Friday, July 21, 2017

Madmen in Authority

Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

                                                                                         ---JM Keynes

This is perhaps my favorite quote from Keynes. What I like about it is that it highlights the extremely powerful role of wrong ideas in screwing things up. It's not just that political actors have constrained choices or make mistakes--it's that they believe in wrong ideas, particularly wrong economic ideas, and systematically follow those ideas with predictably terrible results. 

One big theme of my book is that getting Western capitalism on a better growth path is not that mysterious. We more or less know how to do it. But so many politicians are "slaves of some defunct economist" (in this case Milton Friedman and allied economists of the 1970's market fundamentalist revolution) that it  makes it very difficult to avoid serial policy errors that fail to solve economic problems or even make them worse. 

Anatole Kaletsky has an excellent article on Project Syndicate that reminds of the awesome power of bad ideas. He begins:
Given the abundance of useful ideas, why have so few of the policies that might have ameliorated economic conditions and alleviated public resentment been implemented since the crisis?
The first obstacle has been the ideology of market fundamentalism. Since the early 1980s, politics has been dominated by the dogma that markets are always right and government economic intervention is almost always wrong. This doctrine took hold with the monetarist counter-revolution against Keynesian economics that resulted from the inflationary crises of the 1970s. It inspired the Thatcher-Reagan political revolution, which in turn helped to propel a 25-year economic boom from 1982 onward.
But market fundamentalism also inspired dangerous intellectual fallacies: that financial markets are always rational and efficient; that central banks must simply target inflation and not concern themselves with financial stability and unemployment; that the only legitimate role of fiscal policy is to balance budgets, not stabilize economic growth. Even as these fallacies blew up market-fundamentalist economics after 2007, market-fundamentalist politics survived, preventing an adequate policy response to the crisis.
He notes the inevitable political consequences of applying market fundamentalist logic to the post-2007 economic environment:
The dominant ideology of government non-intervention naturally intensifies resistance to change among the losers from globalization and technology, and creates overwhelming problems in sequencing economic reforms. To succeed, monetary, fiscal, and structural policies must be implemented together, in a logical and mutually reinforcing order. But if market fundamentalism blocks expansionary macroeconomic policies and prevents redistributive taxation or public spending, populist resistance to trade, labor-market deregulation, and pension reform is bound to intensify.....
 Suppose, on the other hand, that the “progressive” economics of full employment and redistribution could be combined with the “conservative” economics of free trade and labor-market liberalization. Both macroeconomic and structural policies would then be easier to justify politically – and much more likely to succeed.
Could this be about to happen in Europe? France’s new president, Emmanuel Macron, based his election campaign on a synthesis of “right-wing” labor reforms and a “left-wing” easing of fiscal and monetary conditions – and his ideas are gaining support in Germany and among European Union policymakers. If “Macroneconomics” – the attempt to combine conservative structural policies with progressive macroeconomics – succeeds in replacing the market fundamentalism that failed in 2007, the lost decade of economic stagnation could soon be over – at least for Europe.
I am sympathetic to this approach and agree that much of what Macron says fits into this model. This is one reason why the intellectually lazy characterization of Macron as "neoliberal" is so useless. It tells us nothing about his actual program and simply serves as a sort of leftist shorthand for dismissing it.

But I am not so sure that Macron himself is strong enough to break away from elements of the political establishment who may indeed be the "slaves of defunct economists." Nor do I think he can really count on the Germans to play ball--and if they don't support expansionary macroeconomic policies, all his plans could easily go up in smoke.

Still, there are promising signs that the influence of market fundamentalism is waning. As Keynes' remark implies, there are few things more important than the decline of bad economic ideas. It is a necessary but not sufficient condition for moving forward.

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