The Thin Basis of the Neoclassical Counterrevolution
John Quiggin’s proposed introduction to his book project Dead Ideas from New Economists is very good. One thing it really brings home is the rather thin motivational bases for the neoclassical counterrevolution in macroeconomics.
I think it’s generally understood that developments in macro are impacted by “real world” events and not just by pristine ivory tower considerations of theory. In particular, the trauma of the Great Depression was seen as discrediting classical economics and giving life to Keynesian ideas. And then the success of Keynes-inspired mixed economies in delivering stability and growth in the 1950s and 1960s was seen as legitimating this settlements. Then came the “stagflation” of the 1970s which helped discredit Keynesianism and gave a major boost to the rise of neoclassical and monetarist ideas.
So far so good. But one thing that’s really striking about this is lack of symmetry between the two events. The US economy in the 1970s was not doing well, but things were much worse during the Depression. And though US economic performance since Ronald Reagan’s election has been better than it was during the troubled Ford/Carter years of the late-1970s it’s been considerably worse than it was in the postwar years. So it’s not immediately clear what about the events in the real world should really be seen as overwhelmingly tipping the scales in a neoclassical direction. What’s more, the scope of the theoretical revision seems unnecessarily large relative to the “real world” puzzle. In retrospect one can fairly easily say something like “monetary policy was too loose in the late-1960s and early 1970s” without chucking tons of additional ideas overboard. But that’s what happened.
And it would be one thing if that switch had been delivering awesome results, but compared to what we had in the postwar years it really hasn’t.
66 Responses to “The Thin Basis of the Neoclassical Counterrevolution”
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July 16th, 2009 at 8:39 am
The rightness or wrongness of an economic theory is not proportional to the economic growth that occurs after the theory has been adopted. This is like expecting a new revelation in fluid dynamics to make existing airplanes fly faster.
If the Phillip’s Curve is broken, it’s broken. You need a new theory to explain that.
Economic growth was dynamite in the late 18th century, does that mean the physiocrats were right?
July 16th, 2009 at 8:42 am
Well, if you are using real world pressures to measure things, isn’t it pretty clear that there were some outside forces, entirely apart from this economic theory or that, that might have led to the post-war boom? And is it possible that those outside forces have changed in such a way as to make the economic performance of the post-war period unattainable today?
July 16th, 2009 at 8:51 am
There is a ‘neoclassical’ critique of the Depression too, and Bernanke’s is doing close to exactly what it said the Fed should have done 1929-1932.
Obama is doing the Keynesian one, even down to the govt spending is as good or better stimulus than a tax cut.
Who’s doing better?
July 16th, 2009 at 8:55 am
A few thoughts come to mind.
First is our natural bias towards weighting present and recent events more heavily in our understanding of the world – and unless you’re a historian, you’re going to give more emphasis to events that you’ve lived through than events you haven’t. (How many of the economists influential in, say, 1995 even remembered the Great Depression?) So economists, like everyone else, are more likely to understand the world as it is through the prism of the past generation than that of the immediate postwar generation. Such is life.
Second is that the context of economic developments makes a difference.
Of course the U.S. economy boomed in the postwar era: except for the U.S., Canada, Australia, and New Zealand, the advanced economies of 1939 had had the crap bombed out of them, and were putting their energies into rebuilding rather than competing. We really had the world to ourselves back then, in a fundamental way. If our economic rivals were to suffer similar devastation later this year, our economy would similarly prosper over the next decade or two, especially if we were once again smart enough to implement a Marshall Plan.
Nonetheless, I’ve never understood how the critics of Keynesian economics could have based much of a critique on the stagflation of the 1970s, which appears (to this amateur, anyway) to have had everything to do with successive steep increases in the price of oil, and very little to do with competing approaches to managing the domestic economy.
One has to wonder what the economy of the 1980s and 1990s would look like, absent the fuel economy standards legislated in the 1970s. Rather than having the recovery choked off by the increasing price of oil (which is a major concern right now), U.S. petroleum consumption didn’t return to 1979 levels until about 1993, thanks to the mandate of more fuel-efficient cars. Which might’ve had something to do with the collapse of oil prices ca. 1986.
July 16th, 2009 at 8:55 am
Matt — you are also leaving out the rise of the neo-keynesians, who make up most of the nation’s best known macroeconomists (krugman, mankiw, stiglitz, bernanke, akerloff (at least before) and many others would self-identify this way). Their basic project — which as you can see is cross-ideological — was to translate some of the old keynesian ideas into rational expectations economics. By introducing ideas like menu costs, the market for lemons and signaling, they were able to argue that some keynesian ideas could survive (maybe not as many as should have, because of claims about the flaws of RE, but some)…
The macroeconomic hook for this was….nothing. It happened in the mid-1980s. The key was mathematic — the development of a variety of ideas and tools (like dixit-stiglitz equations) that freed up some new thinking on these subjects.
Ideas may be related to the times, but it isn’t neat….
July 16th, 2009 at 9:04 am
The problem with Keynes isn’t his theory, it’s getting politicians to abandon the stimulus portion of the program in good times. Implementing only half the theory keeps the whole thing off balance.
July 16th, 2009 at 9:06 am
Of course the U.S. economy boomed in the postwar era: except for the U.S., Canada, Australia, and New Zealand, the advanced economies of 1939 had had the crap bombed out of them, and were putting their energies into rebuilding rather than competing. We really had the world to ourselves back then, in a fundamental way.
Yup… and yet the left-wing dream is to somehow recreate the halcyon days of the 1950s.
July 16th, 2009 at 9:14 am
I hate to keep harping on this, but deficit spending is necessary for private savings – or “surplus”
From Krugman’s column:
In equilibrium the private surplus equals the government deficit (not strictly true for any one country if you add in international capital flows, but think of this as a picture for the world economy).
If we want to have net dollar savings out there in the world – and the market is demanding this – then we need to deficit spend. Paul does not fully understand the implications of his own statement yet, but he will.
To the original post, the neoclassical counterrevolution has strong political backing. The university of Chicago has been disproportionally influential because our economic leaders have wanted them to be. It isn’t like our society are much better off over the last 35 years because of their theories, but some people are…
July 16th, 2009 at 9:21 am
Virtually all metrics of household economic performance were fine during the 70’s. It is actually a canard that the economy in the 70’s was some sort of terrible disaster for households. So why are they held out as some sort of horrific nightmare? That’s easy. Stocks and financial instruments delivered horrendous real returns during the decade. The stock market during the period was virtually as bad as the 30’s because stocks did not inflate when everything else did.
I am not saying the persistent inflation was a good thing but the fact is for most people and households things were fine. For the top deciles in the income and asset categories however they were a nightmare. They lost wealth, and power. They lost political power, exemplified by Carter, the ultimate anti elitist of presidents of the 20th century.
July 16th, 2009 at 9:22 am
Actually, you should define your terms when discussing how “the economy” was “better” under Reagan than under Ford / Carter. Some things were better, some things were worse, and it also matters from whose economic POV you’re talking about.
July 16th, 2009 at 9:23 am
It is intellectually lazy and dishonest for Quiggin, or anyone else, to call Monetarism “economic liberalism”. Monetarism is simply a conservative form of statist Keynesianism. It maintains the essential role of the government’s central bank in a constant dilution of the money supply which invariably promotes malinvestment and an ultimate collapse of the malinvested capital structure in an economic crisis or recession. It’s the gift that keeps on giving to statists of all stripes because they can always blame the government bank inspired crisis upon the free market. The central theme of recent economic history is the relentless misrepresentation of the historical record and the almost universal suppression of the Austrian School out of fear of how it would eviscerate the prevailing statist regime if it became widely understood
At least Quiggin acknowedges that the Austrian School correctly predicted the housing bubble. Others, like Paul Krugman, actively and repeatedly promoted it. Clearly, our current catastrophe is a direct result of the Keynesian legacy of government economic management and monetary dilution.
July 16th, 2009 at 9:24 am
A post-war economy says nothing about the validity of such or such theory.
In France for instance, some people are still believing today that the “30 Glorieuses” (the post-war economic boom who lasted until the mid-70s) were there thanks to the genius of big bureaucray, industrial planification, large inflation, lack of competion, huge public sector,… If we listen to them, we should know nationalise big french company, be protectionnist, create trusts and monopoles, and replace their managers by bureaucrats from the government. Like under Charles de Gaulles.
The successes of the “reconstruction d’après-guerre” (the rebuilding of an economy in a post-war context) eventually became a malediction : the 5% growth with no unemployment during those years created euphoria and made the French people believe in the validity of those theories (big trusts, lead by bureaucrats, with protectionism and lack of competion,…). Hence nostalgia and rejection of competion and free market,… often seen as “imposed” by the “exterior world” (european institutions, “anglo-saxon” world, globalisation,…) more than good per se. Each time economic growth slows down, new fantasms of public dirigism appears again. Successes are attribuated to the system and their leaders (dirigism) instead of the exceptional circumstances in where they took places.
In psychology, this is what we called an “attribution error“ (and you should read Daniel Gilbert, Stumbling on happiness).
July 16th, 2009 at 9:28 am
What’s more, the scope of the theoretical revision seems unnecessarily large relative to the “real world” puzzle.
Matt seems to be under the mistaken impression that the neo-liberal changes since the 1970s was a big problem solving exercise. Instead, it was an exercise in class power, with policies designed to exacerbate inequality and increase accumulation for the top income earners – a project that has been wildly successful.
July 16th, 2009 at 9:39 am
#13 “with policies designed to exacerbate inequality and increase accumulation for the top income earners – a project that has been wildly successful”
The revolt of taxpayers were far larger popular than within the sole “top income earners”. Please stop the demagogic sophism of “let’s the rich pay”. If the American left wants to implement an agenda to face the challenges of today (new investments due to an aging population, energy, migrations,…), they will have to raise taxes for everybody (while keeping progressive taxation if they think that’s economically valid/politically popular). See the VAT in most european countries (between 20 and 25%), the income tax (quickly to 40% even for low salaries),…
July 16th, 2009 at 9:57 am
People got hysterical about inflation in the 70’s but in reality the economy did just fine. Back in the 70’s real wages grew — something which they have not done since then.
July 16th, 2009 at 9:59 am
While the household economy is now in Great Depression levels we are on the cusp of the final transfer of most wealth to the top 1%. The decimation of household balance sheets in the 00’s is now guaranteed to be far worse than the supposedly nightmare 70’s.
This was the inevitable result of the Reagan Revolution even if most of it’s supporters didn’t know it. The very smart did.
It remains to be seen if they can pull it off. It will look like my half joking daydream. Millions of homeless wandering the land and the DOW at 36,000.
July 16th, 2009 at 10:05 am
I agree with those who attribute the popularity of monetarism and neoliberalism primarily to a political propaganda campaign. I would also throw in a failure of Keynesians to defend their position vigorously.
When Friedman first promoted monetarism, he was generally a laughing stock among economists. But when he added laissez-faire to his spiel, he was quickly in demand to speak to rightwing groups.
He dropped the rigid monetarism and emphasized the laissez-faire and then he and others exploited the Keynesians confusion regarding stagflation to dominate the conversation. The Keynesians could have pointed out the effect of oilshocks and the collapse of Bretton Woods but didn’t.
An honest discussion of events and solutions was pre-empted by massive financial support for the laissez-faire argument.
Plutocrats had seen what Keynesianism did to their privleges and they were willing to invest heavily to kill it.
July 16th, 2009 at 10:19 am
I am not saying the persistent inflation was a good thing but the fact is for most people and households things were fine.
Within limits, yes. As long as you weren’t on a fixed income.
People bought a lot of RVs and such. Drove a lot of Dodge Chargers. Consumed lots of things they didn’t need. Meanwhile, certain bohemians were able to live the life of an otter on a riverbank on practically nothing. Everything an American economy is supposed to provide.
July 16th, 2009 at 10:25 am
Calvin Trillion famously called the first Reagan inauguration the night of the minks. He should have thrown in diamonds too. That’s all one really needed to know about the shift that was going to take place.
Today or soon CIT, a major lender to small and midsized corporations is going to declare bankruptcy. Here is what will happen. The better companies who deserve new credit will find it unavailable at anywhere near the rates that the favored corporations do. The ones getting government bailouts and backstops. Then, when they are dead or near dead the vultures will swoop in and pick them off a deep discounts.
July 16th, 2009 at 10:34 am
I’m fairly sure that the folks on this thread dismissing the stagflation of the 1970s as “not a big deal” never actually experienced it.
And I wonder why the postwar U.S. economy did better than in other eras? It must be directly related to specific policies because, after all, it’s not like there were any external factors that could have a difference.
Mike
July 16th, 2009 at 10:40 am
It should be clear that economists respond to incentives like everyone else, and the popularity of a doctrine is related to the chances of material profit that supporting said doctrine entails. The same way that during the 30s (or now) there was strong support (politic and economic) for economists who offered a practical way out of the Depression, during the 70s there was substantial support (politic and economic) for economists willing to say that central banks should do less to keep enployment high and that financial regulations should be abandoned. The growth of the conservative movement and its organizations and the strength of the business lobbies have more to do with the rise of “neo classical economics” than any intrinsic truth in the ideas of Milton Friedman.
July 16th, 2009 at 10:43 am
I hate to be a killjoy, but between the tendency of the rate of profit to fall and the fact that every one of our major competitors and markets were captive and/or obliterated after World War II, there really didn’t seem to be a lot of policy-oriented factors driving either growth or collapse from 1945-1980. Reaganomics maybe staved off the inevitable at best (for us, anyway), and barring a radical transformation of the economy, we’re likely to return to normal – which, like it or not, is stagflation.
July 16th, 2009 at 10:48 am
In physics, you can count on fundamentals to never change. The viscosity of the fluid is going to be the same in 1800, 1900, 2000, e.g. And F=MA, then, now, forever (for all practical purposes).
In economics, there are few things that can be counted on to be immutable.
Insofar as growth’s your goal, and you concede they can’t be expected to have read Hayek, yes, why ever not?
July 16th, 2009 at 10:50 am
The inflation of the 70’s was a monetary phenomenon. One which had almost nothing to do with government expenditures. It was rooted in the end of Bretton Woods and the quasi gold peg for currencies and the establishment of floating currencies. The dollars drop was the monetary cause of the 70’s inflation. To call it the Ford or Carter inflation is silly, or disinformation, take your pick.
July 16th, 2009 at 11:04 am
ron @17 on Friedman
When Friedman first promoted monetarism, he was generally a laughing stock among economists. But when he added laissez-faire to his spiel, he was quickly in demand to speak to rightwing groups.
He dropped the rigid monetarism and emphasized the laissez-faire and then he and others exploited the Keynesians confusion regarding stagflation to dominate the conversation. The Keynesians could have pointed out the effect of oilshocks and the collapse of Bretton Woods but didn’t.
An honest discussion of events and solutions was pre-empted by massive financial support for the laissez-faire argument.
Plutocrats had seen what Keynesianism did to their privleges and they were willing to invest heavily to kill it.
vs. Krugman on Friedman
July 16th, 2009 at 11:07 am
Right, as I recall W. Bush promoted his tax cuts in 2002 as an economic stimulus, but worked hard in 2004 and 2005 to make it “permanent”. Seems like Republicans in particular can only get half the equation correct, which would explain their penchant for huge deficits.
July 16th, 2009 at 11:48 am
I’m fairly sure that the folks on this thread dismissing the stagflation of the 1970s as “not a big deal” never actually experienced it.
Nerts to that. They were my salad days.
July 16th, 2009 at 12:04 pm
J.K. Galbraith: “Milton Friedman’s misfortune is that his policies have been tried.”
Robert Solow: “Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper.”
Paul Krugman: “And over time Friedman’s presentation of the story grew cruder, not subtler, and eventually began to seem—there’s no other way to say this—intellectually dishonest.”
July 16th, 2009 at 12:16 pm
Inflation is an existential necessity for the banking and financial sector. The major political issue besides insuring inflation is choosing who benefits or at least is less hurt. Household income and assets grew pretty well for US households during the 70’s for the lowest 8 deciles. For the upper deciles it was a nightmare. This was the nightmare that the political sphere set out to fix.
The DOW then went from 1000 to 14000 but it wasn’t called inflation. It was called wealth building and increasing values. The assets and incomes of the top deciles exploded.
With a simple cognitive flourish inflation was defeated.
July 16th, 2009 at 12:29 pm
I like the observation that conservatism is simply the preservation of wealth for the wealthy (Rick Perlstein, I think). As much as conservative politicians like to pretend they are talking about tested principles of economics, whatever political incarnation (trickle down, Laffer curve, death tax, or simply Bush’s tax cuts), there is no there there.
The mistake people make is that not everything conservative economists say is backed up by data, charts, empirical evidence.
I wish that when Alan Greenspan admitted that his world view (that markets can regulate themselves) was wrong, Waxman had gone further. He should have asked, why didn’t you have your epiphany when LTCM tanked? Didn’t you think it was foolish to base your world view on Ayn Rand’s silly fictions? Has the concentration of wealth and political power in the hands of a few ever resulted in a stable society?
July 16th, 2009 at 12:33 pm
Stability is for losers. If you’re one of the few, and if you die of natural causes just before the pike-bearing mob come through the door, such a society rawks!
July 16th, 2009 at 12:36 pm
I would buy this if it were not for the fact quiggin is a dumbass who breathes lies.
Plus for the information of our tubby host I should point out that the prominence of ‘keynesian’ ideas in public policy predates both the great depression and kenynesianism. Keynes points out himself near the end of the general theory that he is basically only reiterating what Gessel and other monetary cranks had already advocated and if you had even a scant knowledge of the relevant history you would know that such ideas had been gradually taking hold since the later 19th century.
July 16th, 2009 at 12:41 pm
Economics is politics by another name. There are no free markets or markets at all without government. The entire Libertarian project is an illusion. Every and all governments are engaged in apportioning money and assets.
As a result of the depression when inflation returned during and after WWII income and asset distribution swung sharply to the lowest 8 deciles. A change mandated by popular political pressure. This was the thing the Conservative movement set out to change.
July 16th, 2009 at 12:45 pm
Hey, ron! I’m a fan of galbraith quotes as well!
I think my favorite was when he claimed that the soviet uninion’s economy was superior to the US a few years before the soviet uninion went bankrupt
he a genius!
July 16th, 2009 at 12:52 pm
To: worcestergirl
For all her faults, Ayn Rand was a consistent advocate of the Austrian School of Economics pursuant to which there would be no central bank and no central bank monetary dilution. All money would be created privately. It is intellectually lazy and/or dishonest to suggest that Greenspan, while running the Fed’s fiat counterfeit money machine, was following the views of Rand or that a sleazy governmental operation such as the Fed is an example of the Free Market.
July 16th, 2009 at 12:58 pm
It occurs to one that “The Free Market” is very much like “Tomorrow” in the song from Annie….
July 16th, 2009 at 1:17 pm
The impossibility of sustainable Keynesianism is actually quite simple; getting the political will to commit to a low-inflation, stable trajectory of growth for extended periods of time, as long as politicians have got the levers of government financial power to play with, is quite impossible.
I think another, much more important, thing that people perhaps have neglected is Schumpeterian technological change. The shift from a scale-based, largely industrial economy, manned by workers of mostly undifferentiated levels of training, to a much more fluid, dynamic economy, heavily in services, with much more specific demands for workers of dramatically varying degrees of training, is almost guaranteed to make any sort of (very) blunt, undifferentiated instrument like Keynesian economics fail on a long-term basis.
Keynesianism, in many ways, was the natural response to the industrial age. But of course, we aren’t in the industrial age any more; we are in the technological and information age. What people don’t seem to realize was how rigid Keynesian economics could sometimes be; that is fine for the industrial era, but not anymore so now.
July 16th, 2009 at 1:19 pm
There is also the fact that the Phillips Curve has been empirically disproven, thus completely undermining one of the key pillars of post-war Keynesian economics.
July 16th, 2009 at 1:21 pm
I think my favorite was when he claimed that the soviet uninion’s economy was superior to the US a few years before the soviet uninion went bankrupt
You sure about that quote? Got a link?
July 16th, 2009 at 1:41 pm
Galbraith praising the Soviet charnel house found here, here and here.
July 16th, 2009 at 1:59 pm
Galbraith praising the Soviet charnel house found here, here and here.
I’m shocked, Bob -shocked I tell you- to discover that no such quote can be found in your links.
Are you so insecure in your opinions that you make up shit that is so easily disproven?
July 16th, 2009 at 2:14 pm
For all her faults, Ayn Rand was a consistent advocate of the Austrian School of Economics pursuant to which there would be no central bank and no central bank monetary dilution. All money would be created privately.
So when is a Libertarian going to suggest amending the constitution so that the congress gets out of the money creation business. Now it’s true that the congress has ceded money creation power to the Fed and through the Fed the banking system but let’s not forget the currency represents a claim on the US Treasury which need I remind is still, in theory, a branch of the government. Admittedly a stretch now under any conception the founders may have had. Still, totally private money is unconstitutional.
I actually fully expect a parallel money system actually. It’s form I cannot predict except that giant mulitnational banks like GS will be the ‘issuers’ of said money in some way. It will be the exact opposite of freedom or free markets, and Libertarians will be orgasmic.
July 16th, 2009 at 2:20 pm
MY “without chucking tons of additional ideas overboard.”
Too funny. Isn’t that always the way, though? It happens in sports all the time. A team loses a hotly contested playoff series and in the off-season management panics and dismantles the team and the organization doesn’t sniff the playoffs for another 30 years.
July 16th, 2009 at 2:21 pm
[...] Yglesias marvels at the extent to which stagflation in the 1970s — which was bad, but not remotely as bad as the Depression [...]
July 16th, 2009 at 2:35 pm
naah, ron, let’s go for some contrast:
ron on Friedman @17 “When Friedman first promoted monetarism, he was generally a laughing stock among economists.”
Krugman on Friedman: “Keynesian theory initially prevailed because it did a far better job than classical orthodoxy of making sense of the world around us, and Friedman’s critique of Keynes became so influential largely because he correctly identified Keynesianism’s weak points. And just to be clear: although this essay argues that Friedman was wrong on some issues, and sometimes seemed less than honest with his readers, I regard him as a great economist and a great man.
July 16th, 2009 at 2:43 pm
ron, see clive crook on Galbraith, about halfway down in the piece. If you have a New Yorker sub, you can find the article Crook refers to online in their archives. I like Galbraith just fine, and am no fan of Friedman’s, but you need to mature beyond the hero worship/demonization phase of things. There are plenty of real demons out there, and a few real heros.
July 16th, 2009 at 2:45 pm
Monetarism is a fundamental way to explain economics. It’s main flaw is nobody can agree what money is. Oh sure it’s those pieces of paper in your pocketand supposedly those numbers showing your bank balance but in the financial realm there is an every expanding menagerie of things which have many of the qualities of money.
Milt’s basic dishonesty can easily be summarized in these facts. From the day Greenspan took his Fed chair till the day he left M3 rose at a 10.3% annual rate. The S&P index also rose exactly 10.3% during that era. Milt never ever said stocks inflated.
It should be noted too that Bernanke himself said that money plays no part in setting monetary policy. Get your mind around that if you can.
July 16th, 2009 at 3:06 pm
@41: He believes the shining light of Austrian economics is only ignored because of a sinister conspiracy to suppress it. What do _you_ think?
July 16th, 2009 at 3:13 pm
Bernanke said that, and it’s true, and Greenspan knew it as well, the monetary aggregates don’t begin to tell the entire story. Following them is silly if you want to inflate assets and that has been the primary job of our elites since forever. The Fed never followed monetarist policies even if Volker said he did. What he did was target interest rates just like they always did but he said he was targeting the money supply which gave him stupendous political cover because of Milt’s crusade.
The nature of money is ever shifting. Ever shifting to higher levels of abstraction. With the aid of the government of course.
July 16th, 2009 at 3:14 pm
you need to mature beyond the hero worship/demonization phase of things.
You do like to create strawmen, don’t you?
Friedman himself conceded to the Financial Times in 2003: “The use of quantity of money as a target has
not been a success. I’m not sure I would as of today push it as hard as I once did.”
And Krugman is, in my opinion, more generous than reality would call for.
July 16th, 2009 at 3:29 pm
Myles, the Phillips Curve is looking pretty good right now. In fact anytime you don’t have inlfationary expectations it will look good.
July 16th, 2009 at 3:36 pm
ron, Friedman has the grace to admit he’s been wrong. give it a try! or else you’ll generally be a laughing stock among blog commenters!
July 16th, 2009 at 3:39 pm
Jose Padilla, that was Friedman’s point with the accelerationist stuff, wasn’t it? If you do have inflationary expectations, it won’t work so well.
July 16th, 2009 at 3:46 pm
bdbd-
I’ll admit I’m wrong when you present the evidence.
Your ad hominem comments don’t qualify as evidence.
July 16th, 2009 at 4:06 pm
“There is also the fact that the Phillips Curve has been empirically disproven,”
Long-run, yes. Short-run, no. Look up NAIRU.
“thus completely undermining one of the key pillars of post-war Keynesian economics.”
It wasn’t a pillar of
July 16th, 2009 at 4:12 pm
Here’s the abstrach of the Galbraith article on the Soviet Union:
http://www.newyorker.com/archive/1984/09/03/1984_09_03_054_TNY_CARDS_000338655
Hard to read it as a hymn to Stalin.
July 16th, 2009 at 4:39 pm
Long-run, yes. Short-run, no. Look up NAIRU.
I know exactly what NAIRU is, thank you very much. But of course nobody is talking about the short-run here; everyone understands that inflation in the short term correlates inversely with employment; velocity of money and all that. But of course that is not a long-run solution at all.
The problem is, post-war economists started using the Phillips Curve in a long-run manner, and that just completely blew economic stability apart.
Again, Keynesianism itself was an very much appropriate response to its times and circumstances. But in no way is this industrial-age framework suitable for the post-industrial age, in which we currently reside. There is simply no way you can manage a economy as fluid as ours nowadays using Keynesianism.
Another thing Keynesianism was heavily based upon was the assumption of weak private capital thus needing strong government action. That was largely true during the Depression and the first decade post-war, but as private business revived from the 1929 collapse, private capital and international trade started coming back in a very big way, and inevitably started chafing against the limits of Keynesianism. The heavy-handed exchange controls and fixed exchange rates that characterized that the first post-war period, for example, became unsustainable in the face of ever-expanding trade and international crises, as well as changes in the US economy and fiscal positions. By the time Nixon took us off the gold standard, the whole thing was going to blow over, like it or not.
The difficulty with Keynesianism is that it is essentially a recession-era framework; it is not very useful in normal, growth conditions, where monetary policy suffices.
July 16th, 2009 at 4:43 pm
So far so good. But one thing that’s really striking about this is lack of symmetry between the two events. The US economy in the 1970s was not doing well, but things were much worse during the Depression.
Once something has been disproven (classical Keynesianism), it has been disproven. Economics doesn’t deal in degrees; if a theory is not useful, than it is not useful. You don’t get a “partial” discrediting of Keynesianism because such a thing is not realistic; it is either discredited, or not so.
And though US economic performance since Ronald Reagan’s election has been better than it was during the troubled Ford/Carter years of the late-1970s it’s been considerably worse than it was in the postwar years.
Per others, not comparable.
July 16th, 2009 at 4:43 pm
The difficulty with Keynesianism is that it is essentially a recession-era framework; it is not very useful in normal, growth conditions, where monetary policy suffices.
I don’t see this vindicating the neo-classical outlook, nor does the economic problems of the 70s somehow vindicate non-Keynesian outlooks.
July 16th, 2009 at 5:01 pm
I don’t see this vindicating the neo-classical outlook, nor does the economic problems of the 70s somehow vindicate non-Keynesian outlooks.
It certainly defeats Hicks’s incorporation of Phillips as a part of regular, as opposed to recession, economics. Neoclassical economics suffice in normal market, growth conditions. Keynesianism is useful in recession conditions.
The error of later postwar Keynesianism was to apply this recession framework to normal conditions, causing runaway inflation and monetary instability. The vindication of Neoclassical economics lies in its reestablishment as the dominant framework in normal conditions.
And the problems of the 70’s might not vindicate specific non-Keynesian outlooks, but it certainly defeats the application of Keynesianism in normal times; thus, a need for a new outlook and a return to classical economics.
And the thing about the oil shock is, honestly, a bit misleading. We have had a spectacular oil shock last year as well, with oil going well past quadrupling, just like during the oil crisis, in a few short years; granted, it was not as immediate as the earlier shock. This was at the same time that we are conducting a huge and expensive operation in Iraq; guns and butter indeed. But under non-Keynesian policies, we successfully avoided the sort of runaway stagflation that could have wiped out savings.
I don’t know why Matt is so obsessed with this thing; Keynesianism in full force really is not coming back, especially as we enter a much more flexible economy based on greatly differentiated labour. It’s nostalgianomics, really, more than anything.
July 16th, 2009 at 5:24 pm
And the problems of the 70’s might not vindicate specific non-Keynesian outlooks, but it certainly defeats the application of Keynesianism in normal times; thus, a need for a new outlook and a return to classical economics.
The Great Depression showed classical economics was/is bankrupt. Keynesian was the solution.
The 70s stagflation showed Keynesianism might not have all the answers, that’s it. There was just a big propaganda push on behalf of classical economics b/c people’s memories are short and the Great Depression was forgotten. Republicans wanted to bring us back to the 1920s, even the 1890s. (and the “new” Democrats conveniently forgot the lessons of the pass in order to appeal to the middle class.)
But as the Great Recession has shown, as many of us already knew, classical economics is still bankrupt. Just look at history.
July 16th, 2009 at 6:10 pm
The marxo-keynesian liberal-socialist on this thread should read the following quote. Galbraith wrote in The New Yorker (in 1984) : “That the Soviet economy has made great material progress in recent years is evident both from the statistics… and from the general urban scene… One sees it in the appearance of solid well-being of the people on the streets, the close-to-murderous traffic, the incredible exfoliation of apartment houses, and the general aspect of restaurants, theaters, and shops… Partly, the Russian system succeeds, because, in contrast with the Western industrial economies, it makes full use of its manpower”
Seven years later the Soviet Union collapsed, under the tears of all the Yglesias and Galbraith of the time, taking in history the souls of tens of millions of victims.
Long life to you, Mr. Galbraith.
In his little pamphlet, “Les Mensonges de l’économie : vérité pour notre temps”
the Honorable Mr. Galbraith explodes against the free economy, his enemy forever, but also the foreign policy of the United States, Alan Greenspan, financial analysts, accountants, the “military-industrial complex” and so on. All this with the rigor and depth of a trainee journalist – “free enterprise (…) a threat of military type military against all human life “(p. 83) – and on the tone of a propéthy grim -war is the future of humanity, his general conclusion (p. 87). Add the indispensable marxo-keynesian seasoning : “Nothing indicates that tax cuts have a positive effect on the recession. (…) The only answer lies in supporting the request consumption.”(p. 84) Mr. Galbraith does not propose any solution nor, in particular, any kind of alternative to the market-oriented economy he has always hated. For my part, it is quite astonishing, years after Clinton, New Labour,… that we still find a lot of people on the left to praise marxo-keynesian ideas and those kinds of gurus and apologist of the fallen rogue states.
July 16th, 2009 at 7:19 pm
The difference between the Keynesian revolution in economics and what you call the “neoclassical counterrevolution in macroeconomics” (rational exceptions theory) is that Keynesian economics impacted society as a whole while rational expectations only impacted academia.
The fed never, never, based monetary policy on rational expectations. Fiscal policy was never based on rational expectations.
The whole point of rational expectations is that the monetary and fiscal policy has no power except when people do not know it is occurring.
The emptiness of rational expectations has only gained wider notice because in the current crisis reporters go to Nobel prize winning macro economists (not talking about Krugman here) and they have nothing of value to say.
If the current crisis had not occurred no one outside of the economics profession what rational expectations theory is.
July 16th, 2009 at 8:10 pm
Jumbo jet, home refrigeration, automobile…. huge advances in technology that had a massive impact on how we lived. That is why growth was so good way back when. The question is did Keynesian policies maximise this growth?
July 16th, 2009 at 9:26 pm
I think my favorite was when he claimed that the soviet uninion’s economy was superior to the US a few years before the soviet uninion went bankrupt
Not really equivalent to:
“Partly, the Russian system succeeds, because, in contrast with the Western industrial economies, it makes full use of its manpower”
Galbraith said: “Milton Friedman’s misfortune is that his policies have been tried.”
Friedman said: “The use of quantity of money as a target has not been a success. I’m not sure I would as of today push it as hard as I once did.”
I rest my case.
July 17th, 2009 at 10:06 am
1. Mr. Yglesias has things completely backwards. There were plenty of reasons why the 1970s demonstrated the perniciousness of Keynesian taxing, spending, borrowing and money dilution. The problem is not that Keynesianism was overthrown, but that it was not. Except for the tax rate cuts of the 1980s and Volker’s rate hikes, taxing, spending, borrowing and money dilution have been carried on relentlessly ever since. We are in the mess we are in due to listening to the likes of Krugman and Keynes, not because we haven’t. All Milton Friedman did was give ideological cover to the continued rampage of the Fed. Friedman’s support of the Fed continues to allow lazy and dishonest liberals to blame the free market for an insidious government program of wealth transfer and economic misery.
2. More proof to support Galbraith, economic planning and government control of the environment (not). The joys of the dried up Aral Sea thanks to the benevolent Soviets.