Incidentally, "freshwater" (as Krugman uses the word) refers to the mindset which prevails within the economics department at universities near the Great Lakes, as opposed to the thinking generally encountered at the great universities near oceans.
The freshwater folk are also called the Chicago schoolers, also known as Milton Friedmanites. Their gods are Uncle Miltie and Friedrich "social justice is an empty phrase" Hayek. They think that classic economic theory mirrors (well enough) the actual on-the-ground facts, and that the main financial players will (almost) always act in their own rational self-interest, which (almost) always turns out to be in everyone's self-interest. The invisible hand, Adam Smith, no gummint is good gummint, Mister we could use a man like Hoibert Hoover again. And all that rot.
I'm no economist, but I have to live with (or under) the decisions made by economists, or by the politicians persuaded by their theories -- a fact which entitles me to an opinion. You, of course, are also so entitled.
To me, the matter is simple.
The Chicago schoolers continually represent themselves as the vanguard of an untried ideal. Alas, their grand Libertarian experiment has been tried and tried, again and again. I have seen their future, and it does not work.
Chile: After the dictator Pinochet took over, he brought in Uncle Miltie and a number of other Chicago boys. Result: Disaster. Right now, Chile has a quasi-Socialist leader -- a woman! -- and the country is doing much, much better.
A grand experiment in Friedmanism had the same results in Russia under Yeltsin. Same results in Iraq under Bremer. Same results in America under GWB, to the extent that GWB could put the full plan into action.
Keynesians argue that capitalists, unregulated, often end up cutting their own throats, along with everyone else's, as when those Wall Street powerhouses exercised their freedom to sell crap financial instruments based on crap loans. These civilization-threatening screw-ups are best rectified by government regulation. Imagine what the roads would be like if there were no speed limits and no law enforcement: Everyone would soon fear to leave home. Capitalism needs cops, or so say the followers of John Maynard Keynes.
The Chicagoites hate hate hate Keynesianism. They express their hatred with a passion as purple as Pilate's toga.
Why? Jealousy. In the period between the end of World War II and the 1970s, Keynesianism formed the basis of the bipartisan view of how the capitalist world should work. Result: Prosperity and sound, sustained growth.
Ever since Reagan toppled the Keynesian consensus, we've had unnerving cycles of boom and bust. The country is in debt. We're all living beyond our means. We don't make anything any more. The average person's standard of living made real gains only under Bill Clinton.
Even though Keynesianism equals prosperity and Friedmanism equals ruin and authoritarianism, the Chicago schoolers continue to argue that their way has never really received a fair trial. They have a vision. They point to a wonderful, magic land which is always just a short ways off. There: See it? That shining city on the hill? That gummint-free nirvana of Perfect Capitalism, true and pure? Hold my hand and we're halfway there; hold my hand and I'll take you there.
The American populace despises anything that conveys a Keynesian stink. Constant propaganda plays a role in creating this perception, though perhaps not the decisive role. For many citizens -- not least for those lowest on the economic food chain -- Friedmanism remains popular because it fulfills a psychological need.
Mere success or failure plays no role in this phenomenon. The American mind needs that beatific vision of Magic City.
That vision runs through our heads even as we drift off to sleep on park benches or in the back seat of our cars: I'm sleeping in this place because of gummint regulators, dammit! Get rid of gummint and I'll have a great job again, and so will everyone else. In heaven, everything is fine...you have your things and I have mine...
I disagree with Krugman on one important point:
And the even sadder thing is that it’s very unlikely that anything will change: freshwater macro will get even more insular, and its devotees will wonder why nobody in the real world of policy and action pays any attention to what they say.Wrong. Anyone who offers intellectual justification for rapacious behavior will always be popular among those who engage in rapacious behavior, or who have tawdry little dreams of doing so.
7 comments:
For some reason, the freshwater economists remind me of doctrinaire Marxists: they share that same adorable, quasi-religious faith in an empirically-failed dogma.
Compare:
1) "In the absence of regulation, The Market (tm) will act with perfect efficiency and each person's pursuit of his self-interest will spontaneously combine for the advancement of the common good."
2) "After the dictatorship of the proletariat, the state will wither away and each person will spontaneously work for the advancement of the common good."
I do not agree with the Chicago school, or supply-siders, or monetarists, but there were and are genuine limitations to the policy mix prescribed by the (neo-)Keynesians.
First, well before Reagan's error (era, sorry!), the economy did the boom/bust thing on a regular and periodic basis under Keynesian policies.
Nearly all presidents except Clinton had a recession in their terms after the ascendency of Keynesian thought. FDR had a recession or two. Truman had a recession. There were several very significant recessions under Ike in the '50s, one late in his second term that help JFK win with his message that we needed to get the country moving again. Then the Nixon/Ford recession was actually as bad or in some ways worse than the later Reagan/Volcker recession, in terms of the sharpness of the decline in gdp and length of the downturn. Carter had his own (mini-)recession of the mildest kind.
Keynesianism, or rather neo-Keynesianism, failed to provide any solution to the stagflation that accompanied the twin oil price shocks, and its famed Phillips' curve relationship of inflation to employment failed to work any longer, discrediting that previously dominant public economic policy.
Then, you have the example of the economics policies that Clinton used. He did not use a Keynesianism demand side policy, but instead used monetary policy (because fiscal policy was in a straightjacket known as pay-go and the annual capping of the total expenditures). Clinton had to curtail his plan for a Keynesian style stimulus through the middle-class tax cut and his high-tech investment program, getting neither, in favor of greater deficit reduction (an anti-Keynesian policy).
Given HIS economic successes, including no recessions in a full 8 year presidency and the longest peace-time expansion on record, one might argue that ABANDONING Keynesianism for monetarism was the gold standard for economic policy.
Especially when his successor appeared to use traditional Keynesian methods to boost the economy (tax cuts, largish deficit spending), to stunningly bad results.
I disagree with that conclusion, however, and consider both the Clinton and W Bush economies sui generis, the result of many things in combination besides the economic policies in place.
XI
I think I'm going to write a post some time this week called Adam Smith was Socialist, because even Adam Smith, in the Wealth of Nations, saw a reasonable role for government. That's more than I can say for most of the freshies ... and of course, even worse, the Austrian School (the Hayek cult)
DK, I rewrote my post to add a line about Hayek, because he seems to be Cochran's shining star. You're absolutely right about Smith. I did not read The Wealth of Nations until rather late in life -- an abridged paperback edition, great for bathroom and bus -- but I was surprised to see Adam flirt with ideas that would annoy most modern Libertarians.
He even thought highly of the labor theory of value! In fact, Marx seems to have learned of that theory from Adam Smith -- whom he admired.
Most of the time the cycles are the result of outside influences.
The winding down of industry after the wars, Two, Korea, and Vietnam. Or OPEC shutting off the spigot.
This time around it was greed. Oil speculators drove the price per barrel through the roof killing cars sales and causing people hanging on by their fingernails to default on their mortgages. Housing prices are still collapsing despite what the real estate agents say and commercial properties are due for a "correction". That will be another bunch of bad paper going south that we will have to bail out.
In a sane world day traders wouldn't exist.
Joseph: Glad to see you added the Hayek bit. Friedman's restatement of the quantity theory was a positive step forward and he and monetarism did contribute to the Taylor Rule and a lot of policy that's good despite some of his other shortcomings. Hayek's stuff is just plain nonsensical. Problem has been with Keynes, only Clinton followed the other half of his equation which is run a surplus when the economy is good. Samuelson's reformulation of the old Keynesian stuff is really at the heart of workable policy these days. The economist that more people really should listen to is Stiglitz. He's gotten it right over and over and over again.
Joe -
Smith also pointed out that the progressive (i.e. graduated) income tax was, historically, the ONLY type and form of tax proven to work.
Imagine how much THAT would annoy Libertarians.
(...if, that is, they were intellectually honest: they still don't believe the conclusion - made by their OWN research on the topic - that you can have either low taxes OR small government, but not both at the same time.)
Sergei Rostov
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