10 April 2015

Inbreeding in Economics

Over at Fortune magazine, Steve Keen makes a very interesting observation about the state of discourse about the discourse at the higher level of economics.

Specifically, not only did these guys go to the same school, they literally took the same course with the same professor:
Ben Bernanke has recently started blogging (and tweeting), and his opening topics were why interest rates are so low around the world, and a critique of Larry Summers’ “secular stagnation” explanation for this phenomenon, and for persistent low growth since the financial crisis. Summers then replied to Bernanke’s argument, and a debate was on.

So who is right: Bernanke who argues that the cause is a “global savings glut”, or Summers who argues that the cause is a slowdown in population growth, combined with a dearth of profitable investment opportunities, not only now but for the foreseeable future?

I’d argue both of them, and neither simultaneously—both, because they can both point to empirical data that support their case; neither, because they are only putting forward explanations that are consistent with their largely shared view of how the economy works.

And the extent to which they are the product of a single way of thinking about the world simply cannot be exaggerated. It goes well beyond merely belonging to the same school of thought within economics (the “Neoclassical School” as opposed to the “Austrian”, “Post Keynesian”, “Marxist” etc.), or even the same sect within this school (“New Keynesian” as opposed to “New Classical”). Far beyond.

They did their graduate training in the same economics department at the Massachusetts Institute of Technology (MIT). They attended the same macroeconomics class: Stanley Fisher’s course in monetary economics at MIT for graduate students (was it the same year—does anybody know?) Some of their fellow Fisher alumni included Ken Rogoff and Olivier Blanchard.


If I were describing a group of thoroughbred horses, alarm bells would already be ringing about a dangerous level of in-breeding. Sensible advice would be proffered about the need to inject new blood into this dangerously limited breeding pool. But the issue would only be of importance to the horseracing community.

Instead I am talking about a set of individuals whose ideas have had enormous influence upon both the development of economic thought and the formation of economic policy around the globe for the last four decades. The fact that so much of the dominant approach to thinking about the economy emanates, not merely from such a limited perspective, but from such a limited and interconnected pool of people, should be serious cause for alarm—especially given how the world has fared under the influence of this thoroughbred group.
This has me thinking that I should take a serious look at Modern Monetary Theory (MMT) and Hyman Minsky's theories.


Tim Boudreau said...

I'm amazed that the core idea of MMT is anything other than obvious. You're a government. You print an initial supply of money. You need to pay for labor and services to the government. You have two choices: Print more money, causing instant inflation and its unpredictable side-effect, or borrow the money from your own citizens, which more effectively uses the money that already exists by cycling it through the economy. You will still have to print money to pay interest, but it will be small amounts at predictable intervals the market will anticipate, causing continuous controlled inflation instead of wild swings. This seems like a no-brainer.

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