P.S.: Unlearning Economics is not me – just in case.
… and politics and ideology will seep into it.
I’ve been thinking about these differences for a while, and I’ve reached two major conclusions:
1. Normal people see macro as inherently political.
2. Normal people see macro as being mostly about redistribution rather than about efficiency….
The whole essay is like economists are doing something value free and that politics is not important. Joan Robinson nicely summarized the situation in her essay What Are The Questions (jstor URL):
The movement of the thirties was a attempt to bring analysis to bear on actual problems. Discussion of an actual problem cannot avoid the question of what should be done about it; questions of policy involve politics (laissez-faire is just as much a policy as any other). Politics involve ideology; there is no such thing as a “purely economic” problem that can be settled by purely economic logic; political interests and political prejudice are involved in every discussion of questions. The participants in controversy divide themselves in schools – conservative or radical and ideology is apt to seep into logic. In economics, arguments are largely devoted, as in theology, to supporting doctrines rather than testing hypotheses.
Smith writes as if what he is doing is good for the society as a whole – despite the fact that his own colleagues are pushing their own ideologies in policy which is bad for society as a whole.
Smith also writes:
Many people see the “-isms” of macro – “New Keyneisanism”, “New Classicalism”, etc. – as political advocacy rather than as dispassionate scientific attempts to explain the world around us….
But it is right – people like Greg Mankiw have pushed their agendas. What is wrong with “normal people’s view” on this? They are exactly right. Mankiw’s defending the 1% is a dispassionate scientific attempt?
And the above Robinson quote is actually a dispassionate description of the situation than Smith’s own!
Who is Smith trying to fool here?
One of the main effects … of orthodox traditional economics was … a plan for explaining to the privileged class that their position was morally right and was right for the welfare of society.
– Joan Robinson, 1937, “An Economist’s Sermon”, Essays In The Theory Of Employment, The Macmillan Company
Smith also writes:
If monetarists or New Keynesians (is there a difference?) suggest monetary expansion, for example, a lot of readers see it instead as a liberal attempt to use inflation to redistribute money from rich creditors to poor debtors, while a few see it as a conservative attempt to boost the profits of big banks. Only a small minority seem to consider the question of whether monetary expansion is a Pareto efficient response to the business cycle. Because of this, monetarists like Scott Sumner often spend a lot of time “punching hippies” on every issue other than monetary policy, trying to avoid being tarred as hippies themselves for their lack of fear of inflation.
Whatever Pareto efficiency is. But it is mainstream economists themselves who have promoted deflationary policies by selling them to the public that such policies are good for them. Monetarism was a scourge in the 1980s and has permanently distorted economists and the common man. Now he completely avoids history and presents the case as if (mainstream) economists want a rise in demand, not the normal people!
Unlearning Economics has written a very nice post on Milton Friedman’s distortions.
It is unbelievable that people still believe in the quantity theory of money and the distortion appears to have been permanent. When Milton Friedman was rising in popularity, Nicholas Kaldor took him to task and while conceding to Kaldor that the stock of money is endogenous, Friedman still maintained the direction of causality from money to income.
One of Nicholas Kaldor’s best papers is The New Monetarism written in 1970  in which he shows why the stock of money should be taken as endogenous and that Friedman’s causality is entirely incorrect. In that he also had a nice description of how Friedman’s influence was growing at the time:
… However, we now have a “monetary” counter-revolution whose message is that during this time we have been wrong and our forbears largely, or not perhaps entirely right: anyhow, on the right track, whereas we have been shunted on to the wrong track. This new doctrine is assiduously propagated from across the Atlantic by a growing band of enthusiasts, combining the fervour of early Christians with the suavity and selling power of a Madison Avenue executive. And it is very largely the product of one economist with exceptional powers of persuasion and propagation: Professor Milton Friedman of Chicago. The “new monetarism” is a “Friedman Revolution” more truly than Keynes was the sole fount of the “Keynesian Revolution”, Keynes’s General Theory was the culmination of a great deal of earlier work by large numbers of people: chiefly Wicksell and his followers, Myrdal and Lindahl in Sweden, Kalecki in Poland, not to speak of Keynes’s colleagues in Cambridge and of many others.
The new school, the Friedmanites (I do not use this term in any pejorative sense, the more respectful expression “Friedmanians” sounds worse) can record very considerable success, both in terms of the numbers of distinguished converts and of some rather glittering evidence in terms of “scientific proofs”, obtained through empirical investigations summarised in time-series regression equations. Indeed, the characteristic feature of the new school is “positivism” and “scientism”; some would say “pseudo-scientism”, using science as a selling appeal. They certainly use time-series regressions as if they provided the same kind of “proofs” as controlled experiments in the natural sciences. And one hears of new stories of conversions almost every day, one old bastion of old-fashioned Keynesian orthodoxy being captured after another: first, the Federal Reserve Bank of St. Louis, then another Federal Reserve Bank, then the research staff of the I.M.F., or at least the majority of them, are “secret”, if not open, Friedmanites. Even the “Fed” in Washington is said to be tottering, not to speak of the spread of the new doctrines in many universities in the United States. In this country, also, there are some distinguished and lively protagonists, like Professor Harry Johnson and Professor Walters, though, in comparison to America, they write in muted tones and make more modest claims, which makes it more difficult to discover just what it is they believe in, just where the new doctrine ceases to be a matter of semantics and becomes a revelation with operational significance.
Also read Lunch With FT: Milton Friedman and William Keegan’s article written for The Observer: So Now Friedman Says He Was Wrong referring to the Financial Times article on Friedman finally conceding in 2003 that he was wrong all along.
 Kaldor, N., 1970, The New Monetarism, Lloyds Bank Review 97, pp. 1-18, also published in Kaldor, N., Further Essays in Applied Economics, London: Duckworth, 1978, pp. 1-21.
Thanks to Philippe for pointing out some spelling errors (mine) in the quote in the previous version of this post.
Thomas Palley has a new article Coordinate Currencies or Stagnate on international coordination of exchange rates. (h/t Matias Vernengo). He has a nice small critique of the Chicago school according to which “market forces” work toward resolving imbalances.
It is great such a thing has been raised because the importance of policy coordination (in general – monetary, fiscal and exchange rates) is often forgotten.
In an article Agenda For International Coordination Of Macroeconomic Policies, Tobin wrote 
Coordinate policies! So economists urge governments. Financiers, journalists, pundits, politicians take up the cry. Central bankers and finance ministers agree, as do presidents and prime ministers. They meet, they talk, they announce progress. It turns out to amount to very little…
But the global imbalance has worsened and it has now created a situation in which such coordination is more badly needed.
Wynne Godley had been warning of such things in the 2000s. In a 2005 article  with his collaborators, he wrote:
A resolution of the strategic problems now facing the U.S. and world economies can probably be achieved only via an international agreement that would change the international pattern of aggregate demand, combined with a change in relative prices. Together, these measures would ensure that trade is generally balanced at full employment…Those hoping for a market solution may be chasing a mirage.
I have also found the last words in academic literature very insightful :
… It is inconceivable that such a large rebalancing could occur without a drastic change in the institutions responsible for running the world economy—a change that would involve placing far less than total reliance on market forces.
Time will tell how right he was 😉
- James Tobin, Agenda For International Coordination Of Macroeconomic Policies, Ch 24, p 633, Essays In Economics, Volume 4: National And International, The MIT Press, 1996.
- Wynne Godley, Dimitri Papadimitriou, Claudio Dos Santos and Gennaro Zezza – The United States And Her Creditors: Can The Symbiosis Last?, Levy Institute Strategic Analysis, September 2005. Link
- Wynne Godley, Dimitri Papadimitrou and Gennaro Zezza – Prospects For The United States And The World – A Crisis That Conventional Remedies Cannot Resolve, Levy Institute Strategic Analysis, December 2008. Link