Never Let a Serious Crisis Go to Waste

by Philip Mirowski

  92 “An auction market has even sprung up to sell these [intern] positions to the highest bidder. A Versace internship fetched $5,000 at auction, temporary blogging rights at the Huffington Post went for $13,000, and someone paid $42,500 for a one-week stint at Vogue. At one Californian outfit, Dream Careers, 2,000 internships all over the world are sold annually. You can buy an eight-week summer position for $8,000 (a placement in London will set you back $9,500).” (Perlin, Intern Nation).

  93 Quoted from http://brianholmes.wordpress.com/. Also consult Preston, “Foreign Students in Work Visa Program Stage Walkout at Plant” and “Pleas Unheeded as Students’ US Jobs Soured.”

  94 Lohmann, “The Endless Algebra of Climate Markets”; Richey and Ponte, Brand Aid.

  95 Haight, “The Problem with Fair Trade Coffee.”

  96 See www.transfairusa.org/about-fair-trade-usa. The neoliberal character of the marketing appeal is revealed in another quote: “We’re a nonprofit, but we don’t do charity. Instead, we teach disadvantaged communities how to use the free market to their advantage.”

  97 Daviron and Ponte, The Coffee Paradox; Fridell, “Fair-Trade Coffee and Commodity Fetishism,” pp. 92, 97.

  98 Haight, “The Problem with Fair Trade Coffee.”

  99 Giridharadas, “Boycotts Minus the Pain.”

  100 Arrow, “Invaluable Goods” (p. 761), an essay review of Radin, Contested Commodities. Arrow is regarded within the profession as progenitor of the Arrow-Debreu model, an inventor of neoclassical “health economics” and someone as far removed from neoliberal beliefs as it is possible for a respected orthodox economist to be; which just goes to illustrate the assertion in chapter 1 that the profession has become unself-consciously neoliberal, and also thoroughly compromised in its ability to conceptualize the main problems of the current era. See also how his position anticipated that of the self-identified neoliberals in Becker and Elias, “Introducing Incentives in the Market for Live and Cadaveric Organs.”

  101 Rose, “The Neurochemical Self and Its Anomalies” and The Politics of Life Itself.

  102 Frazzeto and Anker, “Neuroculture.”

  103 See Camerer et al. “Neuroeconomics”; Ariely, Predictably Irrational; Akerlof and Shiller, Animal Spirits. By most accounts, this attempted reconciliation has been an ignis fatuus. This dynamic has resulted in one analytical dead-end in discussions of the causes of the crisis: see chapter 5 below.

  104 Hutheesing, “Better Trading Through Science.”

  105 Talbot, “Brain Gain.”

  106 Ibid., p. 43.

  107 See Havinghurst, “Trafficking in Human Blood”; Healy, Last Best Gifts; Washington, Deadly Monopolies, chapter 7; Arrow, “Gifts and Exchanges.” A history of the debate can be found in Fontaine, “Blood, Politics and Social Science”; Sheper-Hughes and Wacquant, Commodifying Bodies; Krawiec, “Show Me the Money.”

  108 Spar, The Baby Business; Thernstrom, “Meet the Twiblings.”

  109 “‘Experts are not certain what it means to a child to discover that he or she is but one of 50 children—or even more [due to IV fertilization]. Experts don’t talk about this when they counsel people dealing with infertility,’ Ms. Kramer said. ‘How do you make connections with so many siblings? What does family mean to these children?’” (Mroz, “One Sperm Donor” ).

  110 Krawiec, “Show Me the Money,” p. xii.

  111 Bess, “Blurring the Boundary Between Person and Product.”

  112 Ibid., p. 63.

  113 Cowen, Create Your Own Economy, p. 117.

  114 This has been the last refuge of the scoundrel contingent of the economics profession, which includes Ben Bernanke (“The US Economic Outlook”).

  4. Mumbo Jumble

  1 Along with Sorkin, Too Big to Fail; Krugman, “The Return of Depression Economics”; and Morgenson and Rosner, Reckless Endangerment, as of 2011. As someone who has spent an inordinate amount of his life with the tsunami of crisis books over the past three years, I have to once again report that the marketplace of ideas seems an unreliable tutor, since these books are, in my estimation, some of the least informative sources on the causes and consequences of the crisis. Moe Tkacik (“Journals of the Crisis Year”) provides a similar assessment. See www.amazon.com/s?ie=UTF8&rh=n%3A283155%2Ck%3Afinancial%20crisis%20best%20sellers&page=1.

  2 Cohen, “Ivory Tower Unswayed by Crashing Economy.”

  3 One book that more or less acknowledges the incongruity, only to then attempt to justify it, is Backhouse: The Puzzle of Modern Economics. Some better meditations are Spaveneta, “Economists and Economics”; Westbrook, Out of the Crisis; Basen, “Economics Has Met the Enemy, and It Is Economics”; Chakrabortty, “Angry Economists Can’t Answer my Criticism,” and Palley, From Financial Crisis to Stagnation. “None of [the orthodox] economists are losing their jobs. In fact, it is unlikely that many are even missing out on a scheduled promotion as a result of having failed to see the largest financial bubble in the history of the world” (Baker, “Creating Political Space for Effective Financial Regulation,” p. 72).

  4 Portions of this section appeared previously in different format in the Hedgehog Review, vol. 12, 2010.

  5 Sometimes I am suspected of hyperbole in my generalizations, so I need to document this one here, with regard to Joseph Stiglitz: “We should be clear about this: [neoclassical] economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the efficient market doctrines, even before they became fashionable” (Stiglitz, “The Non-existent Hand”). For a number of examples on the right, see the Chicago interviews of John Cassidy (“Rational Irrationality”) or Taylor, “How Government Created the Financial Crisis.” History is always the first casualty in any economics dispute.

  6 See www.britac.ac.uk/events/archive/forum-economy.cfm. The Queen’s question is also discussed in Kay, “The Map Is Not the Territory.”

  7 See, for instance, Jane Smiley’s novel Moo, or Olivier Assayas’s film Summer Hours.

  8 Sorman, “The Free Marketers Strike Back.”

  9 Thoma, “What Caused the Financial Crisis?”

  10 Here is the economist David Levine: “I was reading your article ‘How Did Economists Get It So Wrong.’ Who are these economists who got it so wrong? Speak for yourself kemo sabe. And since you got it wrong—why should we believe your discredited theories?” (www.huffingtonpost.com/david-k-levine/an-open-letter-to-paul-kr_b_289768.html?view=print). In a different register, Jagdish Bhagwati accused his Columbia colleague Joseph Stiglitz of being one of “capitalism’s petty detractors” (www.worldafairsjournal.org/articles/2009-Fall). Eugene Fama in an interview with John Cassidy of The New Yorker: “Krugman wants to be czar of the world. There are no economists that he likes [laughs]. And Larry Summers? What other position could he take and still have a job?” (www.newyorker.com/online/blogs/johncassidy/chicago-interviews). Brad de Long on John Cochrane: “No one could be that ignorant . . . to fail to have noticed that commercial banks are more tightly regulated than investment banks. . . . Cochrane may be completely ignorant about the macro literature except for that recently written somewhere near a great lake, but he must know that investment banks suffered more dramatically than commercial banks” (October 9, 2009, at http://delong.typepad.com/sdj/). Paul Krugman: “Eugene Fama, at least, and perhaps Cochrane too, began this debate from a position of complete ignorance—not understanding at all the logic of Keynesian models (even for the purposes of debunking), and imagining that the savings-­investment identity necessarily implies 100-percent crowding out. There was no deeper logic. And since then, what we’ve been witnessing is a simple matter of digging in, refusing to admit a mistake. I do not believe that Cochrane has, in his head or on the back of his envelope, a maximization-and-equilibrium model that justifies what he’s saying” (http://krugman.blogs.nytimes.com/, February 23, 2010). Brad de Long criticized Robert Lucas: “Last March—when the only reason Mr. Lucas could think of why Mr
s. Romer and Mr. Bernanke were saying the stimulus was likely to be effective was that they were corrupt, and when he just ‘didn’t really get’ any piece of Mr. Bernanke’s major contributions to economics” (www.economist.com/blogs/freeexchange/lucas_roundtable). “Sorry, Art, but aside from the foolish and intellectually lazy remark about mathematics, all of the criticisms that you have listed reflect either woeful ignorance or intentional disregard for what much of modern macroeconomics is about and what it has accomplished” (Sargent, “Modern Macroeconomics Under Attack”).

  11 James Galbraith, “Who Are These Economists, Anyway?” p. 95. I should note that this passage had been written long before the crisis, in 2000. It is indicative that no one had stepped forward to reprimand any of the bad behavior documented in the last footnote, but as soon as Galbraith actually outed the general intolerance within the orthodox economics profession, then he himself was immediately reprimanded. See Hedoin, “Towards a Paradigm Shift in Economics?” This audacious evasion of accountability in the economics profession is the Great Unmentionable in any gathering of the faithful.

  12 Y. Smith, Econned, p. 19.

  13 Some brand-name economists, such as Simon Johnson, Tyler Cowen, Richard Posner, Steven Levitt, Mark Thoma, and Paul Krugman, greatly expanded and extended their influence through their blogs. The New York Times gave many previously obscure economists a soapbox on the Economix blog; similar things happened at the Financial Times and Economist sites. The right wing of the profession ended up generally more successful in amplifying its message through these devices than the left, in my estimation. Some of the better quasi-anonymous independent blogs turned out to be more informative in general, such as Yves Smith’s nakedcapitalism.com, and the blog of my colleague David Ruccio at http://anticap.wordpress.com/. Some of the greater disappointments have been figures like Mark Thoma, who has written critical things from time to time on his blog, but turned more orthodox than the Pope when pressed: see http://thebrowser.com/interviews/mark-thoma-on-econometrics.

  14 See Robert Barro in www.economist.com/blogs/freeexchange/lucas_roundtable, which was itself an online discussion of Lucas, “In Defense of the Dismal Science.”

  15 Abate, “After Calamity, Economics Leaders Rethink Strategy”; Rajan, “Bankers Have Been Sold Short by Market Distortions.” On Greenspan’s close relationship with the Randroid cult, see Burns, Goddess of the Market; Kinsey, “Greenspan Shrugged.” On the attempt to pin the crisis on Greenspan soon after it broke, see Goodman, “Taking a Hard Look at the Greenspan Legacy.” But even there, Very Serious Economists sprang to his defense: “‘The notion that Greenspan could have generated a totally different outcome is naïve,’ said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.”

  16 I have quoted Brad de Long (“Economics in Crisis”) already in the first chapter: “But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future.” See also Hirsh, “Our Best Minds Are Failing Us”; Kay (all); Baker, The End of Loser Liberalism.

  17 A random sample: Eichengreen, “The Last Temptation of Risk”; Litan, “In Defense of Much”; Cochrane, “Lessons from the Financial Crisis”; Zingales, “Learning to Live with Not-So-Efficient Markets”; Saint-Paul, “A Modest Intellectual Discipline”; Sorman, “The Free Marketers Strike Back”; Sargent, “Modern Macroeconomics Under Attack.” An especially fervid advocate of nothing-to-see-here has been John B. Taylor: “And so getting back on track is the way I put it, but the theory itself—the basic theory of economics is just fine” at http://findarticles.com/p/news-articles/analyst-wire/mi_8077/is_20100803/john-taylor-raymond-professor-economics/ai_n54673887/.

  18 Here is not the place to document this trend, but see Paul Samuelson’s setting the tone for the community in the 1970s: “Those who can, do science; those who can’t, prattle on about its methodology” (quoted in Holcombe, Economic Models and Methodology). I survey Samuelson’s attitudes toward intellectual history and philosophy of economics in “Did the Victor Enjoy the Spoils?”

  19 Klamer and Colander, The Making of an Economist; N. Smith, “What I Learned in Grad School.”

  20 This dynamic is described from various vantage points in Weintraub, The Future of the History of Economics; Lee, A History of Heterodox Economics; and Haring, “Economics Is Losing Its Memory.”

  21 Available for viewing at www.aeaweb.org/webcasts/assa2010.php.

  22 For a video admission by Alan Blinder, see www.cengagesites.com/academic/?site=5322&secID=5312. And for that of John Taylor: www.cengagesites.com/academic/?site=5724&SecID=7344.

  23 The texts were “The Methodology of Positive Economics” in Friedman, Essays in Positive Economics, and Thomas Kuhn, The Structure of Scientific Revolutions. See, for instance, http://economistsview.typepad.com/economistsview/ 2009/08/why-this-new-crisis-needs-a-new-paradigm-of-economic-thought.html#more;or www.voxeu.org/index.php?q=node/3210; or www.rieti.go.jp/en/rieti_report/108.html. It was instructive how economists instinctively and unself-consciously turned to the writings of members of the Mont Pèlerin Society such as Friedman and Popper when they were forced to access “philosophy.” Neoliberalism thus came as naturally to them as the air they breathed.

  24 Mata, “Reckonings.”

  25 Eichengreen and O’Rourke, “A Tale of Two Depressions.” I thank Professor O’Rourke for generously providing the updated data.

  26 Rogoff and Reinhart, This Time Is Different.

  27 For the 1870s see Mirowski, More Heat Than Light; for World War II see Mirowski, Machine Dreams. “The intellectual history of economics might be understood as a succession of ways to socialize conceptions of nature” (Westbrook, Out of the Crisis, p. 78); MacFarquahar, “The Deflationist.”

  28 More unexpected, it comes from his most cited work, The General Theory of Employment, Interest and Money, pp. 32–33.

  29 One would begin with Joan Robinson, then proceed up through Axel Leijonhufvud and Robert Clower, and then to the French Regulationist school. Robert Lucas more or less agrees with this point: “I think that in writing the General Theory, Keynes was viewing himself as a spokesman for a discredited profession. . . . He was writing in a situation where people are ready to throw in the towel on capitalism and liberal democracy and go with fascism or corporatism, protectionism, socialist planning. . . . [Keynes] was a political activist from beginning to end. What he was concerned about when he wrote the General Theory was convincing people there was a way to deal with the Depression that was forceful and effective but didn’t involve scrapping the capitalist system” (“My Keynesian Education,” p. 24).

  30 Or its parallel universe, the American Finance Association, which had the spectacular gall to appoint Cochrane as its president in 2010. See Cochrane, “Presidential Address.”

  31 Eaton, “Osborne’s Supporters Turn on Him.”

  32 This petition provides a quick roster of the hard-right membership of the Neoliberal Thought Collective: www.speaker.gov/UploadedFiles/Economists-11-8-11.pdf. A few notables: Michael Boskin (Stanford), Charles Calomiris (Columbia), Eugene Fama (Chicago), Douglas Holtz-Eakin, Jeffrey Miron (Harvard), and Barry Keating (Notre Dame). Events surrounding this incident are discussed further in chapter 5.

  33 John Cochrane’s own connections to both neoliberal think tanks (Cato) and the place where large hedge funds intersect with the Tea Party wing of the Republican Party have been documented by journalists (Crabtree, “Paul Ryan’s $700-Wine-Sipping Buddies”). Here Paul Ryan was observed dining in Washington, D.C. with John Cochrane and a hedge fund manager.

  34 Quote from Bowman et al., Scapegoats Aren’t Enough. Neoliberals, feeling the heat perhaps getting nearer, are quick to dismiss this as “conspiracy theories” (“Economics: A Million Mutinies Now”).

  35 See, for instance, Imperia and Maffeo, “As If Nothing Were Going to Happen”; Baker, “The Soft Bigotry of Incredibly Low Expectations.” There is a big difference between warning of a
housing bubble, as did Robert Shiller, for instance, and warning of global system breakdown over a long horizon. Shiller’s intellectual role in the crisis has been misunderstood, as we argue in chapter 6. (This generalization would also have to take into account the subsequent popularity of a few serial Cassandras such as Nouriel Roubini and Marxists such as David Harvey and Robert Brenner: they exist outside the ambit of this book, dealing as it does with the orthodox neoclassical profession.)

  36 Buiter, “The Unfortunate Uselessness of Most State of the Art Academic Monetary Economics.” Buiter then wrote: “The Bank of England in 2007 faced the onset of the credit crunch with too much Robert Lucas, Michael Woodford and Robert Merton in its intellectual cupboard. A drastic but chaotic re-education took place and is continuing.” Chapter 5 reveals that, in this instance, another economist’s prediction has since bitten the dust.

  37 Ibanez, The Current State of Macroeconomics, p. 180.

  38 Blanchard, “The State of Macro.”

  39 They are available online at www.newyorker.com/online/blogs/johncassidy/chicago-interviews. One wishes more business journalists would emulate this practice of providing full transcripts.

  40 Kroszner and Rajan, “Is the Glass Steagall Act Justified?” p. 811.

  41 Although this chapter deals with economists, and not the theories, I want to insist here that none of these components is plausible on its own terms. The “savings glut” appeals to a discredited theory of ‘“loanable funds,” the mortgage story is dismissed in chapter 5, and the financial-innovation trope is discussed in chapter 6. See also Palley, From Financial Crisis to Stagnation, pp.117–21.

  42 For example, C. Ferguson, Predator Nation, p. 271, and Byrne, Occupy Handbook, p.79 et seq.

  43 “We have seen the triumph of sensible ideas and reaped the rewards in terms of macroeconomic performance. The costly wrong turn in ideas and macropolicy of the 1960s/70s has been righted, and the future of stabilization looks bright” (Romer, 2007, quoted in DeMartino, The Economist’s Oath, p. 165).