Constructing the Keynesian Narrative -- Joe Stiglitz Edition

|Peter Boettke|

I have said before, and I will say it again, to economists of my generation Joe Stiglitz is a towering figure in economic theory.  But despite my great respect and admiration for his intellect and the argumentative strategy that he pursued with respect to the Walrasian system, my judgement has always been that he missed the mark in his analysis of the market process and underestimated the public choice problems that his alternative political-economic systems architecture would have to confront in theory and practice.  Make no mistake about it, an individual can be brilliant, perhaps even a genius, and be brilliantly wrong.  That is, in my humble opinion, what you have with Joe Stiglitz -- a brilliant but wrong thinker.  This stands out nowhere as obvious as in his efforts at applied political economy and policy relevant analysis of contemporary affairs.  There is no doubt that he stitches together facts of the world, but the narrative that he weaves in the stitching is wildly off the mark.  I would argue this is what you see again in his essay "Stagnation By Design."

Since 2008, and before, he has been constantly complaining about neo-liberal policy and how its lack of attention to the appropriate regulatory framework and disregard for fundamental policy priorities has produced the mess we are in.  In fact, he made the argument very simply even while he was in positions of tremendous political power in the Clinton administration and at the World Bank --- if only the world would listen to me, and engage in the appropriate interventions then the mess would be avoided.  But who were the so-called neo-liberals that weren't listening to him?  What neo-liberal thinker had the same powerful positions that he held?  Did F. A. Hayek or Milton Friedman actually come back from the grave to serve as head of the CEA or as Chief Economist at the World Bank?  Or did all this disruptive inequality and global imbalance happen on the watch of other thinkers.

The current mess in the US is six decades in the making, as Laurence Kotlikoff recently explained in an EconTalk episode with Russ Roberts.  The promisory politics that exploded after WWII can be, as James Buchanan has explained, rests completely with the Keynesianism --  Download Buchanan- Keynesian Follies.

Keynes, in Buchanan's alternative narrative, was an artist who sought to change the perception of his professional peers and policy makers during extraordinary times.  In the US, this led to the suspension of the ordinary institutions of politics during the Roosevelt administration, as the normal checks and balances on political power were relaxed.  The real damage, however, was the extension of Keynes's artistic impression of the workings of the economy and the polity in extraordinary times to the operation of economic policy and the polity in ordinary times.  The Keynesian confusion of "art" as "science" in the economic picture that Keynes drew is the culprit.  A narrative was thus constructed.

Stiglitz is the artistic grandchild of that Keynes picture.  As he says in this latest essay: "Markets are not self-correcting."  There is no subtley in such sentiments about the workings of the economy and the institutional framework within which they operate.  Stiglitz's only conclusion is that without the guiding hand of the state, economic disaster looms around each and every corner.

The mainline economists response is not to insist that markets always clear, but instead to explain the variety of economic forces at work under alternative institutional arrangements; to challenge analysis based on assumptions of either omniscience or benevolence; to explore the multiple margins of adjustment that economic actors engage in while attempting to coordinate their plans with one another in the face of changing circumstances; and to construct arguments about what constitutes a robust political economic system rather than a fragile one subject to volitility, disruptions and social strike.  What institutional arrangements can produce peaceful cooperation and productive specialization among a diverse set of individuals?; that is the question that drives the mainline economist.  Rational choice theory provides the argumentative structure, but it is at the institutional level of analysis where the argumentative burden rests.

Stiglitz is right to stress that bad ideas result in bad public policy which in turn results in bad economic, political and social outcomes.  But, Stiglitz has misidentified what the bad ideas are, and his narrative mischaracterizes the nature of public policy for the past 6 decades and in particular the last 2 decades.  We have not experienced a period of neo-liberal neglect and arrogance, but instead a waffling back and forth between conservative and liberal Keynesianism guided by an illusion of an artistic rendering of economic and political life.  This has been the public policy hegemony for the past 60+ years.  It is time that this alternative narrative be listened to, rather than the same old story that emerged from the Keynesian follies so many decades ago.

Comments

[Sabhlok]

A "brilliant" mind (Stiglitz, allegedly) that can't comprehend the failures of government is hardly brilliant, is my view. Arrogant, yes. Brilliant? No.

[Jim Rose]

great post. As for central banks, as Greg Mankiw noted in a great 2006 JEP article:
• Autobiographies and other hands-on sources show that recent developments in business cycle theory by new classical and new Keynesians have had close to zero impact on practical policymaking at central banks.

• Central banker’s analysis of economic fluctuations and monetary policy as discussed in their autobiographies are intelligent and nuanced, but it shows no traces of modern macroeconomic theory, and would seem almost completely familiar to someone who was schooled in the neoclassical-Keynesian synthesis that prevailed around 1970 and has ignored the scholarly literature ever since.

[Roger McKinney]

There is a great difference between intelligence and wisdom. One can be highly intelligent and have no wisdom. To paraphrase Hayke, intelligent people think too highly of intelligence, believing it gives them control over things they can't control.

The best argument against Stiglitz is the Great Depression. No depression in US history lasted as long or went as deep in spite of massive government intervention. The Great Depression is a second example of the failure of intervention.

Of course, mainstream economists would say those are examples of market failure, but they need to explain why markets worked so much better the century before the Great D. The only unique aspect was government and Fed intervention.

And they have said that both would have been worse without state intervention, but it's not likely that the Great D could have been worse, and they don't know that the Great Recession could have been worse. It could have been better without the intervention.

Economic history contradicts mainstream theory, but they don't know economic history.