Krugman on the state of Economics

Krugman has a long article about "How the economists got it so wrong" coming out in the NYTimes magazine this Sunday.

There's a lot to say about it, but I guess the most striking thing for me is how batshit crazy the neoclassical hardliners sound. e.g:

Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.

Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation?

Foolish is a polite word for what it sounds like. Make sure to check this out as well:

Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

No joke. Jobs aren't scarce, and neither were they scarce during the Great Depression. People just didn't want to work, so they willingly became unemployed. That seems to accord perfectly with everything we know about the Great Depression... er... what!?

Didn't any of these people ever read Grapes of Wrath?

It's amazing to me, as someone outside the economics world, that these neoclassical hardliners have spent the better part of 60 years arguing that all unemployment is voluntary. Crazy stuff. I suspect that there is no such thing as involuntary employment, according to these dogmatists, because admitting there was would license the modus tollens: if all unemployment isn't voluntary, then markets are not inherently efficient and rational. Of course, those premises about inherent efficiency and strategic-rationality are the founding pillars of their whole intellectual edifice. One doesn't even really bring them up to talk about them, much less question them. They are to be worshiped not trifled with. That's how you come up with nuggets like this:

In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”

[...]

But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing.

Right. Because you can't say there's such things as bubbles lest you expose those magical pillars about efficiency to empirical questioning. As Krugman explains:

But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Krugman insinuates (but leaves it at the level of insinuation) that some of the currency that this moronic dogma has in the Economics profession owes to its instrumental value (esp. in the 80s) in aiding financiers in landing massive profits. This isn't really very surprising, when you think about it. If you said something critical about the stock prices in the late 90s, if you threatened the neoclassical dogma with talk of recessions or bubbles, you were cast aside as a cook. And not just in the 'academic world'. In industry, people often don't want to seem to listen to nay-sayers when everyone seems to be having a good time and making a ton of money. This is how massive deceptions like Enron and Madoff go down. People are told they're making great returns, and they don't really bother to see if that's sustainable or even really true. Just keep the $$$ flowing. Some rational system indeed.