Macroeconomic theory after the great recession of 2008: the need for a market process approach

This paper sets out to reflect that contemporary schools of thought are unable to explain the great recession of 2008. The Great Recession 2007-2009 and the long, slow recovery from it serve as reminders of the difficulty of explaining business cycles. Macroeconomists of all varieties have been humbled by these events and by our inability to predict or to design policies that moderate the effects. Paul Krugman (2009) and John Cochrane (2010) are examples of how two schools of thought have struggled with the issue. Many theories of business cycles exist, without any being comprehensive; none are able to account for all important characteristics. Macroeconomic theory continues to explore stylised facts for explanatory power. The whole sub-discipline of “macroeconomics” is premised on the belief that the standard microeconomic tools are not of much use in understanding the dynamics of growth and business cycles. Even with the rational expectations revolution purporting to set macroeconomics back on microfoundations, the language of aggregate supply and demand, over-simplified versions of the Quantity Theory of Money, and the aggregative analytics of the Keynesian cross and simple models of functional finance still fill the textbooks and inform most policy debates. The neglect of capital theory in particular has removed the important elements of time and money from Macroeconomics. The main approaches to Macroeconomics are compared and their lack of a firm micro foundation exposed. The dissatisfaction with macroeconomics can be resolved by taking a more capitalbased approach. This will allow for macro elements such as time and money while reintroducing the entrepreneur into macroeconomic theory. Relative prices, especially intertemporal prices can then again take their rightful place in explaining the business cycle