Monday, April 11, 2011

Keynes still right about defunct economists

One of the things that never ceases to astonish me is the power of ideas.  When I was younger, my father served as an officer of a small Protestant mission board--folks who sent their members to "third-world" nations to spread the "good news of the Gospel of Jesus."  As a result, we had many guests in our home that usually lived among the most wretchedly poor on earth.  While many were just religious types who couldn't get a job in someplace like Kansas, some were doctors who chose to work under hellish conditions to treat epidemics of eye disease in Africa or the complications of malnutrition in Bangladesh.  These were highly educated people who could have had prosperous suburban medical practices but chose, for ideological reasons, to work among the world's poor.

Knowing people who voluntarily chose poverty made me highly skeptical about economists who taught that "economic man" sought nothing more than to maximize his wealth and pleasures.  I knew better because I had seen so many examples that demonstrated otherwise.  The economists who appealed to me were always the ones who rejected the simplistic nonsense of the pleasure maximizers.  And so I have long admired John Maynard Keynes--mostly because of the following quote:
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 influence, 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.  (Ch. 24 "Concluding Notes" pg.383. more quotes)
And if you ever need a perfect example of someone who is a slave to defunct ideas, the tale of Alan Greenspan is hard to top.
No Flaw in His Model ... Old Time Religion Was Right After All
Now Greenspan Wants to Take It All Back
By MICHAEL HUDSON   March 31, 2011
It all seems so long ago! On October 23, 2008, Alan Greenspan issued amea culpa for his deregulatory policy as Federal Reserve Chairman. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform. “The whole intellectual edifice, however, collapsed in the summer of last year.”
For a moment he seemed to be rethinking his lifelong assumption that the financial sector would seek to protect its reputation by behaving so honestly that its customers would gain from dealing with it. For years he had claimed that regulation was not needed because bankers would seek to protect their reputations and their “counter-parties” would look to their own interest.
“Were you wrong?” Congressman Henry Waxman prompted him to elaborate.
“Partially,” the Maestro replied. “I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms.” However, he admitted, “I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well.”
But the past two or three years have evidently given Greenspan enough time for a re-think. In yesterday’s Financial Times (March 30, 2011) he returns to his old well-paying job, proselytizing for deregulation. His op-ed, “Dodd-Frank fails to meet test of our times,” is a Mea Culpa The Sequel to his co-religionists for his 2008 apostate Mea Culpa. “The US regulatory agencies will in the coming months be bedevilled by unanticipated adverse outcomes,” he warns, “as they translate the Dodd-Frank Act’s broad set of principles into a couple of hundred detailed regulations.” The Act “may create … regulatory-induced market distortion,” because neither lawmakers nor “most regulators” understand how “complex” the financial system is.
But if Wall Street’s collateralized debt obligations (CDOs) and other derivatives are too complex for regulators to understand, they must be too complex for buyers and other counterparties to evaluate. This would seem to negate a key logical assumption of free market theory. Without “full knowledge of the market,” and of the consequences of one’s action, one cannot make an informed choice. So on logical grounds, regulators would seem to be following orthodox free market theory in rejecting derivatives and other such “complex” products.
Not so in Greenspan’s world. He does not acknowledge that Wall Street has been so adept at translating its wealth into political power that it only approves regulators who do not understand complexity. That is a precondition for deregulators such as Greenspan. more
The best place to find the ideas of defunct economists is, not surprisingly, places like the John D. Rockefeller-founded University of Chicago.  The best way for great stolen wealth to protect itself is to be surrounded by "educated" people who believe that this is the best of all possible worlds.  Chicago cranks out these useful idiots like sausages.
Blame It On Milton
How the Chicago School Hijacked America
By RUSSELL MOKHIBER   April 4, 2011
Chicago School now means – market good, government bad.
But that was Chicago School hijacked by Milton Friedman, Robert Bork, and Richard Posner.
There was a Chicago School before Friedman, Bork and Posner.
"The Chicago School began with the view that in order to have a properly functioning free market, the government must drastically curtail the ability of businesses to build and maintain concentrated economic power," writes Kenneth Davidson in his new book Reality Ignored: How Milton Friedman and Chicago Economics Undermined American Institutions and Endangered the Global Economy (2011). "Early incarnations advocated forbidding corporations to retain their earnings or to purchase other businesses. The explicit fear was that the disproportionate power of big businesses would distort commercial markets and corrupt political freedoms."
That sounds more like Ralph Nader than the Chicago School.
"It was Henry Simons and Aaron Director," Davidson told Corporate Crime Reporter in an interview last night.
"Aaron Director was very close to Milton Friedman. Henry Simons was one of his teachers during the 1930s."
"Both Director and George Stigler were students of Simons. Simons wrote an essay called A Positive Program for Laissez Faire."
"It was in the middle of the depression. At that time, people thought that many of the problems affecting the economy in the United States and the rest of the world were due to the growth of the then relatively new giant corporation."
"They had this ideal that the market would work and would perfectly, but only if you could take out of the market the giant firms that dominated through their economic power."
"And they saw that economic power as a great threat to the nation and national freedom.
That was essentially a Jeffersonian notion of the market. The market would regulate itself if everybody was a farmer, a yeoman farmer, a small businessman."
"They thought it would be automatic."
"By the time Friedman wrote his book – Capitalism and Freedom – in 1962, they had totally changed their minds."
"The problem was not big business. The problem was government."
Henry Simons thought the market had to be pretty rigidly controlled. It was bad to allow companies to keep their profits. The profits should be given back to the shareholders every year. And the businesses should have to sell the market every year on whatever their development plans are and raise new capital."
"Friedman just swept that away. The government could not make a decision that would be correct. He and Stigler were adamant on the fact that the government was not only incompetent to make these decisions, but that whatever regulatory organizations were created would inevitably be dominated by big businesses."
"So, it was better to let the businesses fight it out themselves in a survival of the fittest mode."
One hundred years ago, antitrust policy was a populist policy. It was seen as a way not just to break up cartels, but to challenge concentrated economic and political power. Now, antitrust seems weak in comparison. The Chicago School has eviscerated its powers. Antitrust today seems to challenge power only at the edges. more

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