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The events that brought about the Great Recession, and the circumstances that have combined to transform that recession into an ongoing jobless Lesser Depression, are the result of widespread but erroneous beliefs about economic theories which have taken hold of laymen and policymakers alike.

The fundamental problem in current and recent political activity is caused by a persistent set of “ideas that fail to describe how economies actually function,” writes Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities, in a recent report for The Atlantic. [For analysis of both recession and financial crisis in California, see the July 2011 first tuesday article, The rocky roads: recession and financial crisis.]

At the core of these mistaken economic ideas, sometimes referred to as zombie economics, is an irrational belief in the power of markets to beneficially regulate themselves, without harm to society, in the absence of outside (government) interference. This argument is based, loosely, on the economic theories of Adam Smith, who determined that unhindered competition and rational self interest leads to the greatest profit. Smith, however, never theorized (as some modern economists have) that bubbles were impossible, or that free markets were not likely to lead to disastrous income inequality, poverty and pollution.

Instead, those beliefs are part and parcel of the unjustified tenet at the core of current zombie economics: that markets cannot fail and always self-correct, and that government actions only serve to distort society’s proper functioning. The dominance of these beliefs during the Reagan, Clinton and Bush administrations led to deregulation and tax benefits for the financial and housing markets, which allowed rampant debt for homebuyers and unsustainable pricing for investments.

first tuesday take: Now, as the recession’s effects continue to be felt in all tiers of the economy (except the very highest, which go on as ever), zombie economics wrongly demands that the government deliberately avoid taking action to ameliorate the pain of those in our society worst hurt by the crisis. Under the justification of “the free market,” politicians call for tax cuts and even further deregulation, and oppose any attempts to regulate markets to prevent future bubbles, invest in public goods and industries (such as infrastructure or clean energy), or prepare for the future.

These policy recommendations are divorced from current and historical realities, and are instead motivated by blind faith in an incorrectly characterized economic theory. Until the mantra of “deregulation and free markets” is no longer the go-to rationale for all political behavior, disastrous policies will continue to be the norm. Private sector losses and damages, on the other hand, will continue to be socialized – covered by the government – the last and only recourse of citizens when disaster financial disaster strikes.

RE: “The tyranny of zombie economics in America”, from Housingwire.com