First Bank of the Living Dead

by John Quiggin on August 24, 2010

That’s the title of Daniel Drezner’s review Zombie Economics along with several other post-crisis books. I’m glad he likes the title, but he offers what seems to me to be a rather unfair representation of my argument. As the author, I’m not exactly unbiased, so see what you think.

Here’s Drezner

… Quiggin is clear-eyed about Keynesianism’s failures as well as its successes, but he believes that:

The failures of the 1970s were the result of mistakes that could have been avoided with a better understanding of the economy and stronger social institutions. If so, the current crisis may mark a return to successful Keynesian policies that take account of the errors of the past.

He might be right, but if so it would contradict everything else contained in Zombie Economics. Quiggin thinks he’s only writing about the failure of free-market ideas, but he’s actually describing the intellectual life cycle of most ideas in political economy. All intellectual movements start with trenchant ways of understanding the world. As these ideas gain currency, they are used to explain more and more disparate phenomena, until the explanation starts to lose its predictive power. As time passes, the original ideas become obscured by ideology, caricature and ad hoc efforts to explain away emerging anomalies. Finally, enough contradictions build up to crash the paradigm, although current adherents often continue to advance the ideas in zombielike form. Quiggin demonstrates with great clarity how this happened to the Chicago school of economics. How he can think it won’t happen with whatever neo-Keynesian model emerges is truly puzzling.


And here’s the full quote from the book along with the preceding couple of paras

How then, should we think about the Keynesian era and its failure?

One possible interpretation, a pessimistic one, is that business cycles are so deeply embedded in the logic of market economics, and, perhaps of all modern economies, that they cannot be tamed. Success breeds hubris, and hubris leads us to ignore the lessons of the past: that resources are always constrained, that budgets must ultimately balance, that wages and other incomes cannot, for long, exceed the value of production and so on. It the 1960s and 1970s, this hubris manifested itself in unsustainable budget deficits and the wage–price spiral. In the 1990s and 2000s, it was seen in the speculative frenzy unleashed by the self-styled Masters of the Universe in the financial sector.

But this is not the only possible interpretation.

Perhaps the failures of the 1970s were the result of mistakes that could have been avoided with a better understanding of the economy and stronger social institutions. If so, the current crisis may mark a return to successful Keynesian policies that take account of the errors of the past. (emphasis added)

It’s only one omitted word, but I think it makes a difference.

{ 30 comments }

1

Keith 08.24.10 at 10:21 pm

I think his failure lies in this statement: Quiggin thinks he’s only writing about the failure of free-market ideas, but he’s actually describing the intellectual life cycle of most ideas in political economy. Which prompts him to leave of the “Probably”, since an equivocation would not be the best way to reinforce his (apparent) claim that all ideas, especially political ones, have the same origin and life cycle as a single economic theory. It’s in trying to draw larger conclusions form your thesis that gets kind of hairy.

2

Anderson 08.24.10 at 10:21 pm

“It was Colonel Mustard, in the library, with a pipe wrench.”

“PERHAPS it was Colonel Mustard, in the library, with a pipe wrench.”

Pretty big difference, yes.

3

rea 08.24.10 at 10:53 pm

You have to admire the degree of gall involved in telling a man that he does not understand his own book.

4

Steve LaBonne 08.24.10 at 11:40 pm

Drezner has never lacked for gall. I find him unreadable.

5

Barry 08.25.10 at 2:25 am

“It the 1960s and 1970s, this hubris manifested itself in unsustainable budget deficits….”

Does Dan freakin’ remember the 1980’s and the 2000’s?

6

john c. halasz 08.25.10 at 2:41 am

“First, at present, no economic model perfectly captures the interrelationship between the financial sector and the global economy.”

Er, ya, that’s because the ignorance of models (and their sponsors) serves to disguise what’s really goin’ down: the extraction of rents from “globalized” finance and MNC “platforming”.

7

Dan Drezner 08.25.10 at 3:36 am

@John: The quoted passage was not the only one in your book where you suggest/hope that a wiser brand of Keynesianism would emerge from the ashes of the Chicago school. And, reading that section, it seemed pretty clear that you rejected the more pessimistic take.

The overwheming majority of your book doesn’t address Keynesianism, however — it addresses how the financial crisis exposed the hollowness of various aspects of the Chicago school. You did a great job of demonstrating how these ideas, which originated in some solid observations, became more and more absurd over time.

I think what surprised me, after reading it, was how you maintained any hope that Keynesian thought would avoid this ideational cycle. Call me a pessimist, I guess.

@Barry: you realize you’re mocking John’s words in your comment, right?

8

Irrelephant 08.25.10 at 3:37 am

This Drezner guy liked your book. He kind of didn’t like the others. So is there really a problem?

9

John Quiggin 08.25.10 at 4:55 am

Dan, thanks for the kind words regarding the main focus of the book.

As regards a revived Keynesianism, my position is that it’s by far the most promising approach on offer, but that there are a lot of problems to be resolved and that it’s possible (as you suggest) that no macro theory will work for long. Still, it seems better to give this a shot than to try and salvage New Classical or DSGE macro.

I would have been happy enough if the review had said something like your comment “Quiggin is optimistic that the problems can be overcome, but I disagree”. As it was, the review implied that I ignore the ideational cycle, and that I naively believe that a revived Keynesianism is sure to work work.

10

chrismealy 08.25.10 at 6:26 am

What is the Keynesian (or Post-Keynesian) take on the 1970s anyway?

11

Kevin Donoghue 08.25.10 at 7:04 am

Follow the advice John Steinbeck gave to J. K. Galbraith: if a critic doesn’t have the courage to give you unqualified praise, ignore the bastard.

12

Martin Bento 08.25.10 at 8:34 am

But Drezner did not suggest that it was possible that no macro theory would work for long. He stated as incontrovertible fact that it would not and treated it as a fatal flaw in the thinking of others if this was not explicitly one of their premises. Indeed, Quiggan is attacked not just because he does not, or does not explicitly, believe this, but merely because he actually finds it possible not to believe it (“How he can think it won’t happen with whatever neo-Keynesian model emerges is truly puzzling”), or not to believe it absolutely (Drezner’s critique would not hold much water in case of a partial failure of neo-Keynesianism, as a partial failure would also be a partial success, and therefore potentially worth pursuing). I missed the part where he actually argued this: Is there a paper on Drezner’s Proof of the Impossibility of Human Comprehension of the Economy somewhere?

13

PHB 08.25.10 at 1:04 pm

If Drezner was correct Austrian school would have only started to betray its ideals after their ideas were implemented by Thatcher-Reagan in the 1980s.

In practice, Milton Friedman was no champion of freedom, his first major job was to help the dictatorship in Chile maintain power as they murdered 50,000 of their fellow citizens who happened to prefer the democracy that Friedman’s paymasters replaced. This is hardly a minor issue when Friedman’s entire system was (allegedly) based on individual freedom.

In the UK, the reign of true monetarism only lasted a few months. By 1981, with the economy in ruins even the Thatcher government had jettisoned most of his ideas.

No, Friedman at least was a liar and a hypocrite from start to finish.

The difference between Keynesianism and Marxism is that Keynes was a scientist and Marx’s followers were not. Keynes did not claim to have found an absolute truth. All he claimed was to have found a better model than the one that preceded it and to have found better ways of creating and testing models than had gone before. He was one of the first economists to use computers (analog, not digital).

In contrast Marx certainly implies that he has found absolute truth and his followers insisted that he had. And Friedman et. al. certainly seem to fit into the same slot. In particular his invocation of tinkerbell economics where the theory only works so long as the markets believe in the theory so the only ‘rational’ course of action is to entrench implementation of his ideas in ways that cannot be bypassed through democratic processes. It should not take a degree in economics to realize that that is the argument of a charlatan.

Drezener’s comments are off target precisely because he fails to understand the difference between a scientific intellectual movement and a non-scientific one. The Austrian school was an a-scientific movement from start to finish. Most movements of that type crash and burn within a generation, though they can persist for centuries afterward outside the mainstream (c.f. homeopathy, Freudian psychoanalysis, chiropractic).

14

ogmb 08.25.10 at 1:06 pm

Pretty basic proof by assertion reasoning. JQ claims A. I claim ~A. How JQ can claim A given ~A holds is truly puzzling.

15

Oka 08.25.10 at 1:33 pm

Let’s assume Drezner’s (baseless) claim that “most ideas” have a similar life cycle as the chicago school. “Most” still does not entail “in this specific case” so Drezner give us no reason to accept his conclusion. Drezner sounds kinda like a freshman relativist.

16

chris 08.25.10 at 1:46 pm

What is the Keynesian (or Post-Keynesian) take on the 1970s anyway?

Oil shocks are bad for oil-dependent economies?

I didn’t live through the 70s, so maybe oil shocks weren’t the only thing wrong with them. But they sure loom large in hindsight. A rise in the cost of oil doesn’t just raise prices — it raises *real costs* of nearly everything. In other words, it depresses productivity. And when everyone tries to maintain their standard of living in the face of a fall in productivity, something’s gotta give.

17

Barry 08.25.10 at 1:46 pm

Dan Drezner 08.25.10 at 3:36 am
” @Barry: you realize you’re mocking John’s words in your comment, right?”

You’re right – I’m sorry (I’ll turn my reading comprehension switch to ‘on’).

18

chris 08.25.10 at 1:48 pm

Let’s assume Drezner’s (baseless) claim that “most ideas” have a similar life cycle as the chicago school. “Most” still does not entail “in this specific case” so Drezner give us no reason to accept his conclusion.

Yeah, but when he says “most”, he really means “all”. It’s a totalizing theory of the dynamics of human schools of thought, put forth on the basis of one example not proven to be typical and some plausible-sounding speculation. Pretty brazen.

19

Stuart 08.25.10 at 1:50 pm

“It the 1960s and 1970s, this hubris manifested itself in unsustainable budget deficits….”

Does Dan freakin’ remember the 1980’s and the 2000’s?

Wasn’t US debt as a percentage of GDP falling through the 60s and 70s (still falling from the high levels after the end of WWII)? Even if there were budget deficits in that era, they were sustainable by most definitions as they were growing the debt at less than the rate the economy was growing. The values I am seeing is about 60% of GDP in 1960 falling to just over 30% when Carter left office – just in time for Reagan and the Bush to grow it back to 60% in just one decade.

20

Barry 08.25.10 at 1:53 pm

08.25.10 at 1:46 pm

chrismealy “What is the Keynesian (or Post-Keynesian) take on the 1970s anyway?”

chris: “Oil shocks are bad for oil-dependent economies?”

What frequently puzzles me is that this explains so much of the 1970’s.

The price of the basic commodity that the industrialized world was built upon increased by a factor of 3 (after the initial spike of 5x).

An economist pointed that that a quarter-century of formerly optimal investment based on certain ratios of the price of steel, grain, …(everything) to oil was now sub-optimal, in many cases radically sub-optimal. In addition, a a large chun k of a decade’s worth of R&D was dragged into energy efficiency, which meant that it wasn’t available for anything else.

In addition, what interests me is that when one looks at wage growth vs productivity/GDP per capita growth in the USA over the post-WWII era, it’s pretty clear that those ‘successes’ of the Friedman-Reagan reforms consisted of making sure that the bottom half of the US got as little as possible, and the top 1% got as much as possible. A variation on letting the serfs starve to keep the nobles’ luxuries coming.

21

mds 08.25.10 at 2:14 pm

What is the Keynesian (or Post-Keynesian) take on the 1970s anyway?

(1) Oil prices.

(2) The 1970s were when capital finally found a way to break the power of labor, and replaced wage-financed growth in consumption with debt-financed growth in consumption, thereby … Oh, hang on, David Harvey isn’t a Keynesian.

22

anon 08.25.10 at 7:19 pm

It is standard postmodern procedure to assign construction to right wing political beliefs while pretending their own beliefs have modernist certainty.

After all, they display no moral relativism when they take taxes from the rich.

23

Omega Centauri 08.25.10 at 9:27 pm

What is the Keynesian (or Post-Keynesian) take on the 1970s anyway?

What I find interesting is how the system was unable to apportion the necessary pain (reduction in net inflation adjusted income), and the additional economic damage caused by the inability to adjust expectations downward. Every interest group saw the sacrifice their group was asked to make as unfair, but ignored the fact that on average everyone had to take a hit. They all acted like they were uniquely singled out for punishment, and so used whatever means necessary to retain their position. So we ended up with a damaging wage/price spiral rather than an efficient adjustment to the changed circumstances.

That has some similarilty to one’s immune system overreacting to a small injury, and making the patient much worse off.

24

PHB 08.25.10 at 10:29 pm

There was more going on in the 1970s than just oil shocks.

One of the big issues in the 1970s was that the first effects of containerization were being felt and suddenly Western companies were facing a whole rack of competition that had previously been uneconomic.

So medium sized manufacturing companies were going to the wall all over the place. It may not have affected GDP very much, but those are the effects that dominated our perception. Unemployment leaped to over a million under Labour (Labour isn’t working) and Thatcher quickly went about putting another two million out of work.

25

James Wimberley 08.26.10 at 5:01 pm

Drezner seems over-impressed by Kuhnian cycles. But Kuhn only looked at areas of science where you had at least one revolution, that is a fairly complete and convincing wrong theory overthrown by a better one (evolution, astronomy, combustion, tectonics, quantum physics). In electricity, SFIK science jumped straight from no theory (18th century) to a perfectly good one (Ampère, Faraday, Ohm). Ditto climate science. Did Dalton’s atomic chemistry overthrow the alchemists, or systematise their ad hoc discoveries? The development of mathematics looks linear too; Euclid wasn’t wrong like Ptolemy. Large areas of classical and neoclassical economics are still perfectly sound – Smith on the invisible hand, Ricardo on rent, Jevons on marginal-cost pricing, Walras on general equilibrium. I’d put Keynes on aggregate demand in that category. Keynesianisn Mark I succeeded as a remedy for depression, but eventually failed in the ambitious agenda to keep a stable non-inflationary full employment afterwards. The cycles come from hubris not fallacy.

26

Twisted_Colour 08.27.10 at 1:16 am

What is the Keynesian (or Post-Keynesian) take on the 1970s anyway?

Disco sucks!!!1!uno!

27

Twisted_Colour 08.27.10 at 1:19 am

The intertubes stole my exclaimation marks. So much for net neutrality.

28

John Quiggin 08.27.10 at 1:35 am

James W, that’s pretty close to my assessment.

29

chris 08.27.10 at 1:07 pm

The development of mathematics looks linear too; Euclid wasn’t wrong like Ptolemy.

Except for that awkward fifth postulate. But even then, Euclidean geometry is still perfectly valid, it’s just not the only kind or appropriate to all circumstances.

30

Patrick 09.06.10 at 3:03 am

He also edited your work. He changed the capitalization of the first word to make it appear that the word began the sentence. Strike two?

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