Never Let a Serious Crisis Go to Waste

by Philip Mirowski

  Clearly, all these gems of conventional wisdom cannot all be simultaneously correct. Neoclassical economics cannot have been both oblivious to system degradation before the fact, and yet spot-on concerning the crisis all along. Perhaps we should have anticipated this reaction from a profession renowned for predicting fourteen of the last six downturns. But it was not as though some individual members of the profession had not noticed that they had entered treacherous waters when the crisis broke. Something had to give.

  The figure of the economist has more often than not served as a butt for jokes or perhaps the template for an unsympathetic protagonist in the larger culture;7 economists make for lousy celebrities. No one thinks twice about Charlie Sheen when the house lights come back up. The standard stereotype is verbose, dull, and a little oblivious. When Greece and Italy needed faceless technocratic Gray Men to head up their floundering governments in the euro crisis, they short-circuited elections and opted for economists (trained at MIT, no less; and former Goldman employees). Nevertheless, something novel and not a little creepy started to happen in 2008. General-interest magazines, from Business Week to The Economist to the New York Times, which had hitherto volunteered as cheerleaders for the economics profession without encouragement, turned openly hostile in 2008, hectoring whole schools of thought for their failures, grasping randomly for “new paradigms,” rooting around for sixth-round draft picks and telegenic wicked rebels to replace their prior stable of catallactic pundits. Lusting for scapegoats, journalists initially scoured the landscape for miscreants like Bernie Madoff, Dick Fuld, and Joseph Cassano; and then instinctively turned to find their counterparts inside the economics profession. There was even an online ballot for receipt of the Ignoble (or “Dynamite”) Prize, to be awarded to three economists deemed to have contributed the most to the global financial collapse. (The winners were Alan Greenspan, Milton Friedman, and Larry Summers.)

  Of course, there existed no equivalent of the Justice Department or the Securities and Exchange Commission to actually police the economists, just as there was no phalanx of gumshoes and DAs to do the hard investigative work; and thus it dawned upon some that (unlike medicine, and even sociology) there was not even a professional code of ethics to which bona fide economists were enjoined to subscribe. (We revisit this miscarriage later in this chapter). You can’t transgress a ukase that doesn’t actually exist. Contrary to first impressions, then, it was going to be a long, hard slog to make any indictments stick. Think-tank ringers (and agents provocateurs from the neoliberal Russian doll) were busy stirring the pot, while remaining hidden in the wings.8 Furthermore, some of the self-appointed cops (and not a few of the political protagonists) turned out to be card-carrying economists themselves. Quis custodiet ipsos custodes?

  Hence the jejune American habit of dividing up the dramatis personae into the “good guys” and “bad guys” ran smack dab into the journalists’ nightmare, namely, the Sargasso Sea of Ambiguity, where all shadows were gray and all doctrines context-laden. That didn’t put a stop to the attacks on economics; but it did encourage certain lazy journalistic practices, like uncritically conflating the Nobel Prize (which, of course, due to its provenance was itself not a fully legitimate Nobel in the first place) with an imprimatur of generic intellectual legitimacy and relevance to issues of crisis. (No journalist would ever be reprimanded by their editor for consulting a Nobel winner, however irrelevant the actual work of the person in question had been to the matters at hand.) Hence, it became a cliché to pit one Nobel economist against another, and to substitute kabuki blood sport for serious thought concerning the really interesting question of the culpability of the existing economics profession in bringing about the current crisis.

  Mark Thoma reported on how bootless the unreflexive dependency upon the sanctioned wisdom of Nobel winners had become by 2011:

  What caused the financial crisis that is still reverberating through the global economy? Last week’s 4th Nobel Laureate Meeting in Lindau, Germany—a meeting that brings Nobel laureates in economics together with several hundred young economists from all over the world—illustrates how little agreement there is on the answer to this important question. Surprisingly, the financial crisis did not receive much attention at the conference. Many of the sessions on macroeconomics and finance didn’t mention it at all, and when it was finally discussed, the reasons cited for the financial meltdown were all over the map. It was the banks, the Fed, too much regulation, too little regulation, Fannie and Freddie, moral hazard from too-big-to-fail banks, bad and intentionally misleading accounting, irrational exuberance, faulty models, and the ratings agencies. In addition, factors I view as important contributors to the crisis, such as the conditions that allowed troublesome runs on the shadow banking system after regulators let Lehman fail, were hardly mentioned.9

  Public disputations on the crisis had begun to take on the air of a bad Rodney Dangerfield film. Paul Krugman had kicked things up a notch with his September 2009 magazine article “How Did Economists Get It So Wrong?” which pointed out the “profession’s blindness to the very possibility of catastrophic failures in a market economy,” but then attributed it to the bizarre notion that “economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” This provoked such a rise out of a number of economists that they promptly left all penchant for beauty behind. People who normally spoke in mind-numbing monotones about optimal monetary rules and time-inconsistent policies suddenly started gettin’ up in others’ bidness, trash talkin’ who be disrespectin’ whom, dissing anyone but their peeps. You may think I exaggerate, but do take a moment to check out the level of calumny, defamation, and slander crammed into this single footnote,10 and then tell me this is circumspect behavior in a science that prides itself in maintaining savoir faire amid dour conformity and dismal prognostications.

  After a couple of rounds of this, the disquiet that began to nag at many journalists was: Just how far should we be trusting these guys, anyway? Jamie Galbraith was about the only high-profile economist to echo an attitude that had become commonplace in the blogs:

  Leading active members of today’s economics profession . . . have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They deny the possibility of events that then happen . . . They oppose the most basic, decent and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when they finally sense that some position cannot be sustained, they do not reexamine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject. No one loses face, in this club, for having been wrong.11

  Economists were not of a temperament to suffer what they deemed the New Disrespect lying down. Anyhow, it was proving galling to turn the other cheek when reputable news outlets were sneering “What Good Are Economists, Anyway?” (Coy) and “What Went Wrong with Economics?” (Economist), and books from reputable publishers were quick off the mark trumpeting “The Myth of the Rational Market” (Fox) and “A Failure of Capitalism” (Posner). “Is it fair to attack the economics profession? To a large degree, yes.”12 People were of course always welcome to mock at economists in private, which was nothing new, but this seemed to be a different sort of animal. Remonstrants flocked to the talk shows, the newspapers, magazines, and op-ed pages; but beyond that, they also entered the blogosphere in a big way for perhaps the first time. Not only did a range of hallowed Big Names begin posting regular blogs, but so did some previously unsung economics faculty, and more significantly, tyro students of the subject.13 Prior to the crisis, economics had been something that the average person had gone out of their way to avoid, rather like a colonoscopy. Suddenly, it seemed like everyone with a Web browser summoned a quick and nasty opin
ion about what had gone wrong with economics, and were not at all shy about broadcasting it to the world. Consequently, it looked as if the content and significance of modern economics for the crisis had collapsed into an unseemly free-for-all, pitched somewhere between a barroom brawl and a roller derby.

  Yet the strangest thing of all about this fracas was that much of it was forgotten almost as soon as the pixels faded. It was as if economists and their critics were no different from the protagonist of the Christopher Nolan film Memento: beset with massive memory loss, they forgot what they had just inscribed on their skin last week or last month, condemned to surprise themselves over and over. The contempt of neoclassical economists for the history of economic thought was notorious; but here it was, deployed in real time. One of the ten commandments of neoclassical theory is that bygones are bygones; neoclassical economists trusted that the attention spans of their patrons were so short and flighty that this principle would extend to anything they might have said about the crisis, and one another. And with hindsight, who’s to say they were wrong?

  One major problem of documenting what actually happened during this melee is that all manner of defenses were being sent up as trial balloons, and just as often rapidly abandoned if they landed with a thud. Some economists coquetted with the idea that the crisis had nothing whatsoever to do with them, as if it had happened in a parallel universe far, far away; like the position of the Notre Dame economist described above. Others assumed the stance that economists should acknowledge the obvious, but that from the tough-minded “only the market matters” perspective, there would be no negative fallout for orthodox economics. Card-carrying members of the NTC were major players in this regard. For instance, MPS member Robert Barro wrote, “Like Bob Lucas, I have a hard time taking seriously the view that the financial and macro­economic crisis has diminished economics as a field. In fact, the crisis has clearly raised the demand for economic services and economists. There is no more counter-cyclical occupation than economist.”14

  But the standard neoliberal line that eventually won the day, as we should expect, was that any failings, should they have existed, were distinctly personal and idiosyncratic, and that the thought collective qua collective was pure and innocent as the driven snow. Raghuram Rajan, a Chicago economist and a major presence on the airwaves because the media anointed him as one of the mainstream “predictors” of the crisis, was point man on this line: “‘It was not so much ideology as it was hubris,’ Rajan said of conservative economists, Greenspan included.” In an op-ed article in the Financial Times, Rajan defended the upside of financial speculation, blaming the harmful fallout on the Congress and the Fed for distorting market incentives. Elsewhere, the Stanford economist Gregory Rosston was quoted as saying, “I don’t think (recent events are) necessarily a repudiation of the Chicago School of economics as personified by Alan Greenspan, but it definitely shows there is some role for regulation in society.” Actually, all that was revealed was the unabashed ignorance of history on the part of Rosston, since Alan Greenspan was never a member in good standing of the Chicago School, but rather an acolyte of the Ayn Rand cult, who had been awarded a belated PhD by NYU in 1977 after serving as chairman of the Council of Economic Advisors under Gerald Ford, and who subsequently parlayed numerous right-wing political connections into elevation to his position as chairman of the Federal Reserve from 1987 to 2006. The fact that such an extreme outsider and ersatz economist could have risen to such a pinnacle of prominence was itself testimony to the hold of neoliberals on power, a fact that could never quite sink in for the American news media.15

  Everyone likes a good catfight, and if that’s all there had been to it, then this entire episode could be left to some future cultural historian. But there were two considerations that render the folderol of current interest: one, the effectiveness of neoliberals in stiffening resistance to any and all initiatives to reform the economics profession; and two, the fact evident in retrospect of neoclassical economics sailing through the crisis essentially unscathed in the face of such unseemly behavior. To take but two counterexamples, Freudian psychology and social studies of science have in the recent past been internally roiled and intellectually altered by attacks far less evocative in the way of public embarrassment. Yet here was economics, by contrast, the prodigal profession, rapidly welcomed back to the media and the halls of power with alacrity, patted on the head, and all was forgiven. People began to revert to their general hebetude toward economic theory and economists, and even while the economy further deteriorated, more orthodox neoclassical economists were churned out of academic departments. Barro had been prescient. A few economists noticed and marveled at this.16 That is how it must feel to be really invincible.

  I’m not interested in getting in a few sucker punches of my own; and I’m not congenitally a peacemonger nor conciliator, much less inclined to preach the virtues of a quiet life; but there does seem a modicum of insight in taking a deep breath and surveying the curious predicament of the economics profession, as a preliminary to exploration of how and why it dodged the bullet. Maybe we might extract a few lessons from the fiasco, if only to preserve some small part of the historical record before it is expunged from the collective memory of the profession (a purge that is already under way). Apologists are already hyperventilating that nothing untoward has happened.17

  Four Short Homilies from a Dark Nave

  Lesson 1: This is what happens when you banish history and philosophy

  The reader may struggle to find it within their own heart to feel sorry for economists in their plight; and it is not my intention to stoke pity or schadenfreude in the audience. Rather, the task is to recount these events as a sequence of otherwise avoidable tragedies, the first of which must be conceded to have been the exile of history and philosophy from any place within the contemporary academic economic orthodoxy. After a brief flirtation in the 1960s and ’70s, the grandees of the profession took it upon themselves to express their disdain and scorn for the types of self-reflection practiced by “methodologists” and historians of economics, and to go out of their way to prevent those so inclined from occupying any tenured foothold in reputable economics departments.18 It was perhaps no coincidence that history and philosophy were the areas where one found the greatest concentrations of skeptics concerning the shape and substance of the postwar American economic orthodoxy.

  Top-ranked journals such as the American Economic Review, Quarterly Journal of Economics, and the Journal of Political Economy (the Chicago house organ) declared they would cease publication of any articles whatsoever in the area, after a long history of acceptance. Once this policy was put in place, then derivative journal rankings were used to deny hiring and promotion at the commanding heights of economics to those with methodological leanings. Consequently, the graybeards summarily expelled both philosophy and history from the graduate economics curriculum; and then they chased it out of the undergraduate curriculum as well. This latter exile was the bitterest, if only because many undergraduates often want to ask why the profession believes what it does, since their own allegiances are still in the process of being formed. The excuse tendered to repress this demand was that the students needed still more mathematics preparation, more statistics, and more tutelage in “theory,” which meant in practice a boot camp regimen consisting of endless working of problem sets, problem sets, and more problem sets, until the poor tyros were so dizzy they didn’t have the spunk left to interrogate the masses of journal articles they had struggled to absorb. How this encouraged students to become acquainted with the economy was a bit of a mystery—or maybe it telegraphed the neoclassical lesson that you didn’t need to attend to the specifics of actual existing economies.19 It was brainwashing, pure and simple, carried out under the banner of rigor. Then, by the 1990s, by construction there was no longer any call for offering courses in philosophy or history of doctrine, since there were no economists left with sufficient training (not to mention interest) in order to s
taff the courses.20 Economists would periodically be sounding off in the most illiterate registers concerning Karl Marx, Vilfredo Pareto, Hyman Minsky, Adam Smith, or even John Maynard Keynes, because they were confident no one would ever call them to task on their shallow pretenses.

  Consequently, once the Great Mortification followed in the wake of the collapse of the Great Moderation, those occupying the commanding heights of the profession were bereft of any sophisticated resources to understand their predicament. In a pinch, many fell back on the most superficial of personal recollections, or else the last refuge of scoundrels, the proposition that “we” already knew how to handle the seemingly anomalous phenomena, but had unaccountably neglected to incorporate these crucial ideas into pedagogy and cutting-edge research. It takes some thick skin not to cringe at the performance of four famous economists at the January 2010 meetings of the American Economics Association in Atlanta, in a session expressly titled, “How Should the Financial Crisis Change How We Teach Economics?”21 Three out of the four could not even be bothered to actually address the posited question, so concerned were they to foster the impression that they personally had not been caught with their pants down by the crisis. The fourth thought that simply augmenting his existing textbook with another chapter defining collateralized debt obligations and some simple orthodox finance theory would do the trick. Things got even worse in the subsequent year, with figures such as Alan Blinder and John B. Taylor touting new editions of their undergraduate macrotheory textbooks by reassuring instructors that the crisis did not require them to change anything they had been teaching for years.22 No second thoughts for us foxes, thank you.