I think of Specialization and Trade as an attempt to redirect economics away from the path that it followed after the second World War. This recently produced the following train of thought.
Who has been the most influential economist since 1945? I am inclined to go with Paul Samuelson, and that is implicit in the book. But some people might have said Milton Friedman. In neither case, do I think that the influence on academic economists was good. [somewhat related: Tyler Cowen’s simple theory of recent intellectual history, which he apparently still propounds]
With the public, their impact differed. Friedman argued that people should admire markets and be wary of government. Samuelson said it the other way around. Those of us who agree with Friedman approve of Friedman’s influence. Those who agree with Samuelson disapprove of Friedman’s influence.
Back to academic economists. I think that both Friedman and Samuelson were guilty of promoting economic methods that involved imitating hard science (at least as they thought of science as being practiced). Instead, in my book I argue that economic analysis can yield frameworks of interpretation, but economic hypotheses are not verifiable the way that they are in chemistry or physics.
In macroeconomics, Friedman enjoyed influence starting in the 1970s, because the Solow-Samuelson Phillips Curve broke down and Friedman’s alternative view that emphasized monetary policy seemed to work better. However, my view is that both monetarism and Keynesianism are misleading as interpretive frameworks.
In fact, what started out as monetarism ultimately degenerated into deity-worship of the Fed chairman. First it was Paul Volcker, who slew the dragon of inflation. Then it was Alan Greenspan, the Maestro of the Great Moderation. Until in hindsight he became the Randian ideologue, who turned the banks loose to create a financial crisis. The crisis came on Ben Bernanke’s watch, and he is deified as the man who saved us from another Great Depression.
I think that the effect of each of those three on the economy is vastly over-rated. Instead, I think that financial markets and the economy in general simply took the course that they took, and story-tellers wrongly attribute the outcomes to the policies of the Fed at the time.
If your framework recently predicted a sharp rebound and rapid growth, you were wrong. If your framework recently predicted hyperinflation and soaring interest rates, you were wrong. Get over it. They aren’t disprovable, just fearful of being disproved. People prefer comfortable falsehoods to disturbing truths.
“In fact, what started out as monetarism ultimately degenerated into deity-worship of the Fed chairman.”
It sure does seem like it. However, while on one level this phenomenon is quite ridiculous, on another it’s possible that it’s a good thing. Let me explain.
Here are what I regard as two plausible statements:
1. It is human nature to desire ‘over-simplified attribution explanations’ that assume the possibility of conscious control over complicated phenomena that affect their interests, especially general phenomena that broadly affect the interests of a whole group. This attribution tends to hone in on the focal point of either an almost super-human hero or a supernatural entity, either of which can be the object of the social psychology of cult worship and about which plenty of mythological tales can be told, and to which perhaps petitions can be directed. It’s not natural for people to accept that some important things sometimes happen by pure chance and spontaneous, chaotic action of natural forces, and that there is nothing anyone did or anyone can do about it. Hanson just had a post about how Americans are marinated in story-telling which has a background assumption of a ‘transcendental force of cosmic justice’ in terms of the eventual consequences for moral and immoral acts.
In the past it could have been about mysterious factors related to agricultural production, like precipitation or soil fertility. And today it seems to me that the ‘health’ of the overall macroeconomy (and some environmental issues) fills the same psychological space, being perceived as being the major force affecting ones prospects for better outcomes in the future. Certainly there are plenty of experts willing to sell these seductive stories to very eager publics and policy makers.
2. If that’s true, then any theory of humility and impotence is fated to remain a kind of esoteric knowledge as most people continue to indulge in some delusion or noble lie, but one that by its nature they can still use to coordinate their beliefs, sentiments, and activities. The relevant practical question then is which is the least worst false god?
And given the incentives of our democratic system, there are some potential real demons out there, especially the most destructive forms of anti-market socialism and central planning that could totally derail the engines of prosperity.
Which is why it’s essential to move the focal point from its natural point of the nation’s more powerful politician to some other entity or individual that is, by design, as insulated as possible from short-term public or political pressures.
The analogy to federal judges is obvious, with their lifetime appointments and untrumpable control over certain issues in the name of preventing certain majoritarian excesses. It suppresses entire political conversations and efforts, because the hands of all the other players are tied and thus neutralized. (cf. ‘monetary offset’) Now, the Court is hardly saintly and can and does abuse its powers too, but that doesn’t mean it’s not still the ‘least worst’ institutional option for giving politics a measure of stability it wouldn’t otherwise have.
Now, for economics, this kind of thing isn’t easy to do in an intellectual environment that gives any weight to fiscal or political influence over the economy. Consider how common it is for people and the press to issue credit or blame for economic conditions to the President, regardless of whether he had, or could have had, anything to do with it.
So, in this view, the more ‘deity worship’ and focus on the Fed and the Chairman, the better. Especially if the truth is that he is largely inconsequential and impotent and only responsible for some marginal distortions of market credit allocation. At least he can’t – or most likely won’t – do much harm, unlike the politicians. You would also want to make sure everything they do is obscure, largely inscrutable, non-auditable with plenty of ‘secrets of the temple’ and that any announcements to the public or testimony to congress is either abstruse and/or purposefully vague in the sense of ‘creative ambiguity’.
So, maybe the optimal ‘Straussian’ scenario really is for most everyone to have faith that the naked but benign god-Emperor is really wearing impossibly-fine clothes which they cannot perceive or understand only because they are not ‘worthy’ enough. Otherwise they will shift their attention to some menacing demagogue wearing fancy and alluring socialist garments who will prove much more ruinous when he actually puts his proposed plans into action.
I just noticed that a tag for this post is, “Tyler Cowen is my favorite blogger.” A tag for the previous post was, “Timothy Taylor is my favorite blogger.”
Is this an attempt to increase total status, as discussed in the next post?