The rise of Neo-Keynesian economics and confusion

Many classical economists have given up on their beliefs. How can we blame them, many are ready to give up on capitalism and many more have already given up on free markets. The reasoning is that monetarism, free markets and to some extent even capitalism do not work based on status quo observations. What will cause such an inexplicable outcome in a world that apparently was following classical economics, capitalism and free markets, till recently.

Let's look at the records. Just a decade ago, rock-star monetary policy makers were finely tuning interest rates to drive the $10 Trillion US economy and a larger world economy (that had little policy flexibility due to pegged currencies), to the optimal state. Many watched such foresight and ability in complete awe - unable to understand a single sentence put together by the policy maker. Many believed that they are just too stupid to even comprehend the jargon - uttered in special places as in congressional hearings and Fed policy meetings. Policy makers knew when bubbles formed and they even warned about "irrational exuberance," and took actions to let the air out in finely crafted policies. Never before did the world know of such intellect, capable of not only seeing bubbles but also puncture them optimally. This is, however, NOT classical economics - not sure what one will call it. A passive monetary policy has been the prescription by monetarists who actually studied and taught economics and never ventured into measuring the size of the hole to be drilled on the bubble to optimally deflate it.

Free markets, apparently, have also been in full swing before the whole trouble started.  In these free markets, a few companies were given exceptions and few others to collude and skip regulations. In these free markets, bigness was a proxy for competence and membership to country clubs, a necessary condition for opportunity. In these free markets, institutions were created with implicit guarantees by the government that allowed them to take risk with the ability to capture the gains and demand a bailout for losses. In these free markets, subsidies were doled out to energy producers and tariffs were imposed on steel makers. We did NOT have free markets before the trouble started, just the opposite.

World over, capitalism is under threat. Why not - look at the trouble it brought. We are ready to forget regimes where a few decided on how much bread to produce and how much oil to pump and drove whole countries to despair. We are ready to forget regimes where military vehicles and guns quelled those who wanted to usher in capitalism to loosen the grips of the state owned industrialism. We are ready to forget that policies of the world's largest democracies, driven by leaders with a misguided belief that "compassion" has to be worn on the sleeve and economic growth for the masses is a luxury, took the path to "under-development" under the cover of green revolution.

We have not had free markets or classical economics recently and we know well the results from "non-capitalistic" experiments. Those who have given up on these ideas and those economists waiting to board the Neo-Keynesian train out of sheer confusion, may want to study the data one more time. Confusion is not a sufficient condition to give up on fundamental principles.