The Gospel according to Saint Paul: Keep working!
Pity the poor economists.
Just as they were congratulating each other for having solved all the fundamental problems of managing a regime of permanent expansion of work, life intervenes and all their fine theories come crashing down.
So writes Nobel Laureate, Paul Krugman, in a recent article in the New York Times.
“Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year.”
Krugman blames this massive blind-spot on the domination of one of the many factions among economists – the neoclassical financial economist strain.
That strain of economics, Krugman tells us, held to the belief that market economies, “never go astray …[or]… that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed.”
Krugman offers that economists fell in love with their pretty mathematical equations, ignoring the fact that there are inherent problems with market economies, arising from such, “limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.”
If that is your story, Paul, stick to it.
But it does seem just a bit curious that you, having provided a very brief over-view of the history of economics to us, your layman audience, with a quick nod to Adam Smith, followed by an even quicker transition to the Great Depression and post-war economic debates, overlooked about 150 years of substantial writings more or less critical of the modern economist’s methods, assumptions, and models.
If you think you can get away with using this opportunity to thrust a shiv into the backs of your factional opposition, without having your own guts spilled before Rome, perhaps we can regale you with the story of our friend Brutus – an honorable man, or so we have heard.
In the Gospel according to Saint Paul, until the Great Depression, economics consisted entirely of a theory, “whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of ‘neoclassical’ economics … was that we should have faith in the market system.”
The Great Depression changed all this: calling into question all the fundamental assumptions of neoclassical theory.
Lord John Maynard Keynes provided an unique insight into this catastrophe and produced a corrective for it:
[H]e … challenge[d] the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.
However, as that crisis receded into the mists of history, there arose economists who knew not Keynes.
They, led by Milton Friedman, and the Chicago School – and supported and encouraged by Wall Street, and the Federal Reserve Bank – led the nation into the present catastrophe with their pre-Depression neoclassical economic theories of efficient markets, clever mathematics, and inability to understand the implications of real world collapsing markets in one after another region of the planet.
Ultimately the neoclassical opponents of Keynes were so successful in their assault on common sense even the followers of Keynes imported major chunks of this nonsense into their own theories. The two most important principles of this nonsense being a boundless faith in the wisdom of markets, and lucrative retainers from Wall Street investment banks.
This, of course, got us to thinking:
Despite Saint Paul’s insistence that pre-depression economists were quite enamored of a belief in the stability of market economies, he does mention that even in the face of the Great Depression Joseph A. Schumpeter continued to insist on letting the downturn take its course:
Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.”
(Saint Paul emphasizes 1934 since that was the very low point of the depression – the point where the collapse had taken its greatest toll on employment.)
We wondered about this quote and went to find it on the ‘net – finally locating it in Google Books.
It turns out, the quote above comes in the middle of a passage where Schumpeter was discussing the possible remedies to the Great Depression. He was discussing both the likelihood they would be realized and their ultimate impact.
The full quote is this:
What we face is not merely the working of capitalism, but of a capitalism which nations are determined not to allow to function. This may be, and probably is, inevitable. But it is the great difficulty in the way to recovery.
Hence the problems presented by periods of depression may be grouped as follows:
First, removal of extraeconomic injuries to the economic organism: Mostly impossible on political grounds.
These extraeconomic injuries are a reference to the heavy restitution price imposed on Germany by the allies following World War I, the loss of Russia to the West, the debasement of money from the gold standard, protectionism, the wages policy, manipulation of interest rates, and other factors which, Schumpeter believed, arose not from the crisis itself, but political pressure. All of which raised the question of whether the persistence of high levels of unemployment had its origins in economic causes or political ones.
Second, relief: Not only imperative on moral and social grounds but also an important means to keep up the current of economic life and to steady demand, although no cure for fundamental causes.
This second grouping seems to imagine such immediate relief as keeping people from starving in the streets during the depression.
Third, remedies: The chief difficulty of which lies in the fact that depression are not simply evils, which we might attempt to suppress, but – perhaps undesirable – forms of something which has to be done, namely, adjustment to previous economic change. Most of what would be effective in remedying a depression would be equally effective in preventing this adjustment. This is especially true of inflation, which would, if pushed far enough, uindoubtedly turn depression in the sham prosperity so familiar from post-war European experience, but which, if it be carried to that point, would, in the end, lead to a collapse worse than the one it was called to remedy.
The third grouping appears to target efforts to reverse the chief symptom of the depression, namely high unemployment, resulting from the incredible increase in the productivity of labor following the expansion of capacity in the early decades of the 20th Century. Schumpeter clearly states that failure to allow this adjustment to take place will result in a false prosperity, inflation, and, ultimately, an ever greater depression.
In other words, Schumpeter can be interpreted here to be saying hours of work must be reduced.
Fourth, reforms of institutions not intended to remedy the situation but suggested by the moral and economic evils of both booms and depressions: The crucial point of these reforms lies in the coincidence of a political atmosphere exceptionally favorable, and an economic situation exceptionally unfavorable to their success. No doubt they will always be carried out amidst enthusiastic clapping of hands. But they will also be stigmatized in the future by their tendency to prevent or retard recovery. This should not blind us to any merits they may have, but it is a plain and undeniable fact.
This fourth grouping discusses the reforms put in place during the depression. He clearly states that ultimately all those reforms would ultimately be challenged as economically injurious, unnecessary, and counter-productive.
Given Saint Paul’s own review of the history of deregulation, how can anyone argue that Schumpeter was wrong?
We are not sure how Saint Paul understands this entire passage, but we think Schmpeter’s third point can be interpreted to predict precisely the long period of secular inflation, the present crisis, and that this present crisis likely will be worse than the one for which Keynesian policies were undertaken to reverse.
Further, his fourth point accurately predicts such a crisis would be accompanied by what Saint Paul calls, “the dangers created when regulators don’t believe in regulation.”
As to the charge that Mr. Schumpeter held some misguided faith in market economies, we further quote this very interesting passage he wrote in a book honoring (among others) Karl Marx as an economist of top rank, TEN GREAT ECONOMISTS: From Marx to Keynes:
… [E]ven though Marx’s facts and reasoning were still more at fault than they are, his result might nevertheless be true so far as it simply avers· that capitalist evolution will destroy the foundations of capitalist society. I believe it is. And I do not think I am exaggerating if I call profound a vision in which that truth stood tevealed beyond doubt in 1847. It is a commonplace now. The first to make it that was Gustav Schmoller. His Excellency, Professor von Schmoller, Prussian Privy· Councillor .and Member of the Prussian House of Lords, was not much of a revolutionary or much given to agitatorial gesticulations. But he quietly stated the same truth. The Why and How of it he likewise left unsaid.
Apparently, far from “believing” in the market economies, Schumpeter shared with Karl Marx the belief that social labor would outgrow the bounds of the capitalist relation – rupturing those relations, and destroying capitalist society.
And, he believed, such an assumption among economists was commonplace.
It seems, Schumpeter’s view of what has become known as Keynesian economics appears to stem not so much from an unfounded faith in market economies, but simply a prediction that any attempt to interfere with the adjustment to reduction of work resulting from technological progress would have far reaching consequences of inflation and economic collapse on an even greater scale.
This more nuanced interpretation of Schumpeter might explain why Saint Paul treats Keynes’ own theory with such deliberate one-sidedness.
According to Saint Paul, Keynes, “challenge[d] the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.”
What Saint Paul doesn’t tell us, and we have to find out from elsewhere, is that Keynes himself never saw “active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps,” as the exclusive or even preferred approach to a depression in the long run.
His view was quite the opposite: government intervention to stabilize an economy in crisis was necessary only until such time as investment was saturated, when saving actually should be discouraged: Thus, the long term problem of crisis could only rationally be resolved by shorter hours of work.
Why doesn’t Saint Paul note this other Keynesian solution to crises?
We believe the answer is simple: Because to do so would be to admit that post-war Keynesian fiscal and monetary policy had precisely the effect predicted by Schumpeter. And, because that effect included the rise not only of inflation and a more adverse replay of the Great Depression, it also produced the kind of stupid economics fallacies of deregulation which now stand exposed by the receding tide of economic activity.
The fact is, no one except those on the left of the Party of Washington will take Saint Paul’s sketch of post-war history seriously.
And it would matter little if they did.
This present crisis is NOT an industrial crisis, as was the case in the Great Depression; it is of a magnitude far worse: A crisis of the measures put in place to prevent an adjustment to that earlier crisis; of so-called Keynesian intervention by Washington and other industrialized nations, which produced the long false prosperity of inflation, and now, as accurately predicted by Schumpeter, is leading to its own devastating conclusion.
Just as important, the above implies not a rebirth of the intellectual application of Keynes ideas to the problem of full employment, but to a society that has passed over the hump of scarcity.