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Laughter is the best medicine

from David Ruccio

Sometimes we just have to sit back and laugh. Or, we would, if the consequences were not so serious.

I’ve been reading and watching the presentations (and ensuing discussions) at the Rethinking Macroeconomic Policy conference recently organized by the Peterson Institute for International Economics.

Quite a spectacle it appears to have been, with an opening paper by famous mainstream macroeconomists Olivier Blanchard and Larry Summers and a closing session—a “fireside chat” without the fire—with the very same doyens of the field.

The basic question of the conference was: does contemporary macroeconomics, in the wake of the Second Great Depression, require a few reforms or does it need a wholesale revolution? Blanchard lined up in the reform camp, with Summers calling for a revolution—with the added spice of Adam Posen referring to himself as Trotsky to Summers’s Lenin.

Most people would think it’s about time. They know that mainstream macroeconomics failed spectacularly in recent years: It wasn’t able to predict the onset of the crash of 2007-08. It didn’t even include the possibility of such a crash occurring. And it certainly hasn’t been a reliable guide to getting out of the crisis, the worst since the Great Depression of the 1930s.  

So what are the problems according to Blanchard and Summers? In their view, “the events of the last ten years have put into question the presumption that economies are self stabilizing, have raised again the issue of whether temporary shocks can have permanent effects, and have shown the importance of non linearities.”

Only mainstream macroeconomists could possibly have thought that capitalism is self stabilizing. The rest of us—who have read Marx and Keynes as well as the work of Robert Clower, Hyman Minsky, and Axel Leijonhufvud—actually knew something about the roots of capitalist instability: the various ways a monetary commodity-producing economy might (but not necessarily) generate imbalances and instabilities based on the normal workings of the system.

Yes, of course, temporary shocks can have permanent effects. How could they not, when tens of millions of people are thrown out of work and, especially in the wake of the most recent crash, inequality has soared to new heights?

And then there are those “non linearities,” the idea that financial crises are characterized by feedback effects such that shocks, even small ones, “are strongly amplified rather than damped as they propagate.” Bank runs are the quintessential example—whether customers demanding their deposits in the first Great Depression or the run on financial institutions (including insurance companies that issued credit default swaps) that occurred in the midst of the second Great Depression. But that’s not all: when corporations, facing a declining profit rate, choose to sell but not purchase, they make individually rational decisions that can have large-scale social ramifications—for workers, indebted households, and other corporations (on both Main Street and Wall Street).

So mainstream macroeconomists appear to be waking up from their slumber and seeing capitalism as it is—and as it has functioned for 150 years or so.

You’d think, then, with all the rhetoric of reform and revolution, they’d be in favor of questioning the entire edifice of their theories and models. What we get instead is a bit of tinkering, along the lines of the following: (a) monetary policy is limited because of low interest-rates (although it’s still expected to provide generous liquidity in the even of another shock); (b) more active financial regulation, which still may not be able to keep up with the quickly changing and complex structure of the financial sector and actually prevent financial risks; thus (c) fiscal policy should once again be important, both because of the limits on monetary policy and financial regulation and because, with low interest-rates, government debt is less significant.

No, you’re not mistaken, it sounds a lot like a mainstream version of Keynesian macroeconomic policy, which is consistent with the subtitle of the Blanchard and Summers paper: “Back to the Future.”

That’s it? That’s all we’ve learned in the last ten years? Not a word in their paper about the international dimensions of macroeconomics—nothing about international contagion (e.g., the fact that the crisis started in the United States and then engulfed the rest of the world) or cross-border capital flows. And, perhaps even more important, there’s no discussion of inequality and the role it played both in creating the conditions for the crisis or the way it has characterized the nature of the recovery.*

There’s no reform being proposed here, let alone a revolution. It’s just business as usual, which is exactly the way the recovery itself has been treated.

In the end, Blanchard, Summers, and the other participants in the conference are the macroeconomists who developed the current models and policies. Thus, for all they might venture some mild criticisms of the pre-crisis orthodoxy and call for some new ideas, they are so invested in the status quo, no one should expect a truly radical rethinking from them.

To expect otherwise is just laughable.


*Yes, there was one paper in the conference on inequality, by Jason Furman, but it was about growth, not macroeconomic policy. The theme of inequality was not taken up in the rest of the conference—and it was even ridiculed (e.g., in terms of the research currently being conducted in the IMF) by Summers in the final session.

  1. October 23, 2017 at 6:35 am

    The best to hope for is creeping incrementalism. The best path forward imo
    Is Steve Keen’s proposal to incrementally substitute debt for equity ie more equity replacing more debt. Eric Lonergan has thoughts on how this can be done without action by Treasuries. Just CB’s. Any proposals that suggest dynamiting away wealth inequality by, for example, helicopter money, are I’m afraid like pissing up rope as my dad used to say.

  2. October 23, 2017 at 11:56 am

    If “the events of the last ten years have put into question the presumption that economies are self stabilizing”, is that it? “That’s all we’ve learned in the last ten years? …”

    Yes, as they say in my native Lancashire, “If you didn’t laugh you’d have to cry”!

    Personally, I’ve learned a lot in the last ten years – or rather, the relationship between certain crucial bits of knowledge I’ve had for half a century has clicked together to show me WHY economies are NOT self-stabilizing. We are seeing the economy as a power rather than an information system. [https://rwer.wordpress.com/2017/10/16/tackle-this/#comment-126328].

    “Consider driving – or cycling! One part of your brain is aiming to go somewhere. What you see provides information feedback on whether you are drifting off the road; a signpost may signal to you that you already have, or a diversion sign that you will need to”. When a market is in danger of drying up, money-makers divert to what they hope will be more profitable routes, even cutting provision for preferred goods now in their maintenance phase, which actually takes the economy as a whole off course, as seen both in declining quality and (as Keynes recognised) locally rising unemployment.

    WE can see how to stabilize the economy if we listen to G K Chesterton’s advice: that happiness depends “on NOT DOING SOMETHING which you could at any moment do and which, very often, it was not obvious why you should not do”. I had in mind Nature not requiring “full employment” but creating and living off its surplus and each part of it working as the seasons dictate; also the needs of money making being ceded to subsistence needs by conventions similar to giving way to minor traffic at a roundabout. If you do divert to avoid approaching danger, logic requires that you “negate the negation”.

    Reacting to Peter’s comment, I see the need for both revolutionary and incremental changes: a revolutionary change in understanding, and an incremental introduction of practical changes, starting with increased localisation of local services and then by local evaluation of commercial ones, so that there can be political discussion before decisions are made on what should be mass-produced and what would be provided as materials for use in local production. As portrayed above, Steve Keen’s proposal does not look to me revolutionary.It is merely changing the formal state of monetary IOUs, not recognising and diverting resources to the real debt, i.e. consumption of resources faster than Nature can reproduce them.

    A recent TV programme bearing a remarkable likeness to the state of economics had me wanting to both laugh and cry. It was about a current tendency to leave out of children’s dictionaries the names of animals and plants never encountered by city dwelling kids, just like economists in their gated estates leave out all mention of information science. How pathetic they look, but how serious the need to bypass commercial publishers and get our teachers and students talking about the origins rather than the buttons of the technology they use.

    • October 23, 2017 at 2:55 pm

      PS. Reading the new issue of Economic Thought (6-2), it seems economists leave out not just information science but major issues in their own domain. Here’s Ellerman on p.41:

      “Cartelier also, oddly, takes Ronald Coase’s well-known idea of the firm as the ‘legal relationship normally called that of “master and servant” or “employer and employee”’ (Coase, 1937, p. 403) as if that were definitive of firms as opposed to markets. But, here again, there is no recognition of firms such as worker cooperatives or democratic firms (Ellerman, 1990) where there is still hierarchy but it is based on a delegation (‘concessio’) of authority in the cooperative membership contract, as opposed to the alienation (‘translatio’) of decision-making rights in the employment contract (Ellerman, 2010)”.

  3. Julian Wells
    October 23, 2017 at 6:21 pm

    On (c) above (better regulation might help, supposedly) — what these people overlook is that the counterpart of Speculators’ Fallacy (“this time is different”) is Regulators’ Fallacy (“next time will be the same”).

  4. October 24, 2017 at 5:31 am

    Let me offer a different starting point. Everything in human life is situational. Often on multiple time scales. So, all the diagrams, theories, scales, and equations of “traditional” economics are (to borrow Einstein) relative. Under some conditions and time scales markets function just like described in the textbooks. In others they either work differently or not at all. In others, markets are just homes for sociopaths. Sometimes the “efficient market hypothesis” is correct, but mostly it’s not. Rational decision making in some instances and times functions as described in the economic literature. But people and places tend to go places that economists don’t. As is shown by virtually every study of investor actions, the decisions of CEOs, and modern-day banks. Financial panics and manias aren’t the exception in modern economies, or any economies; they are the rule. Humans, even supposedly smart and dispassionate ones panic all the time. Human evolution gave humans two ways to respond to danger – flight or fight. Cultural adaptations added to these evolutionary tendencies make human choices in danger situations often complex and uncertain. And inequality is a multi-dimensional social (not economic) reality that has no stable origin or results. It sometimes begins with simple voluntary separation of cohorts or even criminal actions. Other times it is the result of deliberate suppression of one cohort by another. Its results can range from geographic separation to slavery. If we accept this starting point, then economists are asking the wrong questions. If all these actions and events are possible, the questions we need to ask are why one rather than another, why at this time, and why these actors and not others?

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