One of the most famous passages in economics writing — at least if you’re an economist, as opposed to a policy maker — is the conclusion of Keynes’s General Theory, on the importance of economic ideas:
But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
But watching the current policy debate, I wonder if Keynes was too optimistic here.
I’ve noted before that these days policy orthodoxy seems, all too often, to be derived from highly heterodox models — or to put it more clearly, perhaps, the “radicals” are people like me who basically want to apply texbook macro, while Very Serious People are seizing on all sort of odd ideas about expansionary austerity and such to justify their views.
The new hysteria over the dollar is another example. The standard workhorse model of international is Mundell-Fleming, with maybe an update to reflect Obstfeld-Rogoff; this model does not at all justify huge fears about the consequences of currency depreciation. And in this case I don’t even think there’s an Alesina equivalent — that is, a study that claims to find evidence for the heterodox things VSPs believe.
This is just pure prejudice, unsupported by theory or evidence. And yet it’s quickly hardening into orthodoxy. What role, then for academic scribblers?
Keynes didn’t say that good ideas would prevail over bad. He said that ideas were more important than interests.
And his argument makes sense. If people don’t have some idea about how the world works, how do they decide which policies serve their interests best?
But, apparently, IS-LM is no longer taught in many US econ programs, at either under or post grad level.
So what you regard as heterodox is actually orthodox in many US institutions.
Given the very large numbers of “academic scribblers” out there and the broad diversity of ideas, Keynes is practically stating a tautology. It is surprisingly difficult to think of anything that has never been scribbled about before.
Needless to say, the “Madmen in Authority” have no difficulty selecting and hiring their own set of academic scribblers to tell whatever story they see fit. Most typically they pick up the threads of authority from previous madmen, and often the ideas and the scribblers just come with the territory.
My observation of “Madmen in Authority” is that they follow a fairly simple algorithm searching for techniques to extend their authority; and that’s about all they do because that’s about all they are good at. Their model of how the world works consists of which people are more powerful, and which people are less powerful… and it’s a simple model, and an incomplete model, but it’s a model that has stood the test of time.
Part of the process involves just throwing stuff at the wall to see what sticks, and part of it involves peeking around at what seems to be working for the other guy. Keynes got popular primarily because he offered governments justification for running big deficits, thus removing one particular constraint that had previously limited authority. Other scribblers such as Marx offered promise of authority to certain people who had not had their share of authority but figured they would like it. More conservative scribblers merely support the status quo and thus make themselves attractive to those who already have authority and would like to keep it that way.
Hmmm, well ideas like “balancing the budget” are not exactly radical and new (perhaps they seem that way from our current perspective). The Romans wrestled with problems like currency debasement, inflation, and government deficits, and that was 2000 years ago. I would argue that the idea that what goes in also comes out is possibly one of the oldest concepts in human history. Even the alchemists attempting to turn lead into gold clung to the principle that it was more plausible to start with something tangible, if you wanted to finish up with something tangible. For example, they didn’t attempt to turn air into gold.
As for Krugman’s dollar article:
So low interest rates are a market-based indicator showing that the bond market is safe and sound? That’s great news.
Oh, so low interest rates are actually driven by Fed QE policy? Errr, that would mean that this is not a market-based indicator, and so I guess QE just hides the bond market problems. Cancel celebrations.
The REER graph shows no long term trend, and that’s because REER has been adjusted for inflation, and to see what’s going on you need to put it alongside a graph of those inflation adjustments. Doubly so when the inflationary effect of QE is the thing that most people are worried about. Krugman presumes most of his readers won’t think too hard about this, and the sad thing is, they won’t.
Smoke and mirrors, dancing faster and faster.
Wait! Krugman is not a Very Serious Person, and here’s silly me trying to take him seriously. Krugman you sly old joker, you got me a beauty. After all these years I’m finally hep, Krugman’s column is a parody of economics. Sheesh, please tell me I’m not the last guy in the room to cotton on.
I agree with Tel that which academic scribbler people adopt is indeed influenced by self interest (often unconscious). It’s not only in the sciences that ideas only propagate when the time is right for them – a point that Keynes missed. I’m surprised to hear such a thoroughly Marxist view (“environment determines consciousness” and this is what determines the dominant paradigm) coming from Tel, though.
May I suggest, though, Tel that if you’re a follower of the “they’re only saying that because ….” school you also apply it to the influence of freshwater economists? Who gains and who loses by a view among VSPs that government is impotent to influence the economy, and especially distribution of resources, because the economy is always at an optimised equilibrium? I reckon an old-fsahioned Marxist could give you a very convincing answer.
BTW, your bit about balanced budgets shows you haven’t fully understood the nature of saving and the way it can, within limits, shift intertemporal allocation. Back to the theory textbooks for you Tel – non-Marxist ones in this case. Keynes might be a good start.
I do believe you unfairly characterise my ideas as old fashioned conservative, merely because I pull examples out of a history book now and then. Under Feudal Law the King is always appointed by God, for the simple reason that an all powerful and universally just God would never allow a wrongful King to occupy the throne. If you have any questions about the matter, just ask those academic scribblers in the Church who will explain it to you (or burn you for your own good, to save your immortal soul, whatever turns out to be more convincing).
Darwin, took a step further and applied the same rule to all living things, but for intellectual consistency it would be silly not to apply it to ideas as well.
Marx made some quite reasonable observations regarding what happens when a system becomes it’s own justification. Unequal bargaining power results in inequitable bargains. The Bible says, “Blessed are the meek for they will inherit the Earth,” but the meek are expected to wait around until doomsday for their payoff. Marx impatiently encouraged the meek to rise up in revolution, meekly overthrow their King. The King deserved every inch of beating that he got because the beating was handed out by God himself (see Feudal Law, rule #1 above). The revolutionaries deserved what they got too, after Stalin finished teaching a long and painful geography lesson to some Germans, followed by teaching a long and painful statistics lesson to some useful idiots, it occurred to whoever was left that their new ruler had also been appointed by God (just like all the others).
The right wing say, “The king is dead, long live the king,” and they try to make something positive of it. The left wing say, “In with the new boss, same as the old boss,” with their usual grump. At least the Libertarians have some concept of how to measure progress: by examining the forces that limit the power of kings, and thus allow the meek to make their own individual mistakes and inherit whatever God decides is appropriate.