The acorn from which a mighty economics grew…
It is worth asking why central bankers so misread the credit boom. Unlike the bankers and the rating agencies, which stood to make millions from their error, the guardians of the credit system had no evident conflict of interest. And it simply isn’t good enough to suggest the bubble was hard to spot. Many more humble analysts and economists managed it.
No, argues Edward Chancellor in his essay for the latest issue of Prospect, the reason the central bankers failed was not that they were blind, conflicted or stupid. It was because they were, to quote John Maynard Keynes, the “slaves of some defunct economistâ€â€”in this case Milton Friedman. Our central bankers were drawn from a generation of economists who have been taught that financial markets tend towards equilibrium, that credit and asset price bubbles can be safely ignored, that international capital flows produce an optimal distribution of capital and that financial innovations are always to be welcomed. It is this intellectual enslavement that has taken us to the brink of the severest debt deflation since the 1930s.
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It seem’s everyone’s boarding the ‘we hate Milton Friedman’ bandwagon started by Naomi Klein hilarious work of fiction, ‘The Shock Doctrine’.
Sir, I have several serious objections against Chancellor’s arguments:
- Greed is not an important argument to require explicit opposition – if it were to be taken seriously, it would be necessary to distinguish between the constructive greed of capitalists and the destructive greed of rent-seeking managers.
- The attack on bubbles is not very smart either. It is a variant of the old argument for anti-cyclical policies that in most cases, because of ignorance and political decision delays, turned out to be pro-cyclical (the failures of Swedish anti-cyclical policies are nicely documented by Assar Lindbeck). That some guys ex post turned out to have known that something was a bubble is no good argument: others did not know it, and still others cried “bubble” when there was none – by the way, Greenspan did this several times, so Chancellor is entirely wrong accusing him of never warning against bubbles!
- In general, I am afraid that Chancellor’s thinking is blurred by his hatred for Friedman, which he shows by calling Friedman “über-economist” (as I noted in his curriculum, he has not even studied economics, only history). This hinders him from intelligently distinguishing the many points on which Friedman was right from those on which he may have been mistaken.
Pavel Pelikan
Professor, Department of Institutional Economics
Prague University of Economics, Czech Republic
The Shock Doctrine is indoctrinate. I’ve found the PBS feature “Commanding Heights – The Battle for the World Economy” a nice antidote.