The evil caused by bad ideas

The University of Chicago is a scary place.  An island of prosperity surround by a large moat of urban wasteland, it is appropriately paranoid about the world that surrounds it.  It's architecture with recurring details of narrow windows and crenellated walls reinforces the impression of being under attack.  Of course, it's really not paranoia if folks are out to get you and because of the track record of Chicago economists and their prescriptions that usually produce economic misery, this school has become arguably the most hated institution on planet earth.

Because Chicago is a private school that was originally funded by that vicious robber baron John D. Rockefeller, its reputation as the global center of crackpot right-wing economics was probably inevitable as the foundation stones were laid in 1892.  The guy who ordered the Ludlow Massacre would have been prouder-than-heck at the Chicago graduates who were such a major part of the military dictatorship of Chilean Augusto Pinochet.  These extreme right-wing economists even called themselves the Chicago Boys.  John D. invested well.

The Chicago Boys in Chile: Economic Freedom's Awful Toll 

Orlando Letelier  The Nation, August 28, 1976

It would seem to be a common-sensical sort of observation that economic policies are conditioned by and at the same time modify the social and political situation where they are put into practice. Economic policies, therefore, are introduced in order to alter social structures.

If I dwell on these considerations, therefore, it is because the necessary connection between economic policy and its sociopolitical setting appears to be absent from many analyses of the current situation in Chile. To put it briefly, the violation of human rights, the system of institutionalized brutality, the drastic control and suppression of every form of meaningful dissent is discussed (and often condemned) as a phenomenon only indirectly linked, or indeed entirely unrelated, to the classical unrestrained free market policies that have been enforced by the military junta. This failure to connect has been particularly characteristic of private and public financial institutions, which have publicly praised and supported the economic policies adopted by the Pinochet government, while regretting thebad international image the junta has gained from its incomprehensible persistence in torturing, jailing and persecuting all its critics. A recent World Bank decision to grant a $33 million loan to the junta was justified by its President, Robert McNamara, as based on purely technical criteria, implying no particular relationship to the present political and social conditions in the country. The same line of justification has been followed by American private banks which, in the words of a spokesman for a business consulting firm,have been falling all over one another to make loans. (See Ann Crittenden: 'Loans from Abroad Flow to Chile's Rightist Junta', (The New York Times, February 20.) But probably no one has expressed this attitude better than the US Secretary of the Treasury. After a visit to Chile, during which he discussed human rights violations by the military government, William Simon congratulated Pinochet for bringing economic freedom to the Chilean people (The Times, May 17). This particularly convenient concept of a social system in which economic freedom and political terror coexist without touching each other, allows these financial spokesmen to support their concept of freedom while exercising their verbal muscles in defense of human rights.

The usefulness of the distinction has been particularly appreciated by those who have generated the economic policies now being carried out in Chile. In Newsweek of June 14, Milton Friedman, who is the intellectual architect and unofficial adviser for the team of economists now running the Chilean economy, stated: In spite of my profound disagreement with the authoritarian political system of Chile, I do not consider it as evil for an economist to render technical economic advice to the Chilean Government, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean Government to help end a medical plague. more

Lucky US!  The raving lunacies of the Chicago economics department have a widespread following in the current USA zeitgeist.

Obama's Chicago Boys

by Naomi Klein   June 14, 2008

Barack Obama waited just three days after Hillary Clinton pulled out of the race to declare, on CNBC, "Look. I am a pro-growth, free-market guy. I love the market."

Demonstrating that this is no mere spring fling, he has appointed 37-year-old Jason Furman to head his economic policy team. Furman is one of Wal-Mart's most prominent defenders, anointing the company a "progressive success story." On the campaign trail, Obama blasted Clinton for sitting on the Wal-Mart board and pledged, "I won't shop there." For Furman, however, it's Wal-Mart's critics who are the real threat: the "efforts to get Wal-Mart to raise its wages and benefits" are creating "collateral damage" that is "way too enormous and damaging to working people and the economy more broadly for me to sit by idly and sing 'Kum-Ba-Ya' in the interests of progressive harmony." Obama's love of markets and his desire for "change" are not inherently incompatible. "The market has gotten out of balance," he says, and it most certainly has. Many trace this profound imbalance back to the ideas of Milton Friedman, who launched a counterrevolution against the New Deal from his perch at the University of Chicago economics department. And here there are more problems, because Obama--who taught law at the University of Chicago for a decade--is thoroughly embedded in the mind-set known as the Chicago School.

He chose as his chief economic adviser Austan Goolsbee, a University of Chicago economist on the left side of a spectrum that stops at the center-right. Goolsbee, unlike his more Friedmanite colleagues, sees inequality as a problem. His primary solution, however, is more education--a line you can also get from Alan Greenspan. In their hometown, Goolsbee has been eager to link Obama to the Chicago School. "If you look at his platform, at his advisers, at his temperament, the guy's got a healthy respect for markets," he toldChicago magazine. "It's in the ethos of the [University of Chicago], which is something different from saying he is laissez-faire."

Another of Obama's Chicago fans is 39-year-old billionaire Kenneth Griffin, CEO of the hedge fund Citadel Investment Group. Griffin, who gave the maximum allowable donation to Obama, is something of a poster boy for an unbalanced economy. He got married at Versailles and had the after-party at Marie Antoinette's vacation spot (Cirque du Soleil performed)--and he is one of the staunchest opponents of closing the hedge-fund tax loophole. While Obama talks about toughening trade rules with China, Griffin has been bending the few barriers that do exist. Despite sanctions prohibiting the sale of police equipment to China, Citadel has been pouring money into controversial China-based security companies that are putting the local population under unprecedented levels of surveillance.Now is the time to worry about Obama's Chicago Boys and their commitment to fending off serious attempts at regulation. It was in the two and a half months between winning the 1992 election and being sworn into office that Bill Clinton did a U-turn on the economy. He had campaigned promising to revise NAFTA, adding labor and environmental provisions and to invest in social programs. But two weeks before his inauguration, he met with then-Goldman Sachs chief Robert Rubin, who convinced him of the urgency of embracing austerity and more liberalization. Rubin told PBS, "President Clinton actually made the decision before he stepped into the Oval Office, during the transition, on what was a dramatic change in economic policy." more

And in case you think all those right-wing proposals that lead to the convulsive outbreaks of political activism in places like Wisconsin and Ohio were dreamed up by the Tea Party governors on their own...

ALEC Exposed: Milton Friedman's Little Shop of Horrors

By Mary Bottari   July 20th, 2011

Although he passed away in 2006, states are now grappling with many of the toxic notions left behind by University of Chicago economist Milton Friedman.

In her groundbreaking book, The Shock Doctrine, Naomi Klein coined the term "disaster capitalism" for the rapid-fire corporate re-engineering of societies still reeling from shock. The master of disaster? Privatization and free market guru Milton Friedman. Friedman advised governments in economic crisis to follow strict austerity measures, combining radical cuts in social services with the full-scale privatization of their more lucrative assets. Many countries in Latin America auctioned off everything standing -- from energy and water utilities to Social Security -- to for profit multinational firms, crushing unions and other dissenters along the way.

Now, U.S. states are in crisis. The 2008 Wall Street financial meltdown, caused by years of deregulation and lack of government oversight, cost Americans $14 trillion in lost wealth and eight million lost jobs. Today some 25 million are unemployed or underemployed. This jobs crisis has tanked federal and state tax receipts, adding billions to state budget shortfalls.

As the prime movers of this deregulatory agenda, the GOP spin machine has launched into hyper-drive in an attempt to wash the blood from their hands. Governors across the nation, backed by Wall Street's Club for Growth and the Koch Brother's Americans for Prosperity, are working hard to convince average Americans the a jobs crisis is actually a deficit crisis and that the culprits are not the big banks on Wall Street, but state, county and municipal workers.

In lockstep, governors are reaching for an almost identical set of "solutions," to their financial woes: massive tax breaks for big corporations, constitutional amendments to prevent states from raising revenue, the slashing of critical public services, the busting of unions and the privatization of every possible aspect of government including public schools -- long a Friedman agenda item. (See the video here.)

The similarity of these measures has not gone unnoticed, but now we have found the fountainhead of these radical measures: the American Legislative Exchange Council. (ALEC) more

And never fear--the people behind these ugly proposals are not exactly the most attractive in history.

Alice in Billionaireland

Jonathan Schwarz    July 18, 20

It's confusing to see the snarling red faces of America's financial overlords. Of all the people on earth, what do they have to be angry about? They almost obliterated the world economy, and as punishment, we opened up the U.S. treasury and told them to haul off as much as they could carry. Meanwhile, everyone else is just praying the Medicare age won't be raised beyond 82.

However, their fury makes perfect sense if you understand that they live inside an all-enveloping fantasy world. You may have seen that Paul Ryan was recently spotted downing two $350 bottles of wine with Cliff Asness, a hedge fund manager. When a woman approached and criticized them for that kind of extravagance as Ryan plots to slash all social spending, Asness apparently said to Ryan "fuck her." Asness was previously known for staging a memorable public freakout about the Obama administration's bailout of Chrysler in an open letter titled "Unafraid in Greenwich, Connecticut."

So far so normal in 2011. But I don't think anyone's noticed this, from Asness's bio on his company's website:

He received an MBA with high honors and a Ph.D. in Finance from the University of Chicago where he was Eugene Fama’s student and teaching assistant for two years (he is still respectfully scared of Gene).

In other words, Asness is a protege of Fama, who's an extremely schmancy figure in right-wing economics. (And John Cochrane, a University of Chicago finance professor who was also eating with Asness and Ryan, is Fama's son-in-law.) This is the milieu in which Asness spends his days.

And here's the significance of that: Fama was recently spotted confidently telling everyone that the sky is green:

But suppose we buy into the more common negative current view of finance. There is still a big open question. Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth. Despite any role of finance in the current recession, are the market naysayers really ready to argue that worldwide wealth would be higher today if financial markets and financial institutions didn’t develop as they did?

As Paul Krugman pointed out, that's obviously false—developed world economies have grown more slowly since 1980 than before, while the fast growth of China had nothing to with the increased size of financial markets. (And just yesterday Krugman noted that essentially the same imaginary belief is held by another top right-wing economist.) 

But here's what you have to understand: in the teeny-tiny world in which Cliff Asness and Eugene Fama live—i.e., the world of wealthy University of Chicago economics professors and their hedge fund manager former students—the sky actually does look green. While the U.S. economy grew more slowly starting in 1980, it did grow, and almost all of the growth in income went to people like Asness and Fama. Since they're such a small group, they and everyone they know have been doused with a gushing firehose of money. And because they have no imagination and no curiosity about anyone outside their mental circle, they assume that must mean that the rest of the world has gotten doused too. Moreover, it's all due to them and the "financial markets and financial institutions" they've created. more

The guy who first understood the flaws of the University of Chicago was there for opening day in 1892.  Thorstein Veblen would ultimately be fired for the heresy the was The Theory of the Leisure Class.  He would eventually respond with a pitch-perfect critique of Chicago entitled The Higher Learning In America: A Memorandum On the Conduct of Universities By Business Men.  It was recently discovered that this book was a pointed attack on Chicago and its President Harper until the final tear sheets when a decision was made to make the book less personal and more universal.

So it is appropriate that the best anti-Chicago economic theories were also penned by Veblen.

The Revival of Veblenian Institutional Economics 

Geoffrey M. Hodgson 

The novelties of today are a . . . later generation of the commonplaces of the day before yesterday. 

Thorstein Veblen, Absentee Ownership (1923) 

Institutional economics is more than a century old. After a period of interwar hegemony in the United States, it suffered from decline and fragmentation, leading to its estrangement from the mainstream of economics (Hodgson 2004). By the 1990s, however, some institutional and evolutionary ideas had re-emerged in mainstream theory and elsewhere. Today, discussion of the role and nature of institutions in economics is commonplace (North 1991; 1994; Schotter 1981; Williamson 1975; 2000). The revival of evolutionary economics was much inspired by the work of Richard Nelson and Sidney Winter (1982), who have since acknowledged Veblen’s contribution (Winter 1990; Nelson 1995). More particularly, writing in this journal, Mauricio Villena and Marcelo Villena (2004) have explored some similarities between modern evolutionary game theory and Veblen’s evolutionary approach. Overall, there seem to be new opportunities for the revival of a Veblenian institutional and evolutionary economics. more