What Spins our World: Schools of Thought

The Wall Street Journal ran a full-page interview with Robert E. Lucas, Nobel Laureate of 1995, on 26 September (p17). The article was written by Holman W. Jenkins.  The headline emblazoned above the piece is “Chicago Economics on Trial”.  Instead, given the current travails of the developed economies, perhaps to be joined by the developing economies, it seems that it is macroeconomics that is subject to scrutiny, and not just one branch thereof.  Applied microeconomics and industry economics is flourishing and in great demand in both the public and private sectors.  Or, as Hazel Henderson puts it, “Economics can be useful at the micro-level, but macro-economics has failed and is in disrepute. Economics' focus on money transactions – only one form of wealth – misses all the others”. Hazel Henderson, “From rigged carbon markets to investing in green growth”, real-world economics review, issue no. 57, 6September 2011, pp. 83-89,   

http://www.paecon.net/PAEReview/issue57/Henderson57.pdf  

We will return to topics raised in her excellent and thought provoking essay in a future post.

However, a cursory glance at the reasons for the financial meltdown of 08/09 (toxic securities that packaged together sub-prime mortgages and which turned out to be much more risky than purported to be by the rating agencies and the organisations that sold them) and the present financial fragility (less than transparent accounting practices in Greece which resulted in the public sector deficit being substantially understated, misleading investors who bought the bonds), it’s not entirely clear that these failings can be laid at the door of any particular theoretical approach to economics.    

I wrote one of the dissertations for one of my Masters degrees on Robert Lucas’s classic paper, Expectations and the Neutrality of Money. At the time, I was attempting to demonstrate that one could generate Keynesian-type results and macroeconomic failures from a framework that incorporated the essential features of Chicago school economics, and in the process demonstrate a role for effective activist macroeconomic policy. Although Lucas has been at the heart of the Chicago school of thought and thus inhabited a different intellectual universe from my professors at Cambridge, they were mildly complimentary about him. They noted that he had set out the position of the competitive markets/rational expectations school of thought in an elegant, mathematically refined way and with sufficient clarity that it was possible to engage in sensible academic debate with him.  Did that constitute damning with faint praise? Perhaps.  Nevertheless, the WSJ article quotes N.Gregory Mankiw of Harvard as calling him the “most influential macroeconomist of the last quarter of the 20^th century. 

Rather disappointingly for the mostly sober Journal, the article attempted to put a somewhat sensationalist spin on the interview.  For instance, although Lucas appears to have desisted in commentating on what policy recommendations he would currently have for President Obama, the Journal article interprets him as saying “(i)f you want to stimulate growth in investment, productivity and income, cut taxes on capital”!  There is also a rather reckless section in which the writer seems to attribute the failure of the American economy to fully recover from the 08/09 recession to expectations people have and the way these interact with government policy.  That may be so, but, as Lucas himself notes, there’s no evidence to be found in any of the data that can be deployed to support this position at this stage.

What is refreshing about the article is that it reflects just how progressive many of Lucas’ current viewpoints and interests are. This would come as a surprise to some of the more outspoken critics of the Chicago school, who tend to portray them as people who, given half a chance, would have your children working in sweat shops building trainers serving the greater good of efficient markets. By contrast, Lucas worries about the gender pay gap – how high tax rates militate against married women entering the labour force as second earners.  His parents were active in civil rights causes, and it was in their honour that he elected to vote for Obama in 2008. He felt that electing Obama helped to eradicate the stain of racism on US history.  Moreover, although critical of aspects of President Obama’s current policy direction, he supported the initial measures undertaken by the Federal Reserve and the Federal Government to stimulate the economy out of the doldrums of the 08/09 recession.   He also has complimentary things to say about Clinton-era economic policy and viewed Obama’s Republican challenger for the White House in 2008 as clueless about matters economic.

If you are reading this blog hoping to encounter unwavering adherence to any particular school of thought, you’ve come to the wrong place.  Often the different schools build models that are designed to answer different sets of questions. We do hope though to carry occasional posts from “Parson Malthus” in California, who, as his nom de plume suggests, is a pretty firm adherent to that particular Malthusian paradigm.  We don’t necessarily share that perspective, but we do seem to have the same objectives in mind.  Which is to articulate a progressive perspective on environmental matters generally and climate change in particular, but also in such a way that the interests of the more vulnerable members of society are recognised and expressed.