies, and it seemed that
free market policies had failed.
Once again, economics became
concerned with the inequalities
and social consequences of free
markets. A few economists even
wondered whether the failure of
free markets was heralding the
collapse of capitalism that Karl
Marx (p.105) had predicted. Not
for the first time, the world seemed
to be on the verge of profound
economic change. ■CONTEMPORARY ECONOMICS
1985 1989
1988 1994
2000 S 2006
2005 2008
Mikhail Gorbachev
begins a process of
economic reform in
the Soviet Union
known as perestroika.Alice Amsden
describes the rise
of East Asian
Tiger economies.Marilyn Waring’s
If Women Counted
gives a gender-
based perspective
on economics.Robert Flood and
Peter Garber create
the first of a number
of currency
crisis models.Alberto Alesina
and Dani Rodrik work
on the relationship
between economic
growth and
inequality.Nicholas Stern
describes global
warming as the
“biggest collective
action problem”
facing human society.In The End of Poverty,
Jeffrey Sachs suggests
that debt relief
can kick-start economies
in the Third World.A banking crisis causes
worldwide recession
as credit is withdrawn
and housing
bubbles burst.