Afternoon Must-Read: Alan Blinder: ‘What’s the Matter with Economics?’
Alan Blinder believes that the “mainstream” is his brand of economics–MIT-Princeton-Berkeley. That economics is, in my view, very sensible about both market failure and government failure, and somewhat sensible (we here at Berkeley being most so) about long-run intellectual strategy. We also have–as the past ten years have taught us–remarkably little influence on policy, either macroprudential or macroeconomic, considering how smart and right we are.
Jeff Madrick and Arnold Packer, on the other hand, believe that the “mainstream” is Chicago-Minnesota-Stanford economics, which is not sensible about market failure, extremely wrongheaded about long-run intellectual strategy, and distressingly influential on issues of economic policy, especially considering how wrong and unwilling to do their proper homework they are.
I guess the next twenty years will show whether we or they were the true mainstream today…
‘What’s the Matter with Economics?’: An Exchange:
“According to both Jeff Madrick and Arnie Packer…
…I claim ‘that except for some right-wingers outside the ‘mainstream’…little is the matter’ with economics…. But it’s not true. I think there is lots wrong…. My review explicitly agreed with Madrick that (a) ideological predispositions infect economists’ conclusions far too much; (b) economics has drifted to the right… and (c) some economists got carried away by the allure of the efficient markets hypothesis.
I also added a few… we economists have failed to convey even the most basic economic principles to the public; and that some of our students turned Adam Smith’s invisible hand into Gordon Gekko’s ‘greed is good.’… the propensity to elevate modeling technique over substance… [and others that] (a) are not germane to policy, (b) are only slightly related to Madrick’s complaints, and (c) are very much ‘inside baseball’ stuff—and hence boring to readers of this Review….
Both Madrick and Queen Elizabeth are right that hardly any economists saw the financial crisis and the ensuing Great Recession coming… not realizing how large the subprime mortgage market had grown… how dodgy the mortgages packaged into mortgage-backed securities were… the crazy quilt of exotic derivatives… not believing that house prices would fall as far as they did…. However, faulty macroeconomic management was not among the causes of the horrors. That… does not exonerate the Fed, whose supervisory and regulatory performance was dreadful. My point is that the Great Moderation… ended because of… an overleveraged, overly complex, and underregulated financial system.
Yes, underregulated—which brings me back to the invisible hand. I thought I had laid this issue to rest by agreeing with Madrick that ‘the Invisible Hand is an approximation, usually not applicable in the real world without significant modification’… [like] antitrust laws, consumer protection, fair labor standards, health and safety regulation, financial regulation, and much more…. Yet Madrick still insists that ‘economists rely on a fairly pure version of the invisible hand most of the time.’ Not us mainstreamers….
Packer’s letter begins, and Madrick’s concludes, by disputing my claim that economists’ influence on policy decisions is greatly exaggerated…. [But] ven today, seventy-eight years after Keynes taught the world how to end recessions, many politicians in many countries refuse to follow his (now very mainstream) advice. That’s not a good show for what Packer calls ‘a powerful force in policy circles.’