What utter self-serving drivel, Brad Delong!

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I can scarce­ly believe what Brad Delong has dared to pub­lish on Project Syn­di­cate today:

We econ­o­mists who are steeped in eco­nom­ic and finan­cial his­to­ry – and aware of the his­to­ry of eco­nom­ic thought con­cern­ing finan­cial crises and their effects – have rea­son to be proud of our analy­ses over the past five years. We under­stood where we were head­ing, because we knew where we had been.

In par­tic­u­lar, we under­stood that the rapid run-up of house prices, cou­pled with the exten­sion of lever­age, posed macro­eco­nom­ic dan­gers. We rec­og­nized that large bub­ble-dri­ven loss­es in assets held by lever­aged finan­cial insti­tu­tions would cause a pan­icked flight to safe­ty, and that pre­vent­ing a deep depres­sion required active offi­cial inter­ven­tion as a lender of last resort.…

So the big les­son is sim­ple: trust those who work in the tra­di­tion of Wal­ter Bage­hot, Hyman Min­sky, and Charles Kindle­berg­er. That means trust­ing econ­o­mists like Paul Krug­man, Paul Romer, Gary Gor­ton, Car­men Rein­hart, Ken Rogoff, Raghu­ram Rajan, Lar­ry Sum­mers, Bar­ry Eichen­green, Olivi­er Blan­chard, and their peers. Just as they got the recent past right, so they are the ones most like­ly to get the dis­tri­b­u­tion of pos­si­ble futures right.

What utter hubris and dri­v­el!

Where to begin? For starters, “the last five years” includes June 2007–just before the com­mence­ment of the finan­cial cri­sis. But this time, peo­ple like Wynne God­ley, Ann Pet­ti­fors, Ran­dall Wray, Nouriel Roubi­ni, Dean Bak­er, Peter Schiff and I had spent years warn­ing that a huge cri­sis was com­ing, and had a vari­ety of debt-based expla­na­tions as to why it was inevitable. By then, God­ley, Wray and I and many oth­er Post Key­ne­sian econ­o­mists had spent decades imbib­ing and devel­op­ing the work of Hyman Min­sky.

To my knowl­edge, of Delong’s mot­ley crew, only Raghu­ram Rajan was in print with any warn­ings of an immi­nent cri­sis before it began. Blan­chard deserves to win an award for one of the world’s worst-timed papers when in August 12, 2008–one year after the cri­sis began–he pub­lished a work­ing paper which crowed that “the state of macro is good”. Krug­man, who Delong crowns as first amongst equals in those work­ing “in the tra­di­tion of Wal­ter Bage­hot, Hyman Min­sky, and Charles Kindle­berg­er” first read Min­sky in May 2009–and not­ed that he did­n’t real­ly see what all the fuss was about:

So I’m actu­al­ly read­ing Hyman Minsky’s mag­num opus, here in Seoul. … I have to say that the Pla­ton­ic ide­al of Min­sky is a lot bet­ter than the real­i­ty.

There’s a deep insight in there; both the con­cept of finan­cial fragili­ty and his insight, way ahead of any­one else, that as the mem­o­ry of the Depres­sion fad­ed the sys­tem was in fact becom­ing more frag­ile. But that insight takes up part of Chap­ter 9. The rest is a long slog through turgid writ­ing, Kaleck­ian income dis­tri­b­u­tion the­o­ry (which I don’t think has any­thing to do with the fun­da­men­tal point), and more.

To be fair, it took me sev­er­al decades before I learned to appre­ci­ate Keynes in the orig­i­nal. Maybe a reread will make me see the depths of Minsky’s insight across the board. Or maybe not.

This was hard­ly amaz­ing to those of us who had start­ed to read Min­sky a bit ear­li­er than 2009–such as me for exam­ple (I first read Min­sky’s real mag­num opus, John May­nard Keynes, in 1987). Those of us with a bit more expo­sure to Min­sky knew that Sta­bi­liz­ing an Unsta­ble Econ­o­my was not Min­sky’s best book–and I com­ment­ed on Krug­man’s blog that he should put it aside and read Can “It” Hap­pen Again? when he got back from Seoul.

The only excuse for the cant Delong has spewed forth today is that, as with Krug­man and oth­ers in the self-described “New Key­ne­sian” camp, he per­ceives him­self as being at the left end of the eco­nom­ic spec­trum, with the only com­pe­ti­tion being from the far right rep­re­sent­ed by the purist Chica­go ver­sion of Neo­clas­si­cal eco­nom­ics. Since the Neo­clas­si­cal left sup­ports deficit spend­ing dur­ing a Depres­sion, while the right sup­ports aus­ter­i­ty, to Delong it’s game over, and the Neo­clas­si­cal left is right.

The real­i­ty is that there is an entire oth­er dimen­sion of econ­o­mists who have known for decades that both extremes of the Neo­clas­si­cal eco­nom­ic axis were nei­ther left nor right, but plain bloody wrong. We also knew that our crit­i­cisms of the Neo­clas­si­cals had no chance of being lis­tened to by the pub­lic until a major cri­sis hit, and we also expect­ed that this cri­sis would do noth­ing to alter their own beliefs. Delong’s delu­sion­al mut­ter­ings today con­firm it.

I some­times get accused of being harsh when I argue that eco­nom­ics will only progress from the delu­sion of Neo­clas­si­cal eco­nom­ics into a more empir­i­cal­ly based and real­is­tic dis­ci­pline the way that Max Planck observed that physics made the move from Maxwell to Ein­stein: “one funer­al at a time”. I doubt that I’ll cop that crit­i­cism any more after Brad’s effort today.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.