In response to: “What’s the Matter with Economics?” from the December 18, 2014 issue of THE NEW YORK REVIEW.
NEWSLANC EDITOR: The following is a response by Alan S. Blinder to Arnold Packer and Jeff Madrick, all prominent economists who have held prestigious government positions. Blinder had critiqued a book by Madrick. What follows is more a quibbling over details by learned economists rather than fundamental disagreements concerning economic principles.
The below excerpts are in response by Blinder to accompanying published letters from Packer and Madrick. We encourage the reading of the original review along with the following discourse.
“However, faulty macroeconomic management was not among the causes of the horrors. That may sound like hiding behind a wonkish division of labor; but it certainly does not exonerate the Fed, whose supervisory and regulatory performance was dreadful. My point is that the Great Moderation did not end because of macroeconomic policy errors. It ended because of a financial crisis brought on by the bursting of a house-price bubble in an overleveraged, overly complex, and underregulated financial system.
“Yes, underregulated—which brings me back to the invisible hand. I thought I had laid this issue to rest by agreeing with Madrick that ‘the Invisible Hand is an approximation, usually not applicable in the real world without significant modification’ (his words). That’s right. And those modifications point toward, inter alia, antitrust laws, consumer protection, fair labor standards, health and safety regulation, financial regulation, and much more. As I noted, conservatives reject many of these interferences with free markets, but the (more liberal) mainstream accepts them.
“Yet Madrick still insists that ‘economists rely on a fairly pure version of the invisible hand most of the time.’ Not us mainstreamers. I’m a member of the tribe, I live among these people every day, and—trust me—we really don’t apply the “pure version” to the real world. For example, many of us see reasons for a minimum wage, mandatory Social Security, progressive taxation, carbon taxes, and a whole variety of financial regulations—to name just a few. On the other hand, we do normally view the invisible hand as the best “mechanism for delivering the right goods and services to the right people at the lowest possible costs” (my words, in the review)…
“Here’s a poignant case in point: even today, seventy-eight years after Keynes taught the world how to end recessions, many politicians in many countries refuse to follow his (now very mainstream) advice. That’s not a good show for what Packer calls ‘a powerful force in policy circles.’ ”
