Home > New vs. Old Paradigm > The inbred Bernanke-Summers debate on secular stagnation

The inbred Bernanke-Summers debate on secular stagnation

from Steve Keen

Ben Bernanke has recently started blogging (and tweeting), and his opening topics were why interest rates are so low around the world, and a critique of Larry Summers’ “secular stagnation” explanation for this phenomenon, and for persistent low growth since the financial crisis. Summers then replied to Bernanke’s argument, and a debate was on.

So who is right: Bernanke who argues that the cause is a “global savings glut”, or Summers who argues that the cause is a slowdown in population growth, combined with a dearth of profitable investment opportunities, not only now but for the foreseeable future?

I’d argue both of them, and neither simultaneously—both, because they can both point to empirical data that support their case; neither, because they are only putting forward explanations that are consistent with their largely shared view of how the economy works.

And the extent to which they are the product of a single way of thinking about the world simply cannot be exaggerated. It goes well beyond merely belonging to the same school of thought within economics (the “Neoclassical School” as opposed to the “Austrian”, “Post Keynesian”, “Marxist” etc.), or even the same sect within this school (“New Keynesian” as opposed to “New Classical”). Far beyond.

They did their graduate training in the same economics department at the Massachusetts Institute of Technology (MIT). They attended the same macroeconomics class: Stanley Fisher’s course in monetary economics at MIT for graduate students (was it the same year—does anybody know?) Some of their fellow Fisher alumni included Ken Rogoff and Olivier Blanchard.

And that’s not all—far from it. Paul Samuelson (MIT) was overwhelming the intellectual architect of what most people these days think is Keynesian economics. Paul Samuelson is Larry Summers’ uncle.

Samuelson’s “Foundations of Economic Analysis” was the core of the MIT approach to economics, and it became the model for economics textbooks around the world. Gregory Mankiw’s (PhD, MIT) market-dominating text today is a pale echo of Samuelson’s original.

This group has been notably dismissive of other approaches to doing economics. Krugman (PhD MIT) leads the pack here, deriding views that are outside this mindset.

If I were describing a group of thoroughbred horses, alarm bells would already be ringing about a dangerous level of in-breeding. Sensible advice would be proffered about the need to inject new blood into this dangerously limited breeding pool. But the issue would only be of importance to the horseracing community.

Instead I am talking about a set of individuals whose ideas have had enormous influence upon both the development of economic thought and the formation of economic policy around the globe for the last four decades. The fact that so much of the dominant approach to thinking about the economy emanates, not merely from such a limited perspective, but from such a limited and interconnected pool of people, should be serious cause for alarm—especially given how the world has fared under the influence of this thoroughbred group.

It all looked fine for a while of course, before the financial crisis hit—and especially to this set of intellectual racehorses. Bernanke saw “The Great Moderation” as proof of how well he and his alumni were managing the global economy:

the low-inflation era of the past two decades has seen not only significant improvements in economic growth and productivity but also a marked reduction in economic volatility, both in the United States and abroad, a phenomenon that has been dubbed “the Great Moderation.” Recessions have become less frequent and milder, and quarter-to-quarter volatility in output and employment has declined significantly as well. The sources of the Great Moderation remain somewhat controversial, but as I have argued elsewhere, there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy. (Bernanke 2004)

Olivier Blanchard stated—one year after the financial crisis had begun—that “the state of macro is good”:

For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism and herding. None of this is deadly however. The state of macro is good. (Blanchard August 2008)

Now, after the crisis, the horses are not so sanguine. But they are trying to understand why things went so badly wrong using explanations that are consistent with the inbred intellectual perspective from which they all emanated.

Are they likely to get it right? Hardly: the odds that the explanation for our post-financial-crisis malaise can be found within the same set of intellectual ideas that didn’t see the crisis coming—and that generated policy biases that arguably made the crisis far worse—must be vanishingly close to zero. This is why students of economics are finally revolting and calling for a wider range of economic ideas to be both taught and developed in our Universities. Groups like Rethinking Economics and the International Student Initiative for Pluralism in Economics are in effect pointing out the degree of in-breeding that has occurred in economics in the last 40 years, and calling for the introduction of new blood (my School at Kingston University in London is one of the few that is responding positively to that student call).

I’ll discuss the substance of the Bernanke-Summers “debate” in a subsequent post. For now I’ll close with a simple visual indication of one aspect of the shared mindset that leads them astray, however much they may appear to differ on this issue. This mindset sees capitalism as a system that either is in or tends towards equilibrium—and the key puzzle for them is explaining why it isn’t in equilibrium at any given time. Figure 1 shows a word cloud of Bernanke’s first blog post, and the word “equilibrium” is the 9th most frequently used in the whole post.

Figure 1: Word cloud for Bernanke’s 1st blog. Equilibrium 9th most frequently used word

  1. April 6, 2015 at 7:06 pm

    Larry Summers believes that the global slowdown is caused by ” slowdown in population growth, combined with a dearth of profitable investment opportunities,”??? Thank god he isn’t our Fed Chairman!

  2. paul davidson
    April 6, 2015 at 8:29 pm

    in my 2002 book FINANCIAL MARKETS, MONEY AND THE REAL WORLD ,p.. 117 I warned that the growth of nonbank financial intermediaries have encouraged savers “to reallocate their savings portfolio…. towards holding more liabilities of nonbank financial intermediaries . This has permitted a significant expansion of debt obligations on the part of debtor households and enterprises. This suggests that a sudden switch by many [savers] to a fast exit strategy at a future date could cause a horrific liquidity problem, unless the central bank is alert to the need of pouring as much liquidity into the system as necessary, quickly and promptly”.

    So five years before the global financial crisis, Post Keynesian economics saw the possible crisis not due to secular stagnation or a glut of savings but as a result of allowing the development of what was later called “toxic assets”– permitted to occur after the Glass Steagall act was revoked. and banks were able to sell off loans t o investment bank divisions of the same enterprise– who could then package them to be sold to unwary savers.

  3. Norman L. Roth
    April 6, 2015 at 10:50 pm

    April 06, 2015
    Locating all the basic problems of modern, complex quasi-organic {Ludwig Von Bertanafly oriented} economic systems, solely in the financial/banking &monetary system, is amateur stuff : Surprisingly ignorant [Or just forgetful?] of the basic monetary & banking courses I first took more than half a century ago. Not to mention Schumpeter’s explanations of how our credit & banking systems evolved, over several millennia, in the first place. And ironically, much closer to old-time “autistic/echolalic ” thinking than ever ! Especially all that blame & punishment chatter about the debt & “default/forgiveness” shell-games: Not to mention intra-academe conspiracy bickering.When it’s the economic “basics” that are all f—-d up:
    And still obscured by both the ‘Worm Urobouros ‘ neoclassical zombies, and their “progressive” attackers. Not that the neos don’t deserve it ! But, another paradigm on offer is the only solution to the mess that’s devouring us.. Which is leeching the credibility out of our maniacally-maligned but still redeemable subject.

    Norman L. Roth, Toronto, Canada.

    Please GOOGLE {1} Economics of Technos, Roth [2] Economics of Technos, Norman Roth
    [3]Norman L. Roth, Origins of Markets {4} Economic theory, Norman Roth

  4. April 7, 2015 at 5:55 am

    In addition to a critique, we need an alternative analysis. As many graphs in connection with inequality have shown, all surplus being generated is going to the wilthy rich. Suppose we break up the economy into two parts — real sector, rentier/financial sector — if investments are made in the real sector, economies will grow, if investments are made in the financial sector, than an APPEARANCE of growth will be created by the “wealth generation: — rising land and stock prices, but the economy will stagnate due to lack of investment in real productive activity. This would account for the secular stagnation experienced since the rise of the financial sector starting from the Reagan Thatcher era. This argument has been made with somewhat greater detail in my post on the Pedagogy Blog:
    Nonetheless, there is a lot of details that could be worked to provide additional empirical support for this alternative expanation of secular stagnation.

  5. blocke
    April 7, 2015 at 10:25 am

    “did their graduate training in the same economics department at the Massachusetts Institute of Technology (MIT). They attended the same macroeconomics class: Stanley Fisher’s course in monetary economics at MIT for graduate students (was it the same year—does anybody know?) Some of their fellow Fisher alumni included Ken Rogoff and Olivier Blanchard.”

    Steve, this sort of argument is historical rather than “scientific.” It is the argument I make when noting that the “triumph” of neoclassical economics in American economic studies was a result of the US victory in WWII and German defeat. That does not automatically mean that neoclassical economics did not win out scientifically as well as geopolitically. It is possible for all the scientists studying the gnome to be in certain departments in certain countries, but for the science to have been correct. The problem with neoclassical economics, as most of the discussion in this blog attests, is that it is a geopolitical not a scientific conquest, which gives credence to Asad’s contention that we need other, Heterodox, explanations for economics events. We won’t find them if we spend all our time talking about the same cast of economists and rehashing their assumptions. That is why I tried to bring Clausewitz into the discussion, without much success. (rwer, issue 61).

  6. paololeon
    April 7, 2015 at 1:15 pm

    Supply of (false) thinking create its own demand, unless regulation is set so as to make non-banking assets more interesting than deposits: the Reagan-Thatcher political involution
    needed some sor of ideology, e this is the MIT.

  7. April 8, 2015 at 10:06 pm

    MIT dilettantes
    Comment on ‘The inbred Bernanke-Summers debate on secular stagnation’

    Steve Keen correctly observed: “So the textbooks are wrong.” (2011, p. 19)

    The mess started with Samuelson’s textbook of 1948. The pivotal point is that Samuelson’s profit theory is logically defective and this invalidates the greater part of the theoretical superstructure.

    Here is the smoking gun:
    “GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP.” (Samuelson und Nordhaus, 1998, p. 392)

    This quote is paradigmatic for the flimsy logic and the loose verbal reasoning that is endemic in economics. The fundamental mistake/error lies in the premise that total income is equal to value of output (2012, Sec. 1.6).

    The scientific incompetence of the MIT crowd does not consist in sharing the same approach but in sharing the same logical defect since more than 50 years.

    The sad fact of the matter is that not only MIT cannot tell the difference between income and profit but critical Heterodoxy also. Steve Keen and others of the heterodox camp still think that total income is the sum of wages and profits (2013).

    The final debunking of MIT economics from Samuelson to Summers consists in the rigorous proof that their profit theory is false (2014).

    The scientific embarrassment of both Orthodoxy and Heterodoxy is that the representative economist fails to capture the essence of the market economy. The idea that economists understand how the economy works and therefore can help to steer it is ludicrous. What we have at the moment is the pluralistic inbreeding of false theories.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential
    Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415:
    1–23. URL http://ssrn.com/abstract=2124415.
    Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series,
    2357902: 1–5. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
    Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
    Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev.
    Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, MA, Burr
    Ridge, IL, etc.: Irwin, McGraw-Hill, 16th edition.

  8. April 9, 2015 at 2:44 pm

    Both Krugman and Summers are Keynesians. Neither of them thinks monetary stimulus, i.e. credit expansion to finance consumption has anything to do with the secular stagnation. Krugman says debt is irrelevant in macroeconomics because “we owe it ourselves” i.e.its effect nets out.

    On the other hand, Summers had repeated on several occasions that “the central irony of financial crises is that they’re caused by too much borrowing, too much confidence and too much spending and they’re solved by more confidence, more borrowing and more spending.” They are clueless and arguing from wrong premises.

  9. Aadil Ahmad
    April 9, 2015 at 6:14 pm

    The fault lies in following blindly and that too for some material & hypothetical positions/ possession. We bear a fungus of blind men, not restricted to MIT only. The dogma of lies was beautified such, even those who might have made some real contribution to serve humanity, left with some dollars to trade off for their thinking. We need some alternative as Zaman pointed out. For that we have to put our effort, not only in criticizing darkness, but also in lighting a lamp.

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