Appendix 2: The Economics in Play
- A faith in efficient markets
- The fallibility of efficient markets
- Keynes’ second coming
…one thing at least is certain in this age of uncertainty. It is that this debate between schools of economists will inevitably go on. One side will go on telling us (indeed they now do so daily in the columns of The Wall Street Journal) that the Obama stimulus package has not reduced unemployment and so should be abandoned. The stimulus has not worked because it was too big. It squeezed private sector investment and job-creation out of the economy it was purporting to stimulate. The other side will counter that unemployment would have been higher but for the stimulus, and would now be lower if the stimulus package had not been curtailed and internally redesigned in a vain attempt to win Republican backing. Job creation, on this counter-argument, now requires a second stimulus, not the abandonment of the first. The choice that they offer and which we therefore face is a stark one: between schools of economists that Paul Krugman once labeled “saltwater” and “freshwater” because of the location of the bulk of Keynesians on either coast and of the new classical economists in America’s hinterland.
Ideally we would face a wider choice, for there is a deeper level of analysis that mainstream economics, and the policy-making it informs, rarely addresses. It is one that recognizes that the space for economic growth is ultimately fixed, not by economic ideas alone, but by social settlements between capitalism’s contending classes in which particular bodies of economic thought play a critical and formative part. Beneath and away from the disputes chronicled here, you can find a rich “social structures of accumulation” literature that sees the heyday of post-war Keynesianism as intimately linked to the character of the immediate post-war global and internal social settlement. It is a literature which then ties the rise of the new classical economics to the contradictions of that first settlement – the stagflation of the 1970s – and to the creation of a new settlement between capital and labor (capital strong, labor weak: capital rich, labor indebted) that crashed to pieces in the financial crisis of 2008. On that argument, the progressive task before us now is bigger and even more daunting than that proposed by the new generation of Keynesian economists. It is to create a new social settlement as well as to find a new economic paradigm.
But the choice before us in the here-and-now is not that wide. What is before us, for immediate resolution, is the saltwater-freshwater clash within mainstream economics. The choice on offer is, in that sense, narrower than some of us would like; but it is a clear choice, and we have to make it. It is, in truth, the most pressing choice of the age.
David Coates holds the Worrell Chair in Anglo-American Studies at Wake Forest University. He is the author of Answering Back: Liberal Responses to Conservative Arguments, New York: Continuum Books, 2010.
He writes here in a personal capacity.