What utter self-serving drivel, Brad Delong!

Jun30
by Steve Keen on June 30, 2012 at 1:22 pm

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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.