In the land of the blind the one-eyed are king: How financial economics contributed to the collapse of 2008-2009

• Published in: Journal of post Keynesian economics 2011-10, Vol.34 (1), p.3-23
• Main Author: Williams, Edward E
• Format: Article
• Language: English
• Subjects: Arbitrage; Business education; business school education; Curricula; Economic crisis; Economic theory; Education; Efficient markets; Finance; financial collapse; Financial crisis; Financial economics; Financial investments; financial markets; Financial research; Financial theory; Finanzmarkt; Forschungsmethode; Investment risk; Kapitalmarkt; Krise; Market prices; modern financial economics; Prices; Risk aversion; Stock prices; Studies; Studium; Teaching of economics; Theorie; USA; Wirtschaft
• ISSN: 0160-3477; 1557-7821; 1557-7821
• DOI: 10.2753/PKE0160-3477340101

The purpose of this article is to discuss why finance went from being a useful, albeit not all knowing, discipline to a state where its pronouncements presently not only are not useful but can be absolutely harmful. Before the 1950s, research in finance was essentially taxonomic and descriptive. It was assumed that finance as an area of study was supposed to describe practical phenomena (stocks, bonds, credit arrangements, etc.). By the 1950s, however, constructs of questionable value replaced the practical wisdom that had developed earlier, and these constructs put blinders on the discipline. The root cause was the reaction to the Gordon and Howell Report and the Pearson Report on business school education, which concluded that finance and business subjects generally were "backwater" areas of study with little intellectual content. The result was a major change in business school curricula and research methodology. In finance, the consequence has been the development of a façade that has fooled practitioners and helped produce various financial collapses, including the recent collapse of 2008-9.