Never Let a Serious Crisis Go to Waste

by Philip Mirowski

  132 Bekelman et al., “Scope and Impacts,” p. 43.

  133 Murray and Johnston, Trust and Integrity, p. 138.

  134 U.S. Senate, Wall Street and the Financial Crisis.

  135 Hodgson and Jiang, The Economics of Corruption and the Corruption of Economics, 2008.

  136 DeMartino, The Economist’s Oath, chapter 5.

  137 The longer version can be consulted at www.nakedcapitalism.com/2011/04/blacklisted-economics-professor-found-dead-nc-publishes-his-last-letter.html.

  138 Larry Summers quoted in Wall Street Journal, December 8, 1997.

  139 The movement was spearheaded by DeMartino (The Economist’s Oath) and supported by Carrick-Hagenbarth and Epstein, “Dangerous Interconnectedness.” The tepid response of the profession is documented in Cooke and Flitter, “Economists Display Little Interest in Ethics Code.” I leave it to some future historian to document the deliberations of the Ad Hoc Committee headed by Robert Solow, first convened in January 2011. Instead of carrying out its deliberations in public, as per normal, the AEA committee discussions were themselves secret.

  140 Edward Glaeser, “Where to Draw a Line on Ethics,” Economix blog, April 1, 2011, at http://economix.blogs.nytimes.com/2011/01/04/where-to-draw-a-line-on-ethics/. This confession of administrative responsibility for neutralizing conflict-of-interest policies is another example of how neoliberal economists actively push universities such as Harvard in a more neoliberal direction.

  141 For the text, see www.aeaweb.org/aea_journals/AEA_Disclosure_Policy.pdf.

  142 Davies and McGoey, “Rationalities of Ignorance,” p. 77.

  143 Posner, Public Intellectuals.

  144 Proctor and Scheibinger, Agnotology. It should be sharply distinguished from agnoiology, “the doctrine of things of which we are necessarily ignorant” (p. 27).

  145 For some telling examples, see Oreskes and Conway, Merchants of Doubt; Michaels, Doubt Is Our Product; and Sismondo, “Corporate Disguises in Medical Science.”

  146 Walker, Buying In. This was analyzed in chapter 3.

  147 Quoted in Proctor and Scheibinger, Agnotology, p. 74.

  148 Oreskes and Conway, Merchants of Doubt. For some quick summaries of this very important work, see www.youtube.com/watch?v=jOnXL8ob_js.

  149 Hayek, Constitution of Liberty, p. 378.

  150 Mooney, The Republican War on Science.

  151 Mirowski, ScienceMart, chapter 7.

  152 Foucart, “When Science Is Hidden Behind a Smokescreen.”

  153 See Sorkin, Too Big to Fail; Swagel, “The Financial Crisis”; and Ferguson and Johnson, “Too Big to Bail.” The key source on economists’ behavior used here is Glenn, “In Dismal Times, Economists Try to Shape Financial Debates.”

  154 The text of the petition and the signatories can be found at http://faculty.chicagobooth.edu/john.cochrane/research/Papers/mortgage_protest.htm.

  155 The sequence of interventions is conveniently documented at www.chicagobooth.edu/news/2008-09-29_voicegsb.aspx. The NPR interview identifying Cochrane as ringleader can be accessed at www.npr.org/blogs/money/2008/09/economist_leads_push_against_t.html.

  156 Glenn, “In Dismal Times.”

  157 In John Cochrane, “Comments on the Milton Friedman Institute Protest” at http://faculty.chicagobooth.edu/john.cochrane/research/Papers/friedman_letter_comments.htm.

  158 The close connections between George Mason and numerous appendages of the neoliberal Russian doll are explored in Tkacik, www.daskrap.com/.

  159 Mayer, “Covert Operations”; Gordon, “The Kochtopus vs. Murray Rothbard.”

  160 Flitter et al., “For Some Professors, Disclosure Is Academic.”

  161 Some major sources here are Hundley, “Billionaire’s Role in Hiring Decisions at Florida State University Raises Questions”; Berrett, “Not Just Florida State”; and Jaschik, “Who Controls a Grant?”

  162 Hundley, “Billionaire’s Role in Hiring Decisions.”

  163 Sherman quoted in David Corn, “Thank You, Wall Street. May We Have Another?” Mother Jones, January 2010; Soros, “My Philanthropy.”

  5. The Shock of the New

  1 Some of the best recent attempts include Snowdon and Vane, Modern Macroeconomics; Laidler, “Lucas, Keynes and the Crisis”; King, “Microfoundations for Macroeconomics?”; and Duarte, “Recent Developments in Macroeconomics.” For a truncated seven-bullet version of the history from Krugman’s perspective, see http://krugman.blogs.nytimes.com/2011/09/26/lucas-in-context-wonkish.

  2 Paul Krugman blog, July 13, 2012, at http://krugman.blogs.nytimes.com/2012/07/13/gadgets-versus-fundamentals-wonkish/.

  3 For an important exception, see Stiglitz, “Rethinking Macroeconomics,” p. 593; “Needed”).

  4 Suskind, “Faith, Certainty, and the Presidency of George W. Bush.”

  5 Gauchat, “Politicization of Science in the Public Sphere,” p. 183.

  6 I have sought to make this case in greater detail in ScienceMart. Both that previous and this current book exist to contravene the conventional wisdom within the profession that, “although some economists within the Mont Pèlerin Society became very influential within economics, changes in the academic arena were driven by other forces” (Backhouse, The Puzzle of Modern Economics, p. 143).

  7 Simon Wren-Lewis blog, “Mainly Macro,” February 18, 2012, at http://mainlymacro.blogspot.com/2012/02.

  8 Sorkin, “Vanishing Act.”

  9 Brush and Benson, “Forged Comment Letters Sent to U.S. Regulators Writing Derivative Rules.”

  10 Reay, “The Flexible Unity of Economics.”

  11 For examples of the former, see the “performativity” school (Callon, The Laws of the Markets; MacKenzie et al., Do Economists Make Markets?) and authors such as Chwieroth, Capital Ideas; for the latter, see Prasad, The Politics of Free Markets; Fourcade, Economists and Societies.

  12 A previous version of this section appeared as a contribution to Hands and Davis, The Elgar Companion to Recent Economic Methodology.

  13 Coy, “What Good Are Economists Anyway?”

  14 Reinhardt, “An Economist’s Mea Culpa.”

  15 Sherden, The Fortune Sellers.

  16 Colander, The Making of an Economist Redux, p. 241.

  17 FRB Philadelphia, Survey of Professional Forecasters; Reay, “The Flexible Unity of Economics,” p. 71.

  18 Sherden, The Fortune Sellers.

  19 “It’s not just that they missed it, they positively denied that it would happen” (Knowledge@Wharton, “Why Economists Failed to Predict the Financial Crisis”). Compare this with an unfounded apologetic version of events: “It is impossible to predict a stock market collapse . . . [yet] there were many economists who did see that something was seriously wrong: they anticipated that a crash was virtually inevitable” (Backhouse, The Puzzle of Modern Economics, p. 94). Backhouse, a historian, declines to name any of those prescient souls.

  20 Economist, “What Went Wrong with Economics?”

  21 I refer to the so-called Revere Prize organized by the Real World Economic Review. The winners are described at http://rwer.wordpress.com/2010/05/13/keen-roubini-and-baker-win-revere-award-for-economics-2/.

  22 See, for candidates from the left, Galbraith, 2009; for candidates from the far right, consult www.freedomfest.com/2009/home.htm.

  23 Lucas and Stokey, “Liquidity Crises”; Warsh, “Last Week in Jerusalem.”

  24 Maskin, “Economic Theory and the Financial Crisis.”

  25 Coy, “What Good Are Economists Anyway?”

  26 Buiter, “The Unfortunate Uselessness of Most State of the Art Academic Monetary Economics.”

  27 Lucas, “In Defense of the Dismal Science.”

  28 See www.economist.com/blogs/freeexchange/lucas_roundtable. All quotes in this paragraph come from this source.

  29 Cassidy, “Rational Irrationality.”

  30 Ibid.

  31 “[T]his inability to predict does not concern me much. It is almost tautological that severe crises are essentially u
npredictable” (Caballero, “Macroeconomics After the Crisis,” p. 85).

  32 S. Johnson, “The Economic Crisis and the Crisis in Economics.”

  33 Acemoglu, “The Crisis of 2008,” p. 3.

  34 This tendency dates back to Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, if not all the way back to the South Sea Bubble.

  35 Hands, “Economics, Psychology, and the History of Consumer Choice Theory.”

  36 Berg and Gigerenzer, “As-if Behavioral Economics”; Harford, “Why We Do What We Do.” “There is no question that economics has been improved by being reminded of the heterogeneity of economic behavior, and the fact that much of the behavior observed does not fit well with existing models. . . .However, now begins the more serious task of restating, re-applying and extending the tools of traditional economics” (Harrison, “The Behavioral Counter-revolution,” p. 56). Concerning such diktats, Berg and Gigerenzer (“As-if Behavioral Economics,” p. 148) observe: “The odd tension between descriptive openness and normative dogmatism is interesting . . . [it] served as compensation for the out-and-out skeptics of allowing psychology into economics.”

  37 Shiller and Frank, “Flaw in Free Markets.”

  38 Although calling themselves Keynesians, their understanding of what Keynes wrote was so tenuous that they were called to account in this regard by Posner, “Shorting Reason,” and Nuti, “Akerlof and Shiller.” That is not to say no historians tended to promote an interpretation of Keynes friendly to the supposed behavioral insights (Backhouse and Bateman, “Methodological Issues in Keynesian Macroeconomics,” p. 447).

  39 Akerlof and Shiller, Animal Spirits, pp. 4, ix.

  40 “Irrationality is the great copout, and simply represents a failure of imagination. Rationality is so weak a requirement that the set of potential explanations for a particular phenomenon that incorporate rationality is boundless” (S. D. Williamson, “A Defense of Contemporary Economics”).

  41 Posner, “Shorting Reason.”

  42 Akerlof and Shiller, “Disputations.”

  43 Berg and Gigerenzer, “As-if Behavioral Economics,” p. 148.

  44 Akerlof and Shiller, “Disputations.”

  45 Shiller, Irrational Exuberance. Donald Westbrook (Out of the Crisis, p. 41) captures the incongruity: “if [Shiller], a tenured superstar at Yale with a reputation for intellectual originality, feels constrained to be orthodox, it seems a safe bet that most of what passes for financial policy is merely recycled.” Lo (“Reading About the Financial Crisis”) summarizes: Shiller proposes “democratizing finance—extending the application of sound financial principles to a larger and larger segment of society.” This follows from his theoretical premise: if bubbles are caused by the contagion of mistaken beliefs about economic outcomes, then the cure must be inoculation against further mistaken beliefs and eradication of currently mistaken ones. Much as the government plays a vital role in public health against the spread of contagious disease, Shiller recommends government subsidies to provide financial advisors for the less wealthy, and greater government monitoring of financial products, analogous to the consumer product regulatory agencies already in existence in the United States. More speculatively, he also suggests using financial engineering to create safer financial products and markets.” The fundamental neoliberal character of Shiller’s work is discussed in chapter 6.

  46 Comment by Greg Mankiw appended to Akerlof and Romer, “Looting”, p. 65.

  47 Norris, “The Crisis Is Over, but Where’s the Fix?”

  48 “What’s probably going to happen now—in fact, it’s already happening—is that flaws-and-frictions economics will move from the periphery of economic analysis to its center. There’s a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance” (Krugman, “How Did Economics”).

  49 Lo, “Reconciling Efficient Markets with Behavioral Finance”; Caplin and Schotter, The Foundations of Positive and Normative Economics; Harrison, “The Behavioral Counter-revolution.”

  50 Ernst Fehr interview in Rosser et al., European Economics at a Crossroads, pp. 72–73.

  51 Rabin, “A Perspective on Psychology and Economics,” p. 659. Yet even this divergence went too far for the Old Guard of the orthodoxy, such as Kenneth Arrow. The dividing line between the postwar generation of neoclassical economists and the post-1980 cohort is that the former believed they could abjure all dependence on academic psychology, whereas the latter believed they could pick and choose among psychological doctrines to elevate those that seemingly reinforced the neoclassical orthodoxy.

  52 Foer, “Nudge-ocracy.”

  53 Gennaioli, Shleifer, and Vishny, “Neglected Risks, Financial Innovation and Financial Fragility.” Of course, since this is an orthodox model, fluctuations are relative to a rational-expectations equilibrium, and not of employment, income, and output. This is compounded by the fact that rational-expectations forecasts of identical agents are replaced by identical inaccurate forecasts. Whoever doubted neoclassical equilibrium would fail in a world populated by identical wonky forecasters?

  54 Loewenstein and Ubel, “Economics Behaving Badly.”

  55 Fox, The Myth of the Rational Market, p. 301.

  56 Stiglitz, Freefall, p. 7. The impression that economists were in some sense responsible for the existence of these markets became the pretense for the burgeoning literature on “performativity” in the sociology of finance. See MacKenzie et al., Do Economists Make Markets?

  57 Washington Post, June 7, 2008.

  58 Stiglitz, “The Non-existent Hand.”

  59 This distinction has been a crucial component in some contemporary defenses of the EMH. See, for instance, Szafarz, “How Did Crisis-Based Criticisms of Market Efficiency Get It So Wrong?” or the Cassidy interview with Richard Thaler: “I always stress that there are two components to the theory. One, the market price is always right. Two, there is no free lunch: you can’t beat the market without taking on more risk. The no-free-lunch component is still sturdy, and it was in no way shaken by recent events: in fact, it may have been strengthened” (“Rational Irrationality”).

  60 S. D. Williamson, “A Defense of Contemporary Economics”; Zingales, “Learning to Live with Not-So-Efficient Markets,” p. 1, 9.

  61 http://blogs.reuters.com/felix-salmon/2009/08/11/why-the-efficient-markets-hypothesis-caught-on/: “Economists are scientists, after all. That which they can’t explain, they turn into an axiom.”

  62 The following three paragraphs are ridiculously telegraphed summaries of narratives found in Mirowski, Machine Dreams and “Why There Is (as Yet) No Such Thing as an Economics of Knowledge.”

  63 Since the notion that the market is uniquely better at information processing than any human mind is a core tenet of neoliberalism, as explained in chapter 2, this trend is another bit of evidence for the claim that the economic orthodoxy has become more neoliberal, and hence more conservative, over time.

  64 Samuelson, “Proof That Properly Anticipated Prices Fluctuate Randomly”; Fama, “The Behavior of Stock Market Prices”; Mehrling, “A Tale of Two Cities”; Bernstein, Capital Ideas; Jovanovic, “Finance in Modern Economic Thought”; Lo, “Reading About the Financial Crisis”; MacKenzie, An Engine, Not a Camera.

  65 See Gennaioli, Shleifer, and Vishny, “Neglected Risks, Financial Innovation and Financial Fragility.” The endorsement of Turner is described in www.bbc.co.uk/news/mobile/business-12679947; Klein in http://voices.washingtonpost.com/ezra-klein/2010/04/how_financial_innovation_cause.html.

  66 Mirowski, “Why There Is No Such Thing.”

  67 Stiglitz, Freefall, pp. 150, 153.

  68 Both quotes are from the Stiglitz lecture to the Lindau Nobel Conference 2011, at www.mediatheque.lindau-nobel.org/#/Video?id=622.

  69 Stiglitz, “Rethinking Macroeconomics,” p. 593.

  70 Stiglitz, “Information and the Change in Paradigm in Economics,” pp. 613, 583, 577.

  71
Stiglitz has been known to pillory the representative agent model in some cases (“Rethinking Macroeconomics”); but since his entire oeuvre is built upon them (Selected Works), it is hard to know what to make of this.

  72 These are reprinted in Selected Works as chapters 21 and 26, respectively. Stiglitz identifies these as the key papers in his Freefall and “The Non-existent Hand.”

  73 Stiglitz, “Information and the Change in Paradigm in Economics,” p. 395.

  74 Stiglitz, “The Non-existent Hand.”

  75 Stiglitz, “Information and the Change in Paradigm,” pp. 573, 580, 620. “Unfortunately, we have not been able to obtain a general proof of any of these propositions. What we have been able to do is analyze an interesting example” (Grossman and Stiglitz, “On the Impossibility of Informationally Efficient Markets,” p. 395).

  76 Grossman and Stiglitz, “On the Impossibility of Informationally Efficient Markets,” pp. 393, 397; Grossman, The Informational Role of Prices, p.108.

  77 Grossman and Stiglitz, “On the Impossibility of Informationally Efficient Markets.”

  78 Stiglitz, “Rethinking Macroeconomics,” p. 596, 618. This point is made in greater analytical detail in Mirowski, “Markets Come to Bits” and “Inherent Vice.”

  79 Stiglitz, Selected Works, p. 557.

  80 “While Keynes was willing to let animal spirits serve as the deus ex machina to retrieve an explanation of investment variability, our theory provides a more plausible explanation of variability in investment” (Selected Works, p. 647). “Talking up animal spirits can only take you so far” (Freefall, p. 256). These quotes exemplify why Stiglitz does not belong in our previous category of “behavioral economics.”

  81 Stiglitz, Freefall, p. 268, 269, 266.