I promised more on this in August.
I am, clearly, very late:
…arguments rejecting Keynes and declaring that only business confidence can achieve full employment serve [the] very useful political purpose… [of] empower[ing] plutocrats and big business…. And this speaks to the wider point of the politicization of macroeconomics. Why did freshwater macroeconomists refuse to learn from the lessons of the Volcker recession and recovery, which clearly refuted their approach and supported some kind of Keynesian view on monetary policy? Why has the overwhelming recent evidence for a Keynesian view of fiscal policy been ignored? You might think that business, at least, would welcome policies that boost sales; but the ideology of confidence must be defended.
At the level of academic economics it is a huge puzzle–after all, Ed Prescott and Bob Lucas decide that downturns are driven not by monetary but by real factors just at the very moment when Paul Volcker hits the economy with a brick, and demonstrates not just that contractionary policy has contractionary effects on the real economy, but that doing everything he could to make his contractionary policy anticipated and credible did not materially lessen those real effects. A bigger example of “who are you going to believe, me and Ed or your lying eyes?” would be hard to imagine.
The best excuse I have found takes off from Marion Fourcade et al.‘s analysis of the American economics profession, especially their observations on the rise of business schools and business economics in shaping what economists think about and how they think it. That they are predisposed by their social location into believing that bankers (and the businessmen) are key value-adders in the economy creates an elective affinity with the macroeconomic doctrine that the bankers and businessmen have got us by the plums, and so the only durable way to create a strong and healthy economy is to keep them confident and enthusiastic about investing in new capital equipment now–which means keeping them very confident and very secure in their expectations of future profits.
My current (very imperfect) thoughts about this are contained right now in: The Confidence Fairy in Historical Perspective.
I was going to revise it into a proper paper before letting it out of the gate into the public. But that has not yet happened. So let me at least put the slides below the “fold”, if “fold” has any meaning anymore. Or, rather, below the next “fold”: