Why Liberal Economists Dish Out Despair
By Gerald Friedman
APR 20, 2016 | MACROECONOMIC THEORY | HISTORY OF ECONOMIC THOUGHT | INSTITUTIONS, POLICY & POLITICS | REINTRODUCING ECONOMIC THEORY
How Gerald Friedman’s assessment of Bernie Sanders economic proposals prompted a rare public political spat among economists:
The angry reaction to my report revealed that by some combination of rationalization and the dominance of neoclassical microeconomics since the 1970s, liberal economists have virtually abandoned Keynesian economics, which supported the notion that governments can and must intervene in the economy to ensure the best results for society. These economists went back to pre-Keynesian thinking, where price fluctuations are supposed to equilibrate supply and demand at full employment with an optimal distribution of good and services. The very suggestion that government action can result in increases in growth rates or wages is now taken to be obviously wrong. Adopting the language of neoclassical micro welfare economics, everything is already as good as can be — all that government can do is to make it worse. Criticisms of the orthodox model and its policies are deemed worthy of scorn, to be dismissed tout court because they are obviously at variance not only with textbook economics, but with what we need to believe to rationalize failure.
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But what if they are wrong? What if government action could, in fact, raise growth rates or narrow disparities? What would be the expected value of a higher GDP growth rate? Would it be worth some academic debate, even if it leaked into the public realm? Might this debate even serve a socially useful function by giving voters an alternative to the xenophobic political economy of Donald Trump? Many Americans believe that government action can improve economic conditions, especially for workers, and many of these support Trump because they see him as the only candidate who is even willing to consider government action to help working Americans. These voters can look long and hard at the “responsible” Clinton platform for some policy, for any policy to raise growth rates and narrow income disparities. But they won’t find it, because policy elites have closed their minds to the possibility of change.
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Controversy reflects the disagreements and uncertainty that alone can lead to intellectual progress. It is time to inject some of these into orthodox macroeconomics. We have been ill-served by a smugly sure macroeconomics both in imagination and policy. Amazingly, the crisis of 2007-9 has left intact the dominant pseudo-Keynesian orthodoxy; maybe the kerfuffle around my report will help to open some space for constructive dialog in a profession that has clearly grown too complacent.
(Read the article. There has been cross-pollenation between the schools after the fire burned out.)
