T he new year has barely begun and already one of 2010s most important analyses of economics has appeared.

It's John Cassidy's rather brave confrontation with the so-called "Chicago School" of neo-con economists, whose free-market doctrines laid the groundwork for the epic global financial crisis we've just endured.

We have paid a heavy price for the dangerous primacy given unfettered capitalism by conservative economists at the University of Chicago beginning in the 1940s, and achieving its peak influence in the late 1990s.

That's when U.S. policy makers, infused with Chicago thinking, began deregulating financial markets and setting the stage for the epic global financial collapse of 2007-08 that triggered the current devastating recession.

It was the end of the Cold War in the early 1990s, more than anything, with its unleashing of Western triumphalism, that lifted the laissez faire ideology of the Chicago School from the realm of untested theory to respectability among public policy makers.

It was they who in the late 1990s revoked Franklin Roosevelt's ban on the co-mingling of traditional and investment banking, and allowed financial institutions to decide for themselves how much capital to set aside for tough times.

(Which was never enough, since it would eat into profits – hence the need for a $700 billion (U.S.) bailout of banks and other financial institutions that otherwise would have cratered the global economy).

It was the Chicago-influenced lawmakers who relaxed government supervision of financiers with their eyes on the main chance, oblivious of the consequences if their ego and avarice led us all over a cliff.

This rankly irresponsible behaviour by the masters of the economy seemed to be validated by the Chicago school's unshakable belief in "efficient-markets hypothesis" and the "rational-expectations theory."

The former assumes that the prices of stocks, houses and other assets accurately reflect all available information about economic conditions.

The latter insists that all economic players, from everyday citizens to high-rolling CEOs and investors, are both acutely knowledgeable about the economy and act wisely on that knowledge.

Both theories are pure bunkum. And never has there been a shortage of experts with a sense of history to explain why – John Kenneth Galbraith, an economic adviser to three U.S. presidents – being a prime example with his steady output of corrective tomes until his death in 2006.

The tripling of house prices in California and Florida earlier this decade bore no relation to economic conditions, but resulted from a euphoric buying panic. As for acting wisely out of full knowledge of circumstances, even bank and brokerage CEOs seldom knew what pockets of cowboy risk-takers in their organizations were betting the company on.

That being the case, pity the working-class wannabe owner of a split-level beyond his means in the predatory grasp of an unscrupulous mortgage broker who convinces him that house prices only rise.

What becomes evident, and is downright frightening, in Cassidy's account is how deliberately untutored are the free-market Chicago school economists in ... economics.

Richard Posner is among the most prominent of the Chicago School propagandists, a jurist who for decades worked with considerable success at incorporating free-market principles into U.S. jurisprudence.

But the recent crisis has made Posner a convert to Keynesianism. This illustrious economist did not trouble to read Keynes' central work, The General Theory of Employment, Interest and Money (always called the General Theory, and published in 1936) until the latest global banking meltdown.

I find this incomprehensible, like purporting expertise in Western philosophy having chosen not to at least breeze through Marcus Aurelius' Meditations. In making my high school case for the superior virtues of capitalism, I was told to first absorb The Communist Manifesto to better know what I was arguing against. Even the Cliff Notes version of Keynes tells you that he argued vehemently for fiscal prudence in prosperous times to be equipped for the necessary pump-priming in times of crisis. Keynes also was the Warren Buffett of his time, one of the sagest stock-market investors in history.

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The man knew capital markets and the periodic euphoria that distorts them from prolonged, intimate experience.

Embarrassing confessions abound in Cassidy's account ("After the Blowup," in the Jan. 11 New Yorker). The central role of banks in hurtling the global economy toward the abyss didn't figure into the Chicago school's thinking because, as Posner tells Cassidy: "You have to know a lot about banking, and that was not the case with economists."

Yet this same school was supremely self-assured in successfully arguing for ultimately catastrophic bank deregulation.

One has to wonder if some of these esteemed academics ever read a newspaper. Eugene Fama, one of the Chicago professors still in denial, attributes the crash to the unwise purchase by government agencies of all those faulty subprime mortgages. It's been widely reported that Fannie Mae and Freddie Mac – whose job is to backstop the mortgage industry, after all – account for only one-third of those purchases, the others being made by look-before-you-leap Wall Street banks.

Robert Lucas, one of the Chicago school's many Nobel laureates, ascribes mass unemployment to workers refusing to accept low-paying jobs and preferring to remain out of work, making government job-creating stimulus futile.

Never mind that Obama's February stimulus had the U.S. economy growing again by the summer. (The pure Keynesianism was replicated in Beijing, Berlin and Ottawa, and it's working.)

The plain fact is that millions of Canadians and Americans laid off from full-time employment have promptly taken part-time, low-paying jobs to keep bread on the table.

And those still in full-time employment have accepted pay and benefit cuts to retain their jobs. Such a slur on the working class, coming from tenured Chicago professors suffering not a day of job insecurity, is a bit rich, to say the least.

It's a popular canard just now that economists are useless, having failed, in the main, to warn us of either of the two unsustainable booms and crashes of the past decade. (The first was the dot-com mania.)

Economic theory tested in behavioural science and taking all players into account, from ego-driven CEOs to low-income earners, is very much needed. We might, and should, be on the threshold of a new era of truly useful economic strategy.

This won't be coming from those of the famous Chicago school still in denial.

Asked if his Chicago peers had learned anything in the past two years of tumult, a candid Posner says: "Well, one possibility is that they have learned nothing ... they have techniques that they know and are comfortable with. It takes a great deal to drive them out of their accustomed way of doing business."