Beginning in the 1980s, both Keynesianism and neocorporatism were heavily impugned. Criticism was aimed in part at politicians, who all too often gave into the temptation of stimulating the economy not just when it was economically necessary but also to win elections. The criticism against neocorporatism was that the big interest organisations were often not capable of acting in the public’s best interest but functioned more as selfish special interest groups that, using political pressure, could obtain undue advantages. As a result of this criticism, which was often empirically well supported, both Keynesianism and neocorporatism were replaced by a neoliberal paradigm.

In some aspects, this way of thinking was a return to the ideas that predominated before the crisis of the 1930s, that is, that market forces should be given freer rein in the economy and interest organisations should be kept on a short lead in politics. The leading advocate of this was known as the Chicago School, which included a number of Nobel Prize winners like Milton Friedman and Gary Becker. This approach in education has not only achieved a hegemonic position in the study of economics but has also influenced other social sciences, particularly political science, to a considerable extent.

The crisis in the financial sector, which began in the US, has now developed into a crisis in the real economy. In Sweden, we are seeing sharp increases in redundancies, and companies the world over are reporting significant falls in demand. Many economic experts foresee a deep, long-term economic downturn in the global economy – in the US, there is talk of the recession turning into an economic depression. The question that arises, of course, is how this could have happened, with the answers to this question leading to a paradigm shift like those we saw in the 1930s and 1980s.  

The first thing that should be said is that it is especially difficult to give clear, scientifically founded answers to the question of what triggers widespread crises. One reason is that it is hard to find a sufficient number of comparable cases to make generalisations. Another reason is that those working in the social sciences, unlike those in the natural sciences, cannot conduct experiments (which most people would probably think is a good thing in a case like this). Potential causal factors are also to be found at different levels – for instance, one must distinguish between underlying structural factors and triggering factors. In the same context, it should be noted that the research community today cannot reach agreement either on any explanation for the outbreak of the First World War, how it was possible to perpetrate the Holocaust or what caused the economic crisis of the 1930s.   

When it comes to the reasons for this crisis, a fair number of neoliberal commentators both in Sweden and abroad have advanced what is known as the Wall Street Journal hypothesis. This, of course, proposed that the crisis was caused by government regulations introduced during the Clinton Administration to allow mortgage lenders in the US, for social reasons, to provide home loans to households that were not sufficiently solvent. According to this view, the crisis should not be seen as a failure for neoliberalism and market forces but as a result of too many political regulations.

As was mentioned, it is difficult to actually determine the causal links in situations like this, but if there is anyone with sufficient insight into the matter, it would most likely be the economists who were awarded the Nobel Prize in economics. Gary Becker, who won the prize in 1992 and made his name as a strong advocate of free market forces, said the following about the Wall Street Journal hypothesis: “I wish it were true.” He continued his analysis by identifying six causes of the crisis, all of which share the trait of having been generated internally by market players. He writes further that the crisis was caused by “lax regulations” and notes that it is of course unreasonable to absolve the market of responsibility for the crisis with the argument that “the state did not do enough to regulate it!”

Joseph Stiglitz, who received the prize in 2001, wrote that the crisis was caused by deregulation of the financial markets and emphasised that the market itself cannot resolve the crisis but that the state must intervene. The 2008 laureate, Paul Krugman, went even further, maintaining that the crisis was essentially caused by an ideological aversion to regulating the market. According to Krugman, because of their strong faith in the market’s ability to self-regulate, political leaders ignored the warnings. He now advocates a heavy dose of old-fashioned Keynesianism. Finally, Robert Solow, the 1987 recipient, did not actually directly address the financial crisis but wrote about the problems associated with a significant increase in economic uncertainty for the very households in the US that were produced by that neoliberal agenda. 

Despite intense searching, I have in fact not been able to find a single Nobel Prize winner who defends the Wall Street Journal hypothesis. On the contrary, the laureates argue that it was shortcomings in the scope, quality and precision of government regulation of the financial markets that caused the crisis. I would be surprised if this does not lead to a paradigm shift in the social sciences in general and in economics in particular.

What conclusions are to be drawn from this for the future? In my view, it is a matter of keeping two thoughts in mind at the same time. One is that the market system has historically shown itself to be superior to any other known system in creating economic growth, and we have every reason to keep and preserve it. By making it possible for innovative entrepreneurs to find new solutions, the market system has created wealth that was unimaginable to previous generations. Yet what must also be realised is that markets are not self-regulating but instead essentially self-destructive.

This market paradox can be expressed as follows: if the markets are not regulated and supervised with a fairly heavy hand, market players will destroy the conditions for their own well-being. In their pontificating, market players say they are always in favour of free competition on equal terms. In actuality, they try as a rule to avoid or destroy the conditions for such free competition.

This is done, for instance, by forming cartels or exerting political pressure to try to obtain advantages at the expense of their competitors. Joseph Stiglitz has told how, during his time as chairman on President Clinton’s Council of Economic Advisors, he was continuously called on by the CEOs of major American companies with almost the identical message: that they were strong supporters of free market forces and wanted to minimise the role of government in the economy, and also that their own company or industry needed specially favourable rules and other government backing to survive. It should be added that in the majority of the countries in the world, market players are the driving force behind the extensive corruption that is particularly devastating both socially and economically.

The term paradigm has been given many different meanings but in its narrower sense it is usually equated with the type of knowledge that is considered necessary to complete an advanced university degree in a given subject. Historically, it can be shown that there are sometimes rapid and ground-breaking changes here, with the classic example being the breakthrough of relativity theory in physics.  

One problem that the present economic crisis brings into immediate focus is that markets have an internal logic that tends to make them self-destructive. This is seen especially if one reads the coursebooks generally used in university courses in the subject in Sweden. I conducted a review which shows that the coursebooks in economics at our universities and university colleges are almost clinically cleansed of the problem of the markets’ intrinsic tendency to pervert the public institutions that are needed for them to function reasonably effectively.

For instance, the best-selling book in Sweden, Vår ekonomi [’Our Economy’], written by Klas Eklund, which has come out in ten editions since it was published in 1990, does not include a single piece of advice about these problems. Even though corruption and economic lobbying and hence related problems are particularly common the world over, this problem is barely visible in the programmes that train economists, political scientists and other social scientists. As a result, in my view, generations of students have been handicapped in their ability to understand the problem underlying the reality they will be working in. To remedy this, a fundamental paradigm shift is needed both in research and in teaching in this subject.