J. Bradford DeLong
The Four Intellectual Horsemen of 2010 J. Bradford DeLong U.C. Berkeley October 26, 2010
The Four Intellectual Horsemen of 2007-2009 The four intellectual horsemen of 2007, 2008, and 2009 were John Maynard Keynes and Milton Friedman, Walter Bagehot and Hyman Minsky. Those were years for Washington University at St. Louis economist Hyman Minsky, and his Cassandra warnings that times of financial calm and economic growth led banks to step further and further out onto the ice of leverage--until finally they would step too far and fall through. Those were years for nineteenth-century Economist editor Walter Bagehot, and his urgent advice that when the bankers fell into the ice-cold lake it was essential for the general welfare that they be rescued by a government that "lent freely but at a penalty rate"--that the government needed to spare no expense to make sure that the network of banking survived but needed to do so in a way that took the bankers' fortunes away from them. (Governments in 2008-9, however, proved much better at the first of these tasks than at the second.)
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Those were years for Milton Friedman, who seconded Bagehot's call for bank rescues in depressions--and called for central banks to actively stabilize the monetary system to keep the flow of spending on its previously expected path. And those were years for John Maynard Keynes, and his gloomy but ex post accurate fears that central banks would not prove powerful enough to do the job--coupled with his overoptimistic hopes that governments run by clever technocrats could then boost their spending to take up the slack and do what was beyond the powers of central bankers.
This Year Is Different 2010 has been a very different year. And its horsemen have been very different thinkers with very different ideas. It has had four very different horsemen. It has been a year for Austrian economists Friedrich von Hayek and Joseph Schumpeter, for plutocrat and Great Depression-era Treasury Secretary Andrew Mellon. Above all, however, it has been a year for Friedrich Nietzsche.
The Theorists of Austerity There was silence in the seminar room. Richard Kahn broke it. "Do you mean to say," he asked, "that if I were to go out tomorrow and buy a new overcoat, that it would increase unemployment?" "Yes," said the man in the front of the room, Friedrich von Hayek, "but it would take a long and complicated mathematical argument to explain why." That is how Robert Skidelsky describes Friedrich von Hayek's visit to the proto-Keynesian economists of Cambridge University in Cambridge,
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England. It was the 1930s. Hayek had taken the train up to London to convince them to his point of view. He thought that depressions were not to be avoided or cured but rather endured. In his view, they were righteous karmic payback for past sins against the gods of monetary orthodoxy. Any attempts to cut them short or make them shallower would produce only temporary palliation. And they would produce temporary palliation at the cost of a fiercer and deeper and nastier further depression in the future. Friedrich von Hayek's fellow-countryman Joseph A. Schumpeter went further: "Gentlemen!" he announced to his students at Harvard (there were no ladies). "A depression is healthy! Like a good ice-cold douche!" If depressions did not exist, Schumpeter thought, we would have to invent them. They were "the respiration of the economic mechanism." Agreeing with Schumpeter was Herbert Hoover's Treasury Secretary, Andrew Mellon. If we can trust Herbert Hoover, Mellon saw depression as the necessary fire in which the economic dross and slag was removed, leaving the pure metal behind. In his memoirs Hoover was bittter toward many, but bitterest of all toward Andrew Mellon, whom he called the head of: the “leave it alone liquidationists”... who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”...
He was, Hoover said, himself opposed to Mellon's policies, and worked to undermine them. But what could Hoover do? He was, after all, only President. And Mellon. was Treasury Secretary.
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It is unclear why the economists' voices in the air heard by this year's madmen in authority in the world's governments have been the voices of these three.
Voices of Reason As Milton Friedman liked to say, Hayek (and Schumpeter) "was a great economist... but his contributions did not lie in the field of business cycle theory." Friedman condemned Hayek, Schumpeter, and Mellon as devotees of an "atrophied and rigid caricature [of the quantity theory of money]... frequently described by the proponents of the new [Keynesian] income-expenditure approach, and with some justice, to judge by much of [their] literature on [economic] policy." "[T]his dismal picture," said Friedman, led "young, vigorous, and generous mind[s]" to recoil. And both Keynes's and Friedman's flavors of post-WWII American macroeconomics, with its focus on government action to maintain a stable growth path for totally economy-wide spending, were the result. To me, Friedman's explanation of the Great Depression appeared and appears true. Friedman blamed it on an unwarranted and unnecessary policy by the Federal Reserve, a policy that permitted the collapse of the money stock, created an enormous excess demand for money in the economy which necessitated a balancing deficient demand for goods and services. It was that deficient demand--not any "respiration" of the economic system--that drove the collapse of production and rise of unemployment was. And Keynes's explanation of the full recovery during World War II appears and appeared true as well. Government spending necessitated by the threat of Hitler proved perfectly capable of melting away unemployment: there was no requirement that the current depression be suffered to end "naturally" on pain of a greater one to inevitably follow. Nothing has changed in the past two years to make Hayek's, Schumpeter's, and Mellon's arguments stronger intellectually against the critiques of
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Keynes and Friedman than they were sixty years ago. On the level of intellectual argument, their current victory is inexplicable.
The Theorist of Ressentiment The explanation of why it is the voices of Hayek, Schumpeter, and Mellon that are heard in today's air is, I think, something that can be explained by our fourth horseman: Friedrich Nietzsche in his role as psychologist of human ressentiment. Nietzsche talked about the losers--or about those who thought they were the losers. He looked at those who saw themselves as weak--rather than strong--and poor--rather than rich--and passive--rather than active. They had a tendency, Nietzsche wrote, to deal with their situation by transvaluing values, and inverting the natural order of things. Today unemployment is high, yet aid from a Federal government that can borrow at unbelievably good terms to states could allow states to maintain their levels of public employment, and the employed public workers would then spend their incomes and so boost the number of private-sector jobs as well. "But no," say the voices of today. "We have lost our jobs. It is only fair that those who work for the government lose their jobs as well"-never mind that each public-sector job lost triggers the destruction of yet another private-sector job over and above those already lost. Such is the logic of the recent Governor of California and of the Prime Minister of Great Britain. Job losses are no longer a bad, but a positive good. Today homeowners are underwater. The normal pattern is for them to stay in their houses, making occasional payments and undertaking no maintenance, until eventually they leave and leave the bank with an asset worth much less than the mortgage. Better to write down the value of the mortgage to the current market value of the house immediately--that way banks won't hesitate because they do not want to recognize losses on their
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balance sheets and homeowners won't neglect maintenance because they have skin in the game. "But no," say the voices of today. "We lost our money. It is only fair that homeowners lose their money--it is not fair if they get to write down the value of their debts just because they owe more on their houses than they are worth"--never mind that the longer the mortgage crisis remains unresolved the more do unmaintained houses fall apart and lose value, the more do vacant houses blight neighborhoods as West Nile virus breeds in the untreated swimming pools in the desert between Los Angeles and Albuquerque, and in the swamps of Florida. Because some are unemployed, unemployment is good--we need more of it. Because some have lost their wealth, wealth destruction is good--we need more of it. That is a psychology that Friedrich Nietzsche would have understood very well. And of that psychology are made the horses that this year's horsemen ride.
October 22, 2010: 1560 words
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