David Warsh's Economic Principals Gets It right

At last some sensible comment and analysis of the so-called ‘bail-out’, which too many serious economists are treating as a test of one’s virility as free-market economists, as if these irregular events are final proof of the need to call for government passivity and trust in markets to correct with all the brutal force of unforgiving militants for laissez-faire, while others from the left, the doomsday environmentalists (often with a marxist tinge), and the 'we are doomed' fringe, see their chance to extend government into ever greater roles in place of markets.

I refer to the article, The Enormous Bodkin, by David Warsh, of Economic Principals, (subscription) which gives an historical slant to the current problems, while showing that mostly the economics profession, as trained in the past thirty years, is not treated to any passing familiarity with the nature and causes of ‘the cycles of manias, panics and crashed that have been a familiar feature of global capitalism since its emergence in the seventeenth century’. Indeed, as David Warsh shows, leading introductory textbooks scarcely mention them.

I shall make one small quotation from Economic Principals (with apologies to David Warsh for doing so without his permission as the copyright owner):

“This is not the bankruptcy of modern economics, as my friend Robert Samuelson put it the other day in Newsweek, a shattering of the conceit that the problem of stability had been solved once and for all. Economists have done pretty well at stitching the global economy together these last thirty years, during a period of unprecedented growth. The failure to give recurring financial crises a more prominent place in its undergraduate texts is, however, somewhat embarrassing, or so it seems to me. Kindleberger was of the opinion that both Keynesian orthodoxy and monetarism were incomplete because they left out credit cycles altogether (he was writing in the mid ’70s, remember). He was right. Last summer, Olivier Blanchard, of the Massachusetts Institute of Technology, now serving a stint as chief economist of the International Monetary Fund, observed in a survey of macroeconomics that the New Keynesian orthodoxy that, for the past twenty years or so had constituted the mainstream textbook view, had, with respect to asset prices, fallen “short of the mark.”

It had become vividly clear, he wrote, that financial institutions do matter, and that shocks to their capital or liquidity positions can be potentially seriously damaging to macroeconomic health. Research on credit and financial markets was proceeding vigorously, though, Blanchard concluded, and “one can be confident that progress will happen rapidly.”

It can’t happen too quickly for the next editions of those introductory texts.”

Comment
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