The Chicago School–why does anybody still listen to it
by Linda Beale
The Chicago School–why does anybody still listen to it?
I have frequently written here about the problems of “freshwater” economics–the school personified by Milt Friedman and the extremist “free market” ideology that views government as the enemy, the “markets” as always right, and any public role in economic development as “socialism”. As I’ve noted, this ideology misses many points about the role of government in creating a space where markets can function as they should and where individuals can have maximal personal liberty while pursuing better lives and respecting a societal decision that valuing each individual means allocating society’s resources in ways that support, rather than brutalize, those at the bottom.
The Nieman Foundation, connected with Harvard’s journalism school, has an interesting watchdog website that includes a number of controversial articles raising questions about the way today’s media tend to accept without questioning the “received wisdom” of the past (including the ideological views of the “free market” right). As part of a series on the economic collapse, the site includes an article by Henry Banta (a partner at Lobel, Novins & Lamont) noting the consensus developing among a small but diverse group of economists, professors, and those interested in how the economy works about the failure of efficient market theory. That’s a post worth reading, since it focuses on this issue. (My posts, perhaps to readers’ chagrin, tend to throw these criticisms in as asides in the course of analyzing one position or another being put forrward unthinkingly by proponents of that theory.). Enjoy. Henry Banta, Republicans are locked in a passionate embrace with a corpse and won’t let go, Nieman Watchdog, Feb. 11, 2010.
crossposted with ataxingmatter
As I’ve noted, this ideology misses many points about the role of government in creating a space where markets can function as they should and where individuals can have maximal personal liberty while pursuing better lives and respecting a societal decision that valuing each individual means allocating society’s resources in ways that support, rather than brutalize, those at the bottom.
How is that not de-facto socialism? I’m a communist, so I definitely do not object to government taking that role, but shouldn’t we call things what they actually are?
If capitalism is defined as the private ownership of capital, i.e. society’s resources, and ownership entails a more-or-less arbitrary right of the owner to consume the benefits of that which is owned, then doesn’t allocating society’s resources for any other reason than the private benefits of its owners necessarily compromise their ownership, the essence of capitalism?
It’s one thing to restrict the derivation of benefit in certain ways: it doesn’t compromise my ownership (at least not too much) to demand that I cannot use my car to mow down pedestrians. But it’s another thing to demand that I use my car to give my jobless neighbor a ride to work every day: to demand that another consume its benefits actually does compromise my ownership.
Again, I’m a communist: I have no objection to compromising the ownership of private property. (At least in principle; there of course are of course non-trivial pragmatic issues and considerations about how specifically we should do so.) But if we’re going to compromise the ownership of capital, let’s stop pretending we really aren’t.
I think half the power of the right wing is this innate hypocrisy of the capitalist left: They (formerly we; I used to be a liberal Democrat) give lip service to idea of capitalism out of one side of their mouths and work for its essential compromise out of the other.
er… carless neighbor…
“that valuing each individual means allocating society’s resources in ways that support, rather than brutalize, those at the bottom.“
Larry,
You’re building straw mansions for others to argue about. That phrase, above, doesn’t outline any specifics. It’s something like the Consitution and the Dec of Independence. It’s a frame work for democratic determination of everyone’s quality of life. Let’s just assume for the moment that it goes no further than suggesting that no one, owners included, has a right to exploit human capital to the disadvantage of the exploited. Throughout history governments, including Kings, Dukes, Popes, etc, have taken a piece of the owner’s pie. A bit of tribute to insure protection of that owner’s general right to enjoy his property. Our’s is a country of laws that structure every day life in our complex society. That includes laws restricting criminal behavior, as you note, but also laws of contract structuring economic behavior. Free men are free to protect their lives, both economic as well as physical. The capitalism that you describe is the rapacious form which there is no legitimate reverence for.
Hell of a communist you are. Economic systems need not be one extreme or the other.
The longer things go on the more confusing the entire situation gets and the more I start to agree with the end conclusion of the other side (the far right).
If you don’t trust that the government is actually acting in your interest, then you pretty much have to come to the conclusion that you’d prefer that it do nothing. I went on another pretty bad rant last night with some friends about what I consider to be the “foreign occupation” of my country (not by people from another country, but by people with foreign ideals and morality).
Many (most) of the representatives to the federal government do not represent my interests adequately, they presumably are representing the interests of others, but those people are also not satisfied with the policy that is being produced. If we’re really being ruled by the representatives of “special interests” (whatever that is, I guess I’m assuming at this point that it’s banks, drug companies, etc, but I presume that the other side thinks it’s unions, dirty foreigner poor people and blacks, drug dealers and prostitutes) instead of representatives of the people, and if the people are too diverse in their basic perceptions of morality (health and wealth doctrine vs what I consider a more biblical structure of mercy, compassion, and tolerance), then there’s no solution under the current structure.
It doesn’t matter where you think the ownership of capital should reside, or whether you think there should be restrictions on imports, or whether the government should be involved in financing the accumulation of private wealth through subsidized loans and grants for housing. Those are all side issues that are proxies for the real war that’s going on. For those affected, that’s a real conflict, but it’s all just Operation Urgent Fury in a much larger battle for control of the direction that culture is moving.
None of it makes any sense outside that context to me at the moment.
Maybe it’s just the spectre of foreign influence that I’m seeing in even more stark relief with the massive amounts of out-of-state money that plowed into the Commonwealth in the recent senate election. That same thing is happening everywhere, the media, etc. I saw a headline last week on google news where the WSJ was “reporting” what Rupert Murdoch said somewhere. How can you not see through that? The man is ostensibly an American, but only because at the time he started buying media outlets non-citizens were on the outside looking in on that game. The outlets don’t have an independent editorial voice outside the corporate structure that he’s created. When they speak, it’s with his voice to start. It’s a many headed hydra.
I even have problems telling at this point whether the culture war is real or if it’s just a corporate fiction that’s powered by the same kind of money that flooded into the senate election, where what I hear as the voice of Texans and flyover country fundamentalists is really some corporation talking. I just want increasingly to withdraw from it and have my home protected from those forces.
The country as structured is ungovernable, whether it’s because of actual grass roots issues or whether it is because of the pervasive influence of massive corporations acting in ways to pervert the system to their benefit. The economic issues can’t be addressed as long as that black hole is at the center of it.
“The Chicago School–why does anybody still listen to it”
Two reasons: 1. Every dog has its day and 2. The alternative is no better.
I think when they took “political” out “economy,” it was not progress, but an obscuring and intellectually regressive step. The political decisions about what kind of state a group of people have, how much to keep of what they have inherited and how much to innovate new institutions obviously are in a feed back loop with the basic economy that group of humans use to put bread on the table. When economy was 90% agricultural and based on human manual labor and animals, it is not an accident that wherever this type of economy blossoned, from Dark Age Europe to Mexico, most people worked as peasants/serfs/slaves on the land supporting an aristocratic elite, with a small merchant class involved in trade within and between territroiral entities. In the 17th century something new came along, an intellectual revolution called the scientific revolution (whose leaders and innovators, while not disinterested in money, appeared primarily driving by intellecutal curiosity, a driven passion to figure out the world and improve the material conditions of humanity (see Lord Bacon’s “Novum Organum” )). Hobbes and Locke and the great English Whigs such Sidney all recognized that what we call “private property” is the creation of the state and enforced by the state. Corporations, protecting their owners and operators with limited liability for their debts, are artificial persons created by the state. The most dynamic capitalist societies in the world today, dynamic because huge number of men and women are being transformed from low productivity agricultural peasants into high productivity industrial, technical, and service workers are China, India, and Brazil, states that are far more interventionist then the United States. One of the great problems for the United States the last 50 years is that one faction does not believe in spending resources to educate and transform groups that they don’t see as “real” Americans, (that is they are not white or native) and another faction came to believe that creation of standards and causing another to feel less than wonderful about oneself was the worse thing one could do (the part of the New Left that seeped over into the right). Liberalism is not socialism. Socialism is creating a command economy, something that can only exist if your purpose is war. Modern Liberalism has a preference for markets, but recognize that markets, being made up and driven by humans, are not perfect and that they have to be regulated and the negative side effects corrected and counterbalanced.
***I have frequently written here about the problems of “freshwater” economics–the school personified by Milt Friedman and the extremist “free market” ideology that views government as the enemy, the “markets” as always right, and any public role in economic development as “socialism”.***
People listened to Friedman for the same reason that people listen to Krugman. He was very smart and frequently right. It’s usually a pretty good idea to listen to people who are smart and right even if you don’t agree with them.
Why people listen to Friedman’s successors is a bit of a mystery since they are hardly ever right about anything. I reckon it’s a mixture of religious orthodoxy, and a search for unintentional entertainment.
======
Friedman himself explicitly said he did not believe there was no proper role for government. His approach seems to have been that government should act as little as possible and in as straightforward, equitable, and predictable a manner as possible. That strikes me as being neither unreasonable nor an endorsement of no holds barred free market capitalism.
So we are going to repeal free speech and declare the saltwater economists as gods?
(The saltwaters insisted NAFTA and the aftermath would be good for American workers – ugh.)
A big part of the problem is the concept of economics as science because economics uses math. Sorry, no sale.
And government regulators are not all benign and smiling people who make our lives better.
Couple of points:
– The supposed proof that free markets don’t work is the Great Depression. Milton Freidman pretty much agrees with what’s become somthing like A Standard Model – that the Fed slashed the money supply at a bad time. This unified, roughly, Keynes and Hayek (modulo when it didn’t). Bernanke is of this shcool.
– The Republican interpretation of saltwater/freshwater is very flawed. For electoral purposes, the Republican base is principally people who must rely on the free market more than people who have college degrees. This creates an incentive to stilt the dialogue. Talk radio further smooths and dumbs-down the debate.
– Regulation/governance is hard. Markets are easier. That’s really all you can say from an EMH perspective. I’ve had it explained before, and how you get to “omniscience” from that is a mystery to me. Markets switch … multiple times more data than do regulations. I’d guess thousands, but that’s just a guess.
– The reason I listen to *both* is because I wonder if there’s not a synthesis in the works. That there are differences is less interesting than where the differences come from. Sometimes, this is a bit *too* interesting.
“How Milton Friedman saved Chile”
In 1973, the year the proto-Chavista government of Salvador Allende was overthrown by Gen. Augusto Pinochet, Chile was an economic shambles. Inflation topped out at an annual rate of 1000%, foreign-currency reserves were totally depleted, and per capita GDP was roughly that of Peru and well below Argentina’s.
What Chile did have was intellectual capital, thanks to an exchange program between its Catholic University and the economics department of the University of Chicago, then Friedman’s academic home. Even before the 1973 coup, several of Chile’s “Chicago Boys” had drafted a set of policy proposals which amounted to an off-the-shelf recipe for economic liberalization: sharp reductions to government spending and the money supply; privatization of state-owned companies; the elimination of obstacles to free enterprise and foreign investment, and so on.
http://online.wsj.com/article/SB10001424052748703411304575093572032665414.html
Larry H.
Unless you are libertarian which economic anarchism, you are socialist.
There spectrum of socialism runs from “Free Market” which is psywar con for socialism for the rich, socialized risk.
The other extreme is communism, as formulated by the Voltaire, which is true socialism for everyone.
Free markets are the con of the socialsim for the rich which does not work unless the masses are slaves.
Larry,
Discuss the link of employment and health insurance as a tool for exploitation…………….
“2. The alternative is no better.”
How come, why?
I think the basic problem is that politicians have never embraced any economic theory or school of thought. As noted by VT Codger even Friedman understood the need for government and with respect to Larry, I believe strongly in the rule of law and I do not think it makes me a communist or socialist to not rely on the market to weed out the sellers of tainted products or stifle competition through sheer market power or run Ponzi schemes or sell Blue Sky. The devil is always in the details and I think politicians from both sides have used the government to advance special interests at the expense of the economy or public good. Dumbya was not a free market guy–he was a crony capitalist who used the government to aid the rich. A free market system would allow all those corporate parties to defend their own interests without government involvement around the globe. We have never had that sort of free market since Jefferson sent the marines against the Barbary Coast pirates. STL nails it. Government regulators are not all benign, just like not all cops are honest. Unfortunately, we have a democracy where the rules are a lot looser than they are in the market.
***The saltwaters insisted NAFTA and the aftermath would be good for American workers – ugh.***
Not only did, but do. However, the freshwaters don’t seem to disagree with them. Here’s a link to Friedman’s enthusiastic (and IMHO mistaken) endorsement of NAFTA. http://www.achievement.org/autodoc/page/fri0int-5 The only public figures I can recall who have been skeptical of unrestricted free trade from the start are Ross Perot, Ralph Nader and Bernie Sanders. They are all pretty smart but one is raving nuts, the second is iffy, and the third is a socialist who approaches the world from another dimension (doesn’t make him wrong)
There are probably other critics of free trade who have functioning minds. But they aren’t numerous.
From time to time, I ask the economists here exactly why unrestricted free trade is a good thing. Either I’m too dumb to understand the responses, or they are blowing smoke. My bet is on the latter..
***A big part of the problem is the concept of economics as science because economics uses math. Sorry, no sale. ***
Hey, Astrology is really big on math also.
Sammy — you do understand that most of that is unmitigated bullshit? Probably you don’t.
Here’s Krugman’s response — which is pretty much accurate except perhaps for painting Friedman as being a bit more anti-government than he was — a point that is addressed in the comments. http://krugman.blogs.nytimes.com/2010/03/03/fantasies-of-the-chicago-boys/
I don’t suppose there is any way to convince you that the Opinion section of the WSJ is a cesspool. It is not now, and has never been, a source of credible information. They do not now, and have never in my adult lifetime considered either facts or critical thinking to be relevant to their activity. The News Section OTOH has traditionally been very good. There are fears that Murdoch will change that. My guess is that if he does, he will end up wishing he hadn’t.
People listen to the Chicago school because they do the fundamentals correctly. They also tend to make their macroeconomics to be based on microeconomic principals. This seems to make sense to have the overall economy be made up of the sum of its parts.
Remember the promise of free market economics is for higher highs, higher averages, all at the expense of short sharp lows. This seems to be the way this recession is working itself out except with all the intervention we are flattening and the low but making it much longer.
By the way. Obama has not done his really harmful economic policy of massive environmental regulation and raising taxes.
VtCodger,
Krugman has not been a real economist for a very long time.
This is what Daniel Okrent said about Krugman:
Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.
Now acedemics say the same sort of thing and this is more serious and bad in their circle.
The big question:
Why should anyone listen to a tax specialist that does not seem to care about saving them money on their taxes.
I believe Pinochet is a war criminal, waged war on his own people
Sometimes the common good is more important than scurrulously getting yourself a few buck back this year………
Oh yeah that is socialism.
Some would say civilization, but according to your self interests, socialism is bad except to bail out AIG.
ilsm,
But if what you are doing is not really for the public good and you don’t make any money that seems like not a good use of ones time.
Well then that settles it. Daniel Okrent evaluates the work of Paul Krugman. Interesting. Qulaifications for reviewing the work of a PhD economist with significant professional stature through out the world? BA degree, tenure as an editor, granted for the NY Times, and an expert in baseball history. To say nothing of having developed a widely populat form of fantasy baseball. Oh. He also sitts on the board of a public corporation. I see nothing in Okrent’s bio that implies any significant expertise in economics or any other form of critical analysis. Nice work Cantty.
I think Justin Fox laid out the best explanation for why the Chicago school became ascendant in his “The Myth of the Rational Market.” Badly paraphrasing his fascinating prose, the Chicago school made the dismal science look a lot less dismal and a lot more like a science by creating mathematical models that seemed to fit the data (although they really didn’t).
A secondary reason for the Chicago school’s rise was Friedman’s monetarist explanation of what caused the Great Depression, which provided a counterpoint to Keynesianism. He’s been proven wrong on pretty much everything, but nobody seems to remember that.
One needs to be careful to distinguish between high level talking points, and the finer details of one’s work. Milton Friedman did not say “no government”, but tried to highlight where too much might hinder economic growth that may be needed for a stable society. Is Gary Becker’s “Treatise on the Family” a worthless piece of work? Is all of Krugman’s? One must differentiate between a Krugman op-ed and a more detailed analysis. No economics work is perfect.
Markets are a very powerful force, and even government regulation cannot completely squash markets, and prevent every market hiccup. Regulation can also make markets dysfunctional. The former Soviet Union had active black markets, despite it not being a market economy. Our illicit drug market is very efficient at delivering the goods, albeit in an often ugly manner. The latter MAY be good case of bad government market policy.
“They also tend to make their macroeconomics to be based on microeconomic principals. This seems to make sense to have the overall economy be made up of the sum of its parts.”
Ever hear of the fallacy of composition? Please, many freshwater adherents are obsessed with stylistic mathematical models that a) are actually not all that impressive mathematically and b) utterly divorced from reality. At least Kocherlakota had the good sense to admit that his school’s models are patently unrealistic in how they determine the sources of macroeconomic shocks – too bad Prescott, Cochrane, and Mulligan never got that message.
“People listen to the Chicago school because they do the fundamentals correctly. They also tend to make their macroeconomics to be based on microeconomic principals.”
Which “fundamentals” are those?
They make their macro based on micro principles? Exactly which ones are those?
Of course the overall economy is a sum of its parts, thats a completely meaningless statement. The question is do the things which work on a micro level work on a macro level the same way?
For instance if I make the decision to stop eating out and cook at home for six months, no big deal, but if everyone in NE Ga makes the same decision, a lot of restaurants (like ALL OF THEM) will go out of business. Its those kind of dynamics which Austrians and many Friedmanites ignore. Paradox of thrift and Paradox of deleveraging are real phenomena. Bank runs are another form of this. I can run and take all my money out but everyone cant.
Yes, the Fed caused the great depression by tightening in the early 1930s.
But remember, they tightened because the rules of the gold standard required them to tighten.
The Chicago school for the most part still believes in the rules of the gold standard. So to them it was not a mistake to have tightened in the early 1930s.
The Chicago school still opposes the Fed special measures this recession to stop the free fall of the economy and would have preferred that we repeated the experience of the early 1930s.
***Krugman has not been a real economist for a very long time. ***
And YOU would know that how? How about you name a few “Real” economists and let’s check the record and see how well they did at predicting the events of the past decade?
***I believe Pinochet is a war criminal, waged war on his own people***
Was, not is. Died December 10, 2006 while under house arrest awaiting trial on 300(!!!) counts of human rights violations, embezzlement, and tax evasion. http://en.wikipedia.org/wiki/Augusto_Pinochet
***Why should anyone listen to a tax specialist that does not seem to care about saving them money on their taxes.***
How about because in the long run, the free lunch governance principles that you embrace do not work? Not that I expect anything that pragmatic to influence your thinking process.
You remind me off ~18th century european diplomats. More similar to each other than to the broad population in the countries they represented, for that reason telling everyone all the time how different you are from each other. No you are not, you are all the same, no matter if you got your Ph.D in economics from Chicago or Harvard. The people you have much less in common with are those economists from staate schools or foreign Universities, or those with other social science degrees at the very same schools you went to. Stop trying to frame this as freshwater crisis. Its not, all high prestige US econ departments failed.
***They also tend to make their macroeconomics to be based on microeconomic principals. This seems to make sense to have the overall economy be made up of the sum of its parts. ***
That makes sense although one might quibble about whether summation is a definable operation over this realm. It would certainly seem one ought to be able to at least define and describe the relationship between micro-economics and macro-economics and explain any things that don’t scale between the two.
However, the logic here seems to be that we can derive a logical system from a few principles — rational actors, efficient markets, etc. We can expand that system to include all economic activity. We therefore understand economics.
The problem is that the system that is defined has proved to be pretty much useless at predicting economic activity, and causes its advocates to make utterly looney pronouncements such as Mulligan’s “Great Vacation” view of the current recession or Cochrane’s apparent belief that the Panic of 2008 was caused by the president (Bush BTW) publically acknowledging that there might be a few problems. Bankers engaging in unsound activity contributed to the problem? Apparently neither possible not relevant in Cochrane’s universe.
Anyway, the freshwater school seems to be totally unwilling/unable to work backward from its failures to making changes to its models to better match reality. That’s not science. It’s religion — and not a religion that is likely to have much future success or to find many converts.
BTW, does it ever trouble you that there is essentially no experimental evidence supporting any school of economics? There is game theory, and a very small number of experiments. But nobody can/has unified them and checked to see if the results matches freshwater ideas … or anybody else’s ideas for that matter.
What role did cheap money play in the housing collapse that started all of this mess. Is that not the flipside?
I’m not sure that the efficient market theory has failed, as such. Rather, I think people have read their ideological wants and desires into efficient market theory.
There’s nothing wrong with the core observation of the efficient market theory, which is that prices in a market tend to converge over time towards some value which can be presumed to be the “true” value of the commodity in question. The problem is that *OVER TIME* thing. In the long run, prices will converge… but in the long run we’re all dead (i.e., the timeframe where it takes markets to settle on the price of a commodity may be longer than the timeframe in which economic fundamentals change). In that case the entire efficient markets theory involved is useless, because if conditions in the market change faster than prices can converge — if new sources of a commodity arise, if new technology is invented to make something cheaper to build, if an economic recession caused by a temporary bubble in housing prices collapsing happens — then the prices in fact never *will* converge on the price that efficient markets theory predicts.
The efficient markets advocates themselves will readily admit that prices converge over time as markets “discover” the value of the commodity, not immediately. Given how swiftly market conditions change in the real world, that in essence is an admission by the efficient markets advocates that their theory is not, in fact, useful under real world conditions. Good luck on getting any of them to admit that, though…
– Badtux the Economics Penguin
“A government which maintained law and order, defined property rights, served as a means whereby we could modify property rights and other rules of the economic game, adjudicated disputes about the interpretation of the rules, enforced contracts, promoted competition, provided a monetary framework, engaged in activities to counter technical monopolies and to overcome neighborhood effects widely regarded as sufficiently important to justify government intervention, and which supplemented private charity and the private family in protecting the irresponsible … would clearly have important functions to perform. The consistent [classical] liberal is not an anarchist.” – Milton Friedman
It doesn’t make any sense to me, given that the long-term empirical evidence points the other way. By all appearances, everyone gets more prosperous as a result of progressive, redistributive policies.
And the reason seems to have everything to do with efficient markets:
http://www.asymptosis.com/the-party-of-prosperity-the-seven-reasons-that-democrats-policies-are-more-economically-efficient.html
Codger
I would like to posit that in fact there is a school of economic thought that has much evidence supporting it. It is the school of thought originally attributed to Abba Lerner and later Hyman Minsky, functional finance. Their understanding of how money is created, how debt bubbles propagate and burst and how this leads to boom and bust cycles is quite compelling.
Modern disciples of this school would be Marshall Auerbach, Bill Mitchell, Randy Wray, Warren Mosler and Scott Fullwiler. The salient point is that there models rely on little theory and are simply based on how double entry accounting works. It refrains from using the term money in the traditional sense and asks the question of every transaction, where is the liability and where is the asset. e.g In govt debt the “asset” is in the publics hands and therefore any attempt to reduce govt debt removes a financial asset from OUR hands. There are times when that may be desirable but anyone suggesting reduction of govt debt needs to explain why making US poorer is a good thing.
In addition, knowing how the money cycles through the economy and in what direction (govt spending PRECEDES taxation not follows, loans create deposits not vice versa and investment precedes savings) opens up new avenues of policy recommendations.
STR,
(The saltwaters insisted NAFTA and the aftermath would be good for American workers – ugh.)
I agree that many defended NAFTA on precisely those grounds. I support NAFTA and believe it was the right thing to do, but justifying it as a jobs program was a mistake. There is nothing in macroeconomic theory (either freshwater or saltwater) that says free trade increases employment. Over the long run the economy tends towards full employment except during recessions. That doesn’t mean the economy is always at full employment, but over the long run it tends towards full employment. So increasing trade has no long run effect on employment. The right defense of free trade is that (in general) it increases general welfare. That does not mean free trade increases general welfare in an equitable way, but that’s a political argument not an economic argument. Free trade increases the size of the economic pie; it’s up to politicians and voters to make sure that the pie is sliced equitably.
NAFTA was oversold and that was a mistake.
Cantab,
Krugman has not been a real economist for a very long time.
At some level that’s kind of true. And Krugman himself admits that he no longer does deep research. But then again, no economist over 40 does deep research. Almost all original and deep research is done when you’re a young gun. That’s true in a lot of fields. As Krugman recently said, at 56 he no longer has the intellectual focus that he had when he was 26. I know the feeling.
That said, Krugman still thinks like an economist and he’s probably forgotten more macroeconomics than most of today’s Chicago School guys ever knew. Casey Mulligan is a particularly pathetic case.
Interesting trivia: the Chicago School was actually founded elsewhere. A long time ago the Univ of Chicago was trying to buy itself a reputation, so they hired Frank Knight and virtually all his colleagues away from another school. And true to form, Frank Knight contributed very little original research after that. He did all of his important work when he was young. As did Ramsey…and he died at the ripe old age of 26.
Cantab,
They also tend to make their macroeconomics to be based on microeconomic principals.
Huh? The Chicago School doesn’t believe in macroeconomics. Sometimes they write books that say the word and they try to describe macro, but in their heart-of-hearts the boyz from Hyde Park just don’t believe in macro.
All they’re doing is the fundamentals. Rational expectations and policy evaluation said that people would take the new policy as a decision variable. Why is this such a stretch of the imagination.
One sided Jack strikes again. Linda the linguist/lawyer questions free market economics and the Chicago school. You don’t seem to have a problem with that. She is not expert. However, Daniel Okrent is an expert in journalism and he is questioning the veracity of Paul Krugman. Okrent was the person in charge of looking at the Opinion writers at the New York Times when he wrote it. Now you hear opposing viewpoints in economics questioning Krugman’s honesty. This is not usual.
What’s Krugman’s prediction for the future? Last time I heard he blames the weak economy on us not being liberal enough. What would you expect from him.
Also, Economics is not really good at making forecasts. Economists work with numbers and models to study the economy and sort of as an afterthought they are asked to use their models to make predictions. This is because most of them don’t have dart boards in thier offices.
Macroeconomics without microeconomic foundations is data mining. Bellman would call it a blind man’s bluff (not sure what that means).
Trying to find and take advantage of market inefficiency for individuals is like looking for bigfoot and going on a snipe hunt. If it were so obvious then why don’t the big mouths here go out and corner some market and make a fortune. Talks cheap — but then so is Linda’s vacuous analysis (if you can call a rant analysis).
Cantab,
That’s not all they do. They assume perfect, forward looking rationality. They assume instantaneous and frictionless price changes. They assume away any of the real world problems that don’t fit the five basic assumptions of micro.
Over the last 30 years saltwater macro has advanced to incorporate micro foundations, but Chicago School economics is still in the same intellectual rut that it was 40 years ago.
Cantab,
You’re describing 1970s macro, not today’s macro.
“…noting the consensus developing among a small but diverse group of economists, professors, and those interested in how the economy works about the failure of efficient market theory.”
This really is not a small group, although it depends on extent. The majority in finance and I think economics academia think that efficient market hypothesis is off to at least some substantial extent. The extremeists who take completely literally, or not far from completely, absurdly unrealistic assumptions at places like Chicago are now in the minority in academic finance and economics.
And as Chevy Chase might say, Gen. Pinochet is still dead.
Since the Keynesian school is nothing and the socialist school is negative I think that leaves Chicago in the lead even if they are in a rut. Anyway, economics is in a rut. They figured out most of the important stuff in the 1950s. After that its been window dressing. Look at the recent Nobel Prize winners. None of them have done anything that catches the immagination. You have some doing statistics, some playing with experiments, and guys like Krugman and Stiglitz trying to respectively make picking the winners and socialism cool. They ought to do away with the prize if they can’t find anyone worthy to give it to.
McWop:
Cheap money would have been ok if governed by the CRA. Whether cheap or not, it didn’t matter. It was how it was loaned out.
I would say they believe in macro, GDP and DJIA are macro metrics, they just dont understand exactly how they work. The Friedmanites are too wed to monetary policy which is a back asswards way of managing aggregate demand.
This is posted on another thread, but I think it is relevant to this thread as well. I’d appreciate answers to the question at the bottom.
For a second time recently I heard an interview on WBAI, Guns and Butter/Bonnie Faulkner, with Michael Hudson. Scathing is the word. About Obama’s economics, more so about Bernanke. The Village Idiot is an approximation of his opinion of Bernanke though he through in the word smiling. A tool of the banking industry seems to be what he was saying. Debt peonage for the working class is the goal of the Administration as described by Hudson. One data item he threw out relative to the bank rescue by the Fed,
total bad mortgages is less than one billion dollars. So why all the hundreds of billions given to the banks. And he’s was none too nice in describing the Fed nor Treasury.
Does anyone know more about Hudson? Is he a crank or respected contributor? He claimed that no professional economist outside of the banking industry thinks that Bernanke is competent.
Krugman supported Bernanke as the Fed chairman. So did I. The deal being that yes, Bernanke is a monetarist… but that’s the primary job of the Fed chairman, to maintain a stable money supply. All that other stuff Hudson rants about should probably be done somewhere else, that is not a central banks’ proper role.
Within those limits, Bernanke is the perfect man for the job — a man who is quite imaginative in his methods of finding ways to expand the money supply in the face of massive, massive deflationary pressures, but who is not imaginative enough to actually take the Fed in policy directions that lie outside its proper role. The majority of Hudson’s complaints against Bernanke boil down to, “Bernanke hasn’t paid attention to unemployment, social justice, or anything like that!” Well, all of those are more properly the role of Congress, not of a central banker. Bernanke hasn’t thought about those issues because those would require a technocrat (Bernanke) to basically assume the role of a legislator. All of his various quantitative easing measures thus far can be easily fit into the central banker’s role of maintaining a stable money supply and monetary system, whereas the notion of “social justice” cannot. Hudson espouses a more expansive role for Bernanke’s office, one which simply has not been historically the role of the Fed, and I can’t fault Bernanke for sticking to what the traditional role of the Fed has been rather than haring off after Hudson’s pet causes.
Now, is Hudson respected? Yes, but. The “but” being important. As you would expect from someone who is Dennis Kucinich’s economic advisor, he is somewhat to the left of even “liberal” economists like Paul Krugman, and his policy suggestions and criticisms tend to reflect that, advocating an expansive role for technocrats such as Bernanke that goes well beyond the traditional thought of what such jobs entail. It’s good to have Hudson out there, but I wouldn’t say his specific policy suggestions and criticisms are as well respected as his core economic observations are.
“he is somewhat to the left of even “liberal” economists like Paul Krugman, and his policy suggestions and criticisms tend to reflect that,”
Considering that a modern day “liberal” is little more than a latter day centrist, I’d say that puts Hudson into the latter day progressive category in regards to political-economoic ideology.
“It’s good to have Hudson out there, but I wouldn’t say his specific policy suggestions and criticisms are as well respected as his core economic observations are.”
The accuracy of a professional economist’s observations is of great value and a rare commodity these days. That alone should make his criticisms of greater value and his suggestions worth listening to. it’s only ideological differences that make any suggestions more or less valued.
Almost forgot, thanks for the reply.
I would tend to agree with you here. Both Paul Krugman and I are fundamentally conservative, neither of us want change just for the sake of change and espouse policies that have been time-tested and proven all the way back to the recovery from the Great Depression. The fact that this puts us to the left of the entire Republican Party and most of the Democratic Party as far as most of the political spectrum is concerned is rather bizarre…
In any event, Hudson’s been pushing for some fundamental changes in the way our political elites think about things like social justice and worker’s rights vs. owner’s rights for a long, long time. In the early 70’s he would have been viewed as a typical liberal. Today that makes him a raving loonie lefty. I think that says more about where we’ve gone as a society than about Paul Hudson though.
“The majority of Hudson’s complaints against Bernanke boil down to, “Bernanke hasn’t paid attention to unemployment, social justice, or anything like that!” Well, all of those are more properly the role of Congress, not of a central banker.”
This got me to thinking. Hedson sounded very well read on his subject matter. Not a trait I’d assign to too many social science professionals. So I go to the source. From the Fed’s onw web site:
Today, the Federal Reserve’s duties fall into four general areas:
* conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
* supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
* maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
* providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system.
That sounds a whole lot more comprehensive than confining his efforts to monetary issues, especially the parts about maximum employment, stable prices and protecting the credit rights of consumers. And of course point three says it all in regards to Bernanke’s failure to do even a superficially competent job.
But thanks again for the insight.