Chicago economics — a pseudo-scientific zombie

25 Jun, 2019 at 19:17 | Posted in Economics | 6 Comments

A couple of years ago, in a lecture on the US recession, Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturns in the US economy and its future prospects.

lucasLucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery from where the US economy is today, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the new classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But — if left to run its course unimpeded by European type welfare state activities — the free market will fix it all.

In a rather cavalier manner — without a hint of argument or presentation of empirical facts — Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead — “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” — this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises shows how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.

Chicago economics is a dangerous pseudo-scientific zombie ideology that ultimately relies on the poor having to pay for the mistakes of the rich. Trying to explain business cycles in terms of rational expectations has failed blatantly. Maybe it would be asking too much of freshwater economists like Lucas to concede that, but it’s still a fact that ought to be embarrassing.

shackleIf at some time my skeleton should come to be used by a teacher of osteology to illustrate his lectures, will his students seek to infer my capacities for thinking, feeling, and deciding from a study of my bones? If they do, and any report of their proceedings should reach the Elysian Fields, I shall be much distressed, for they will be using a model which entirely ignores the greater number of relevant variables, and all of the important ones. Yet this is what ‘rational expectations’ does to economics.

G. L. S. Shackle

6 Comments

  1. Thank you prof Syll! Those idiots deserve a special place, in hell i guess?

  2. “the US recession that started in 2008 was basically caused by a run for liquidity”
    .
    That is correct. What Lucas ignores is that the Fed supplied liquidity without capacity limits to end the global run.
    .
    “what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector.”
    .
    Using the Fed’s power of unlimited liquidity to fund basic income would involve none of these frictions.

  3. I have always held Chicago Economics of Milton Friedman in Great Disdain because it was always a run for quick profits by any means necessary. If the worm has finally turned and some insight has dawned upon the collective mind of man I am grateful.

  4. I think MIT is the institution that actually dominates economics, and what they produce is every bit as idiotic as Chicago. The ‘Smorgasbord of Models” idea – that’s very much MIT. Samuelson is probably the person most responsible for the farce of economics today. You could also argue that he paved the way methodologically for the Chicago School and Microfoundational Fundamentalism.

    The MIT-Goldman Sachs nexus also forms the international policy making elite, dominating, for example, central banks. Even in Europe. Three of the BOE’s 6 Governors are ex-Goldman Sachs. Part of a revolving door. Draghi is ex-MIT and ex-Goldman Sachs. Ex EU Commission President Jose Barosso now works at Goldman Sachs. This is in spite of the exposure of Goldman Sach’s activities during the Financial Crisis.

    The failures and arrogance of the economics and financial establishment and the exposure of their vacuity and excess has had little impact on either the individuals or institutions that have played a key role in creating the waste, social misery and damage that will leave scars for a generation. There is no wonder there is so much cynicism towards the political establishment and a distrust of experts – economists in particular.

  5. Do people guffaw and belly laugh at the idiocies proposed by Lucas? I mean other than me

  6. Love that quote from Shackle. Thanks!


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