Never Let a Serious Crisis Go to Waste
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There is one more reason Geanakoplos should be a little more wary about his own model. In public presentations, he suggests that it was the lenders who bore the onus of responsibility for the leverage cycle this time around; and consequently, in a just world, they should submit to substantial writedowns of principal to reboot the economy back to sustainable leverage levels. But he forgets that his model tells us excessive leverage is a product of supply and demand; keeping that in focus, it can just as easily underwrite the NTC story that it was as much the fault of irresponsible shady deadbeat borrowers who discovered a way to game the system and wallow in debt. The model is incapable of fingering culprits: no one here but us blameless Walrasian agents. As Markus Brunnermeier once is reported to have said about Geanakoplos, “His work assumes that the leverage cycle is bad, but gives little guidance to what extent regulators should control it.”110 And nothing in his model acknowledges that once Bernanke rescued the banks, they would end up essentially owning the government, rather than the other way around. The commitment to adhere to Walrasian heuristics can easily undermine his leftish politics, whatever the inclination of the particular economist.
B) Paul Krugman Conjures the Shade of Hyman Minsky
In this next model presentation, I cheat a little bit by returning to Paul Krugman via his younger collaborators. For the most part, my previous characterization of Krugman as someone who wishes to return to 1969 as if nothing else had happened in macro in the interim is basically correct, with the minor proviso that he has intermittently seemed to begrudgingly reach out to some strains of heterodox thought, under the guideline that the enemy of my enemy should be treated as a friend (although maybe in the way “friend” is treated as a verb in Facebook). Of course, he has always been candid about which side of the divide he really belongs:
I like to think I am more open-minded about alternative approaches to economics than most, but I am basically a maximization-and-equilibrium kind of guy. Indeed, I am quite fanatical about defending the relevance of standard economic models . . . I won’t say I am entirely happy with the state of economics. But let us be honest: I have done very well within the world of conventional economics. I have pushed the envelope, but not broken it, and have received very widespread acceptance for my ideas. What this means is that I may have more sympathy for standard economics than most of you . . . Methodological individualism is of the essence . . . I guess it is no secret that even John Kenneth Galbraith, still the public’s idea of a great economist, looks to most serious economists like an intellectual dilettante who lacks the patience for hard thinking.111
In an era proud of its fearless “hard thinking,” where heterodox economics is being stifled, it would perhaps become a bit more understandable that a few younger economists, seeking to construct models that would better address aspects of the crisis than those we have covered above, might gravitate toward collaboration with Krugman as a way to preserve some orthodox credentials. What is even more interesting is the way Krugman, given all his open allegiance to the orthodoxy, has apparently felt impelled to grapple with the legacy of Hyman Minsky since 2008. The first sign that something like this was going on was in a lecture series Krugman delivered at the LSE in June 2009, the third of which was titled “The Night they Re-read Minsky.”112 Paraphrasing, Krugman there aired his opinion that what had been done in macroeconomics over the past thirty years had been “spectacularly useless at best, positively harmful at worst.” However, many journalists had been pointing to Minsky’s work as an alternative, and Krugman conceded his core insight had been spectacularly right, concerning the dynamic of progressively increased leverage setting the stage for crisis. Nevertheless, Krugman raised what he saw as a definitive objection: Minsky had rejected neoclassical micro theory, and Krugman highlighted his rejection of marginal productivity theories of distribution as particularly unforgivable. Then he began to pine for a day when his favorite Men in White Hats, the behavioral economists, would ride into town and do what Minsky did, but in a more acceptable idiom.
Of course, as we have suggested above, it was a forlorn hope that day would ever arrive. Perhaps Krugman realized something similar, because in the subsequent year he teamed up with Gauti Eggertsson to author what he advertised as a “Fisher-Minsky-Koo” model. The problem Krugman hoped to address was to convince the reader that in the throes of a deleveraging crisis, when financial failures induced everyone to try to shed debt, there was room for the government to improve the situation by taking on substantial volumes of new debt. In his books, this supposed “Keynesian” solution had to map into the old-fashioned IS-LM model of a “liquidity trap,” something he had long trumpeted as the paradigm for “depression economics,” which he interpreted to mean that the supply and demand for loanable funds could be equilibrated only at a negative interest rate. Eggertsson and he sought to render these ideas more acceptable to the orthodoxy through resort to a standard New Keynesian model with the wrinkle that there were posited two different agents, and the “impatient agent borrows from the patient agent, but is subject to a debt limit. If this debt limit is, for some reason, suddenly reduced, the impatient agent is forced to cut spending; if the deleveraging required is large enough, the result can easily be to push the economy up against the zero lower bound . . . [This is appended to] a sticky-price model in which the deleveraging shock affects output instead of, or as well as, prices.” Recall, “New Keynesians” get unemployment out of their neoclassical models by throwing a little sand in the gears—something Keynes himself rejected.113
There are a number of ironies about this paper. The first is, after saying such rude things about contemporary macroeconomics, Krugman ends up writing down a set of equations not so very different from those he had disparaged. Two simple log utility equations, Euler equations, divergences from long-run steady states, Taylor rules, the natural rate of interest, nominal prices but nary a bank or fiat money to be seen; perhaps one would be forgiven in thinking they were reading John Taylor, not Paul Krugman! Only the glaring absence of rational expectations (which would serve to neutralize all the results he strove so hard to derive) is a signal that someone is not completely toeing the line. Second, the only function of the interest rate in the model is to equate saving and investment, possibly carried out by two different people. This is a construct Keynes explicitly repudiated in the General Theory—so much for steadfast fealty to the Master. Finally, and most egregiously from our current perspective, none of this has any relationship to what Hyman Minsky wrote. Minsky wanted to identify a systematic source of instability in the capitalist economy in the financial sector, involving the need to continuously augment leverage in order to realize profit over time. By contrast, Krugman portrays the crisis as an unfortunate glitch due to flaws and frictions in an otherwise ideally functioning system, which are made manifest as a thoroughly arbitrary debt limit imposed upon the “impatient” agent by (God? The model fairy? The meddling government? Impetuous insufficiency of agent imagination? Too much sludge in the pipes?).
Our purpose is not to take the model apart, but rather to ask: Why pretend that truly heterodox ideas are becoming incorporated into the orthodoxy, when patently they are not? Why drag Minsky’s name into this, demeaning the deceased? Why not just call a spade a spade: here is one more little toy model that wouldn’t pass muster among the macroeconomic elite of the orthodoxy, and struggles mightily to derive what you could get just as easily out of an undergraduate IS-LM model, with pretty much the same level of disdain for logical consistency. Even with the Krugman imprimatur, no one will ever use this model as the basis for a “new economics,” much less policy justification. No, it seems the only point of the exercise is to insist that there is nothing worth paying attention to outside the neoclassical orthodoxy; “we the elect” have said everything there is worthwhile to say, and absorbed every idea worth considering. There Is No Alternative.
Of course, if the profession expels anyone who takes Minsky seriously, and never publishes the
m in any ranked journal, soon there will be no one left who can credibly challenge TINA, or perturb the complacency of Krugman’s self-congratulatory stance on his catholic tastes. The citadel is impregnable.
Hard-core Neoliberal Agnotology
I have just frog-marched the reader through some turgid conceptual critique of the last few years of orthodox neoclassical models of the crisis. It has not been pretty. Perhaps you have come to suspect that much of the sound and fury over the intellectual response of the economics profession to the crisis has been bootless and counterproductive. Even if you think that the history of economic thought should pertain to an assessment of the crisis, you might be inclined to wonder: Why bother with this mainstream stuff ? Possibly you recognize that I have consciously chosen as candidates for consideration those vanguard deviations among the orthodox that have been most widely taken up by journalists and the blogosphere in the aftermath of the crisis; these, therefore, are the Potemkin controversies that have sucked up most of the intellectual oxygen in the public agora. However, what may have been felt missing from this tale of woe is evidence of the causal story proffered at the beginning of the chapter, namely, that the ensuing confusion serves the purposes of the Neoliberal Thought Collective in fostering doubt and confusion in pursuit of its political objectives. Sure, we may have encountered some individual MPS members and think tank denizens in the course of this chapter; but, after all, the odds of that happening are pretty high whenever one perambulates among the contemporary orthodox economics profession. The impartial spectator interjects: there are no Wizards lurking behind the curtain orchestrating this ballet méchanique, or so it seems. Perhaps what we have encountered here instead is just the garden-variety wishful thinking, stodgy cognitive conservatism, and discombobulated ripostes of any corporate entity that has endured a shock of the magnitude of the current crisis.
Decorum and prudence dictate we should invariably extend charitable interpretations to our opponents, avoid fractious and wanton approbation, and abjure from conspiracy theories. Yet the reason we need to invoke agnotology here is that even some figures in the mainstream media have come around to openly speculate that economic analyses of the crisis have been manipulated for dark motives for quite some while now. I shall here quote two impeccable sources. The first is the New York Times financial reporter Joe Nocera:
So this is how the Big Lie works. You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings. You’re chosen for an investigative panel related to your topic. When other panel members, after inspecting your evidence, reject your thesis, you claim that they did so for ideological reasons. This, too, is repeated by your allies. Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.114
My second exhibit comes from Paul Krugman:
Basically, Joe is arriving where I’ve been since 2000: what’s going on in the discussion of economic affairs (and other matters, like justifications for war) isn’t just a case where different people look at the same facts but reach different conclusions. Instead, we’re looking at a situation in which one side of the debate just isn’t interested in the truth, in which alleged scholarship is actually just propaganda.
Saying this, of course, gets you declared “shrill,” denounced as partisan; you’re supposed to pretend that we’re having a civilized discussion between people with good intentions. And you’re supposed to match each attack on Republicans with an attack on Democrats, as if the mendacity were equal on both sides. Sorry, but it isn’t. Democrats aren’t angels; they’re human and sometimes corrupt—but they don’t operate a lie machine 24/7 the way modern Republicans do. Welcome to my world, Joe.115
Now, these people are not your usual blowhard bloggers. However, their recriminations do tend to resemble the earlier hubbub about a “Republican War on Science,” and are deficient in many of the same respects.116 The phenomenon they excoriate and try to pin on the Republican Party is far more elaborate and profound than any party-political dispute or local Machiavellian turn: how can there be a “Republican” plot when it is a worldwide phenomenon? Indeed, many NTC members reserve their purest disdain for card-carrying Republican Party figures. Surely a few think tanks inside the Beltway cannot, of themselves, paralyze our minds 24/7! The resort to the language of the Big Lie also suggests comparison with Cold War propaganda; but we have repeatedly insisted herein that conventional notions of propaganda do not begin to grasp the current phenomenon.
The understanding of politics displayed by these writers is far too parochial to stand up to the pervasive character of the global crisis. It is distressing that these writers, frequently champions of hard-nosed, tough-minded “analysis of reality,” fall short when it comes to serious analysis of the multipronged efforts to steer public discourse in certain targeted directions, the incongruous swerves that so vex their sensibilities. Perhaps worse, it seems evident someone like Krugman might be more than a little disconcerted to be told that he is as much a cog in this larger machine as John Cochrane, or any other bête noire. That is why we had to insist in chapter 2 that the central doctrine of neoliberalism is the unquestioned superiority of the marketplace of ideas, but conjoined to a notion of the market that requires endless vigilance and interventions; sequentially that in chapter 4 that neoclassical economics has progressively come under the sway of neoliberalism, whether it can acknowledge it or not; and even in the previous parts of this chapter, that Krugman’s economic analysis offers little respite from the run-of-the-mill superficial responses to the crisis found in the rest of the profession. We now need to consult the tenets of agnotology to begin to understand how the Neoliberal Thought Collective efficiently manufactures both knowledge and ignorance concerning the crisis.
Agnotology takes many forms. Sometimes, it is little more than a minor sideshow at the grand cacophony of the Interwebs. For instance, in 2011, Sarah Palin got caught on video confusing Paul Revere with some cartoon figures mimicking the Founding Fathers, and it rapidly went viral; some of her Tea Party acolytes then got into the act, revising the Paul Revere entry on Wikipedia to conform to her garbled recollections. This is the poor man’s pocket version of the neoliberal creation of alternate realities. Other times, it involves descent into accusations of conflicts of interest in ways that serve only to distract the audience from the actual interests at play in the particular incident: here one might point to Gretchen Morgenson and Josh Rosner, authors of Reckless Endangerment, insinuating that Joseph Stiglitz was paid by Fannie Mae and Freddie Mac in order to defend their activities.117 But the practice of agnotology that has long-term consequences operates at a much deeper level of intellectual activity. It ventures far beyond the discrediting of this or that individual; it seeks to destabilize the things we were predisposed to take for granted, and insinuate a sharply targeted narrative explanation as one of those default presumptions. This does not appear to the public as overt strident propaganda; rather, it presents itself as liberating, expanding the cloistered space of sanctioned explanation in an era of wrangling and indecision. There are two steps to this procedure: one is the effort to pump excess noise into the public discussion of appropriate frames within which to approach the controversy; the second is to provide the echoic preferred target narrative as coming from many different sanctioned sources at once; ubiquity helps pave the way for inevitability. To make this work, one must do both: amplify the impression of indecision and doubt on the part of the elect, while sharpening the preferred narrative as making a demand upon our attention. Doubt is their product, but eventual manufactured consensus is their profit.
It is therefore my contention that there is method to the madness, goal o
rientation behind the gallimaufry laid out in this chapter. I would suggest that much of the brouhaha documented above ends up being subservient to the first movement of the agnotological playbook. Whatever the individual motivations, the plangent exculpations of the orthodox economists serve mostly to ratchet up the levels of doubt and skepticism in the public mind, and lure unsuspecting bloggers into ineffectual disputes that lead nowhere fast. The folderol over the DSGE model or rationality or the EMH just prepares the ground for the implantation of one or more clear and simple neoliberal alternatives, covered in the remainder of this chapter. Of course, most of the technical topics covered herein do not lend themselves to direct affiliation between abstract theory and the special pleading of a particular powerful cadre (although the relation of the DSGE model to the patronage of the Federal Reserve and European central banks might be a counterexample). These sagas of the ineffectual “reform” of orthodoxy might be contrasted with instances where the unabashed promotion of the doctrine that the manufacture of ever more baroque derivatives must be framed as abstract “financial innovation,” a force of nature on a par with more conventional technological innovation in the physical sphere, deserving utter freedom and profound obeisance, a meme stridently promoted by the Ewing Marion Kauffman Foundation, an openly certified neoliberal outfit.118 There the lifelines are visible for all to see. Theoretical departures like behavioral economics or fortified DSGE are rather more obscure in their determinations. The connections might instead operate at a few steps’ remove, such as the EMH indirectly expressing the worldview of the neoliberals, because it translates Hayek’s central doctrine of the marketplace of ideas into the stochastic formalisms of neoclassical finance theory. However, behavioral economics and the DSGE model and Krugman’s “Fisher-Minsky” model are not generally the sort of ideas that, on their face, readily lend themselves to special pleading and shady sponsors; they may not even initially appear especially neoliberal in orientation.