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.