Bookblogging: new name(s), new intro (slightly updated)

by John Q on August 16, 2009

The current working title for the book is Zombie Economics: Six Dead Ideas that Threaten the World Economy (suggestions for a better subtitle are welcome) and that requires a new intro.

Also, I’ve come to the view that “market liberalism”, as opposed to “economic liberalism”, is a better name for the viewpoint, based on the efficient financial markets hypothesis and other ideas criticised here, that has dominated policy thinking in recent decades.

Any thoughts on these points, or the revised intro, would be most welcome.


The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. JM Keynes

Ideas are long-lived. They often outlive their originators, and, even when they have proved themselves wrong and dangerous, they are very hard to kill.

Before the global financial crisis ideas like the Efficient Markets Hypothesis and the Great Moderation were very much alive. Their advocates dominated mainstream economics and their influence, acknowledged or not, guided the thinking of the practical men and women whose decisions created a financial system in which tens of trillions of dollars of interlinked obligations were built on a foundation of speculative, or entirely spurious investments, and a global economy in which both households and nations lived far beyond their means.

Today these ideas appear to be defunct. Commentators who were proclaiming, a year or two ago, that the business cycle had been tamed, and replaced by a Great Moderation in economic activity, have admitted their error or, more commonly, moved on to talk of other things. The claim that financial markets make the best possible use of economic information, and can never be subject to irrational bubbles, is rarely made, and usually hedged with all kinds of qualifications and escape clauses.

But habits of mind and thought are hard to change, especially when there is no ready-made alternative. The ideas that brought the global financial system to the brink of meltdown, and have already caused thousands of firms to fail and cost millions of workers their jobs, still underlie the thinking of those who are trying to respond to the crisis and, to a large extent, of the commentators and analysts who assess those responses. These ideas are neither alive nor dead; rather, they are undead, or zombie ideas. Hence the title of this book.

If we are to understand the financial crisis, and avoid the kinds of responses that set the stage for a new and even bigger crisis in a few years time, we must understand the ideas that got us to this point. This book describes six ideas that have played a role … Some of them, like the Efficient Markets Hypothesis and Micro-based macroeconomics belong to the realm of technical economic theory. Others, such as privatisation and central bank independence are specific policy prescriptions, ultimately derived from these abstract ideas. Still others like the Great Moderation and Trickle-down economics, are catchphrases that incorporate a set of claims about how the economy works, or worked in the thirty years or so before the current crisis.

Together these ideas form a package which has been given various names: : Thatcherism in the United Kingdom, Reaganism in the United State, economic rationalism in Australia, the Washington Consensus in the developing world and “neoliberalism’ in academic discussions. Most of these terms are pejorative, reflecting the fact that it is critics of a dominant theoretical or ideological framework who feel the need to define it and analyse it. Politically dominant elites don’t see themselves as acting ideologically and react with hostility when ideological labels are pinned on them. From the inside, ideology usually looks like common sense.

The most neutral term I can find for the set of ideas described by these pejoratives is ‘market liberalism’, and this is the term that will be used in this book. [fn1]

The book is organised in a way that I hope will help readers to understand how market liberalism depends on ideas that have failed the test of the global financial crisis, and which, if they continue to influence policy, will ensure a repetition of the crisis. Each chapter starts with a section describing the beginnings of the idea, followed by a section on its theoretical and policy implications. The next section describes the failure of the idea. In most cases, problems were evident well before the current crisis, but those who pointed them out were dismissed or ignored. The final section, entitled “What next”, looks at alternative ideas that may point to an alternative to market liberalism. The final chapter, “Economics for the 21st Century” looks more generally at the kind of policy ideas that will be needed in the light of the failure of market liberalism. A simple return to traditional Keynesian economics and the politics of the welfare state will not be sufficient. It is necessary to develop both economic theories and policy programs that respond to the realities of the 21st century economy.

1. There’s a similar problem of terminology on the other side of the debate. The success of market liberalism was the result of a reaction against a set of ideas and policies commonly referred to as “social liberalism” or “social democracy” in Europe and simply as “liberalism” in the United States. The distinctions between the positions implied by these different labels will not matter for the purposes of this book. What matters is that all of them included a commitment to full employment, based largely on Keynesian economic management, and a major role for the state in the provision of income security and services such as health and education.



mike huben 08.17.09 at 11:15 pm

Some other candidate synonyms for neoliberalism you might include are Manchester liberalism and classical liberalism.


quanticle 08.18.09 at 12:02 am

The only thing that can kill off an idea is an even more powerful idea. That is why ideas (especially seductive ones like the Efficient Market Hypothesis) live on for so long after their falsity has been shown. In the absence of a new idea that explains the world as simply and elegantly as the old idea, people continue to act in accordance with the outdated idea, even when its shortcomings have been amply demonstrated.

EMH will live on until some other idea that can be summed up in a pithy one liner comes along to replace it.


Moby Hick 08.18.09 at 12:59 am

I had the best subtitle ever, but I couldn’t post it last night and now I’ve forgotten.


Sandwichman 08.18.09 at 2:21 am

What I was trying to say, before you ran out of disk space, was “what if these aren’t ‘ideas’ at all but the verbal equivalent of Masonic handshakes?”


Martin Bento 08.18.09 at 2:59 am

“If we are to understand the financial crisis, and avoid the kinds of responses that set the stage for a new and even bigger crisis in a few years time”

I think there’s a verb problem here: do you mean “will set”? “may set”? Or are you unequivocally predicting another crisis in a few years.


Substance McGravitas 08.18.09 at 4:22 am

Punchy and clear. The only thing that threw me a little was in Before the global financial crisis ideas like the where non-jargon-familiar-me wondered a little about what the global financial crisis ideas were.


floopmeister 08.18.09 at 5:11 am

Zombie Economics: Six Dead Ideas that Want to Eat Our Brains
Zombie Economics: Six Dead Memes Walking


LFC 08.18.09 at 5:17 am

Most of these terms are pejorative, reflecting the fact that it is critics of a dominant theoretical or ideological framework who feel the need to define it and analyse it. Politically dominant elites don’t see themselves as acting ideologically and react with hostility when ideological labels are pinned on them. From the inside, ideology usually looks like common sense.

I see what you’re getting at here, but surely Thatcher, Reagan et al did have some label(s) for their perspective — it’s just that those labels were intended to be positive in tone, e.g. “free market capitalism”. As to whether politically dominant elites see themselves as acting ideologically, it depends — some (perhaps many) of those running the show see “ideology” as a pejorative word, but not all do. Not that long ago Alan Greenspan, iirc, told a congressional committee that “everyone has an ideology” — possibly the only time I’ve agreed with something Greenspan has said.


Martin Bento 08.18.09 at 5:36 am

I don’t think “Reaganism” and “Thatcherism” are necessarily pejorative. After all, both, especially Reagan, still have many fans, and they couldn’t accept those as pejorative terms. People will react to those terms as they do their namesakes.


Tracy W 08.18.09 at 8:17 am

Their advocates dominated mainstream economics and their influence, acknowledged or not, guided the thinking of the practical men and women

So now we have unacknowledged influences. So even if you can’t actually dig up any reference by the proponents of idea x to saying that their thinking was influenced by EMH, or the Great Moderation, you can still assert that idea x was influenced by them. Is there any evidence that could convince you that EMH was not the driving idea behind privitisation?

And the idea that the Great Moderation was behind Thatcherism and Reagnomics makes me smile. The Great Moderation, at least as is typically defined, is that in 2001 Blanchard and Simon noticed since the mid 1980s the volatility of a number of economic variables had declined substantially. And this idea got more famous in 2004 with a speech by Bernake in 2004 – see
As Thatcherism dates back to the 1970s and Reaganomics to about 1980, to attribute those economic packages even in part to the Great Moderation implies that you believe that the Great Moderation is so powerful as an idea that it not only lives on after its death, but could also reach back before its birth. Zombies look pathetic by comparison. What name could you use instead for the title of your book? Terminator Ideas perhaps? (I’d suggest Skynet, but I think it lacks the name recognition of Terminator.)

. The claim that financial markets make the best possible use of economic information, and can never be subject to irrational bubbles, is rarely made, and usually hedged with all kinds of qualifications and escape clauses.

Oh Dr Quiggin, you were doing so well. If the strong form of EMH is true, it implies that financial markets make the best possible estimate of future flows given existing economic information. As you said in a previous comment. And now you’ve gone back to claiming that EMH implies that financial markets make the best possible use, but of course “best possible use” requires value judgments which Fama’s EMHs just didn’t make. There’s a big philosophical difference between the technical process of getting the best possible forecast and the more subjective issue of what decisions to take. For example, the NZ government uses information about fish numbers in setting the fishing quotas, whether this is a better or worse use of that information than what financial markets do with it depends not merely on the truth or falsity of the various forms of the EMH but also on other, more subjective issues, like how much value you place on fish species’ existance.

Together these ideas form a package which has been given various names:

I don’t have any evidence to hand for the thinking behind those packages. But in NZ, as far as I can tell, EMH was at best only part of the thinking behind Rogernomics, and the Great Moderation was not mentioned at all, which makes me deeply skeptical that those ideas were important in Thatcherism, Reaganomics or Australia’s economic rationalism. To repeat the quote I gave before:

Officials, most notably within the Treasury, were also intensively following developments in microeconomic theories concerning public choice, market competition and governance: contracting issues including property rights, asymmetric information and transaction costs and institutional economics more generally.

page 7 of the pdf, page 1863 of the Journal of Economic Literature, Vol XXXIV (December 1996).
This paper was written by Lewis Evans, Arthur Grimes, Bryce Wilkinson and David Teece, and should be right on what NZ officials were thinking at the time, as Bryce Wilkinson was one of those officials at the New Zealand Treasury. Nothing in there about EMH or the Great Moderation. Although of course now we’ve introduced the idea of time travel all bets are off. Perhaps the Great Moderation sneaked in while the article was at the printers and edited it to disguise its and the EMH’s tracks?


P O'Neill 08.18.09 at 8:26 am

The zombies fight back —

The fourth, and biggest, implication of a recession that ends now is that the obituaries written last year for liberalism, for the 30 years of policy domination by the ideas of Reagan and Thatcher, will prove premature. The state has been back only as an emergency rescue service, albeit a vital one, and governments in Europe and America will sell nationalised banks and other assets at the first opportunity, and cut public spending wherever they can. Financial regulation will be tighter at the end of this crisis than at the start, but even Friedrich Hayek, Lady Thatcher’s guru, would not quibble with that.


John Quiggin 08.18.09 at 1:39 pm

@Tracy, as you must surely be aware, NZ had its own version of the Great Moderation. Every three or four years during the period of Rogernomics, its advocates announced that the hard slog was now over and that a period of boundless growth and prosperity was underway. Every fifth year or so, the economy fell in a heap. I must say, I’m surprised that any New Zealander still buys this stuff.

More generally, it’s pretty obvious that the Great Moderation is an ex post claim about the success of market liberalism, and therefore can’t have been a motive for its adoption. I don’t think any reader except you has a problem with this, so I’m going to leave the text as it is.


Donald Johnson 08.18.09 at 3:23 pm

Unless your book leads to the demise of Tom Friedman’s reputation as a globalization expert I just don’t see the point. There is no room for subtlety or pious hopes that mere reason will do the trick or that people will read your book and understand that each and every page is like a dagger driven through his heart. Ending each chapter with Friedman delenda est would go a long way to assuaging my concerns.


Trevor 08.18.09 at 3:49 pm

+1 sandwichman!


Tim O'Keefe 08.18.09 at 8:00 pm

If they’re zombies,shouldn’t that be “Six Undead Ideas”? They should be safely in the grave but aren’t. That slight tweak to the subtitle will also boost sales among the AD&D crowd.


ogmb 08.19.09 at 10:40 am

Zombie Economics → Zombienomics
Six Dead Ideas → Six Undead Ideas
that Threaten the World Economy → that Continue to Haunt the World Economy


JoB 08.19.09 at 1:10 pm


FWIW, the improvements are many and you’d have me almost interested in reading the rest of it. Thanks for taking the risk of listening.

No time to shorten it but on the title you seem to have your zombie-stuff quite wrong. So: what ogmb said and “Six vampiric ideas that are sucking the life out of the world economy.”

Combine that with a cartoon of a wooden stake that is shoved through the heart of …. and you’ll have the press attention that any new book requires.

(don’t know whether you’re strict dualism between neo-liberalism & social democracy will ever work though, it’s strictly speaking not true, it’s a Hegelian delusion, something stuck in Kuhnian paradigms — surely neo-liberalism and social-democracy have a common ancestor in political liberalism (which also explain all the name confusion) & surely the essence of the commonality is to be kept — I personally am emphatically committed to as little employment as possible and you will find that this is, however much forgotten, a common theme on the left; employment & its necessities being typically a very right wing reflex)


Bob B 08.19.09 at 2:16 pm


Highly recommended: Kenneth Rogoff on: Why we need to regulate banks sooner, not later, in Wednesday’s Financial Times:

Rogoff makes a very persuasive case for tougher regulation of financial institutions notwithstanding orchestrated howls of anguish about the loss of innovation and competitiveness this would inevitably lead to.

Rogoff also – persuasively – rejects the lament, popular in some quarters, that if only Lehman Bros had been bailed out last September the subsequent recession induced by the financial crisis would have been much less severe.


Tracy W 08.19.09 at 4:40 pm

I notice that you didn’t answer my question as to what evidence could possibly convince you that EMH was not the driving idea behind privatisation.

Really, I don’t get why you are so convinced that Fama’s EMH was a driving idea behind privatisation. Take the rule you proposed earlier, that markets are great for making short-term economic decisions but governments should be involved in long-term ones. Say you’re the new government minister in charge of state-owned enterprises, and you’ve decided that an economic activity that the previous government had under state control should be privatised because the decisions were relatively short-term and it’s not a natural monopoly so there would be plenty of competitive pressures, and so forth through whatever other considerations you have in mind. And I’ll explicitly add the assumption that Fama’s semi-strong-form of the EMH is false. So, if you privatised the activity and the new company was traded on the stock market, then couldn’t the government make a profit trading that company on the stock market, and thus increase its return on government workers’ pensions? Now perhaps there’s some problem with that final argument, perhaps you think the government traders would be subject to whatever cognitive or market flaws that stop the semi-strong EMH from being true, perhaps conflict of interest concerns prohibit trading, etc. But at most these other considerations mean that the falsity of the semi-string form of the EMH is irrelevant to the decision of whether to privatise or not. But I can’t see how the falsity of the semi-strong form of the EMH argues against privatisation.

2. Yes, I agree entirely with you that the Great Moderation claim couldn’t have been a motive for its adoption. I assume that you are writing this book in order to try to convince people who are emotionally opposed to you, like me, and not merely those who already agree with you. If I can mock your arguments based on time periods, so can other reviewers, and use this as a reason to dismiss your ideas. Why not, pre-publication, take advantage of my animosity to improve the clarity of your arguments and writing?

Also, part of the reason I mocked your introduction was that I suspect many readers do not have a time series of economic policy ideas in their head (I had to look up the history of the Great Moderation myself). If you write like the Great Moderation was an idea behind Thatcherism, Reaganism, etc, my experience of tutoring in history, maths and economics, is that a non-zero number of readers will believe that it was.

I do hope that you have taken advantage of me enough to change your discussion of the EMH from “best possible use” to “best possible estimate”.

3. The Great Moderation is a specific claim about observed historical volatility. Assertions made about NZ’s economic future were, at the times they were made, predictions. Observing history is different from predicting the future. So nope, the two don’t strike me as the same. Are you arguing that people like Oliver Blanchard and John Simon miscalculated the volatility rates? Or that the US statistics department, and other relevant countries’ departments have revised their historical series so that the Great Moderation, as a statement about the history, is now false? (Both are of course possible). Interpretations of why the Great Moderation can of course be wrong, especially with the inability of macroeconomists to do controlled experiments on the global economy, and what you see in the past can be affected by what you expect to have happen in the future, but still observations of history are different to expectations about the future.

As for statements about the economic future in NZ, I recall the NZ 1999 Labour Government coming to power promising to return NZ to the top half of the OECD per capita GDP tables by 2010 by stepping away from that nasty economic liberalisation and embracing the mixed economy (see, the 2010 date was quietly dropped shortly after election but see for a relatively-left wing source of the claim). I don’t see any sign of that goal happening. Somehow I suspect that this is going to make absolutely no difference to your opinion of mixed economies.


urgs 08.19.09 at 10:20 pm

No chance for a shorter title? Two words could do. Neoliberal disaster for example.
Not that i would agree with the idear that emh is somehow at the core of that ideology.
On the contrary. How is anybody supposed to believe stock markets are efficient and at the same time believe the market for investment products is efficient. Neoliberals in my expirience are almost always on the equity markets are inefficient camp.


John Quiggin 08.19.09 at 10:34 pm

Tracy on #2, I’m writing to convince people who want to understand why these ideas have failed, not people who resort to obviously silly quibbles about timing to save themselves the trouble. But again, if you’ve managed to keep the faith while living in NZ, you must have some strong defences.

As regards both privatisation and the Great Moderation, if you waited until you read the chapters rather than misreading a short introduction, you’ll see that these points have been anticipated.


Tracy W 08.22.09 at 10:11 am

Hmm, two personal attacks, and you still haven’t answered my question about what evidence could convince you that EMH was not the driving idea behind privatisation. The reason I keep asking this is that unacknowledged or subconscious motives or influences often turn into a hypothesis that is non-falsifable (see full-blown Freudianism).

As for your structure of your intro, well do as you wish, it’s not like I could stop you anyway.

On the topic of the Great Moderation, and privatisation and so forth, well patience is not one of my virtues, so while I wait for the happy day in which you get to those chapters I will occupy my mind and fingers by putting down thoughts on what you have written as they occur to me.


Bunbury 08.24.09 at 10:53 am

The second paragraph of this from Robert Lucas in The Economist looks like a good example of someone who matters continuing to maintain that the EMH is still a sound and sufficient basis for making policy decisions.

Over the years exceptions and “anomalies” have been discovered (even tiny departures are interesting if you are managing enough money) but for the purposes of macroeconomic analysis and forecasting these departures are too small to matter. The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.


John Quiggin 08.24.09 at 11:16 am

Tracy W, as I think I mentioned, there will be a chapter on privatisation. FWIW, I agree that the main motivation for privatisation was a desire to get access to a large pot of cash that could be used to buy political support, give out favours to financial sector firms in return for cushy post-political careers and destroy public sector unions.

But, as I will spell out in more detail in the relevant chapter, the theoretical case for privatisation depends on the EMH, even if neither you nor the people who implemented the policy understand this. As a sketchy outline, if you buy the EMH, then the required rate of return to public investment must be the risk-adjusted private rate, and (assuming in addition that operational efficiency in the private sector is at least equal to that in the public sector) privatisation must yield a net benefit.

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