Posts Tagged ‘efficient markets’

Emperors-New-Clothes-2

The following post was contributed by Richard McIntyre, in response to Alan Blinder’s review of Jeff Madrick’s book, Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World, in the New York Review of Books.*

Alan Blinder is certainly correct that politicians generally use economic research findings for support not illumination. After that, his critique of Jeff Madrick’s Seven Bad Ideas is not so accurate.

Three examples: (1) Blinder defends the “invisible hand” as one of the “great thoughts of the human mind” and attributes it to Adam Smith. It is neither. Smith uses the term precisely once in The Wealth of Nations and does not use it to mean that free competitive markets produce efficiency. Paul Samuelson invented the modern version of the “invisible hand” in his famous 1948 textbook.1 That book was deliberately written to please free-market advocates given the red-baiting that had doomed a similar and failed textbook by Laurie Tarshis.2 In most economics texts, the treatment of market failure comes long after the celebration of market virtues, and with much less conviction, and usually by the point in the semester where most students are just trying to survive the course.

(2) The Chicago School is fully incorporated into mainstream macroeconomic models. Blinder wants to portray the Chicago school as somehow marginal to the mainstream but nearly all the intermediate textbooks portray the macroeconomic debate as between Classical and “Keynesian,” and then New Classical and New Keynesian models. (The Keynesian models have little to do with what Keynes actually wrote but that is another story.) The Keynesian “defense” against the Chicago school attack beginning in the 1970s was basically to accommodate it. This is best seen in the professional transition of Larry Summers from antipathy to grudging respect to ungrudging admiration for Milton Friedman.3

(3) Efficient-market theory was something more than a prop for right-wing politicians. As Donald Mackenzie has demonstrated, these models actually changed the way finance works. Fama and other efficient-market theorists provided tools that led to the creation of derivatives markets and a powerful ideological defense of them.4

I could go on. There may be problems with Madrick’s book but they are not the ones Blinder identifies, nor are economists quite so powerless as Blinder makes them out to be. Liberals like Alan Blinder and Paul Krugman are willing to criticize parts of the orthodoxy but not orthodoxy itself, perhaps because they and their colleagues at elite schools benefit enormously from the influence they have as players within that orthodoxy.

Those of us in the provinces may be freer to notice that the emperor wears very little clothing.

 

1Gavin Kennedy, “Paul Samuelson and the invention of the modern economics of the Invisible Hand,” Journal of the History of Economic Ideas, no. 3 (2010): 105-20.

2Yann Giraud, “The Political Economy of Textbook Writing: Paul Samuelson and the making of the first ten editions of Economics (1945-1976),” THEMA Working Papers, 2011-18; David Colander and Harry Landreth, “Political Influence on the Textbook Keynesian Revolution: God, Man, and Laurie (sic) Tarshis at Yale,” in O. F. Hamouda and B. B. Price, eds., Keynesianism and the Keynesian Revolution in America: A Memorial Volume in Honour of Lorie Tarshis (Cheltenham: Edward Elgar, 1998), pp. 59–72.

3John Cassidy, How Markets Fail: The Logic Of Economic Calamaties (New York: Picardo, 2009), pp. 83-84.

4Donald Mackenzie, An Engine Not A Camera: How Financial Models Shape Markets (Cambridge: MIT Press, 2008).

 

*McIntyre is Professor of Economics and Political Science at the University of Rhode Island. His book, Are Worker Rights Human Rights? was published in 2008 by the University of Michigan Press.