The
James Galbraith
Actual policies were (and are) in on principled way governed by official doctrine. Rather, the doctrine serves as a kind of legitimating myth --- something to be repeated to schoolchildren but hardly taken seriously by those on the inside.
What is the purpose of the myth? It serves, as it did there, mainly as a device to corralling the opposition, restricting the flow of thought, shrinking the sphere of admissible debate. Just as a lapsed believer kneels in church, respectable opposition demonstrates fealty to the system by asserting allegiance to the governing myth. This in turn limits the range of presentable ideas, conveniently setting an entire panoply of reasoned discourse beyond the pale of what can be said, at least in public, by reputable people. There is a process of internalization of self-censorship. Once the rules and boundaries are understood, adherence becomes reflexive, and at the end of day people come to think only what it is permitted to think. They know when they might be ¡°going too far¡±. (p. xii)
But I chose these three ideas in part because they struck me as being the most despised, the most dangerous, the hardest to get across, and therefore the most important of all the essential points that might be offered here. (p. xiii)
Milton Friedman himself, the father of monetarism, in 2003 repudiated his own old policy doctrine: ¡°The use of quantity of money as a target has not been a success, ¡ I¡¯m not sure if I would as of today push it as hard as I once did,¡± ¡ In the face of the complete collapse of the evidence on which they had based their case linking money growth to price change, the other monetarists have mostly dropped the topic or passed on. Practically everyone today agrees: the Federal Reserve sets the short-term interest rate, and it is interest rates, not the money stock, that drive the economy. Indeed, the Federal Reserve recently quietly ceased to publish certain monetary statistics in which the academic world had lost interest (and no one else ever had any). ¡
A similar fate has befallen the made-for-export version of
the conservative creed, the so-called Washington Consensus of international
development strategies, as a set of universal precepts of sound money, balanced
budgets, deregulation, privatization and free trade. ¡ It turned out that
economic success in the
Everywhere and always, monetarism leads to financial crisis. Supply-side tax cuts have no detectable effect on work effort, or savings, or investment. Financial deregulation, from the savings and loan debacle to the subprime mortgage fiasco, leads to criminal misdirection of the firm. Cuts in government spending are neither necessary nor sufficient for productivity gain. These are facts now well absorbed by practical policymakers ¡ Only the dedicated academic economist can pretend to be unaware of them, and the conservative creed economics survives at all not because of a renewable wellspring of success stories, but only because it retains a powerful grip on the academy itself, on the ideas that scholars reproduce for the close circle of their own journals. (p. 10)
To explain the appeal of conservative economics to the wealthy is no great challenge. These ideas have always enjoyed a firm foundation of support among the rich who want low taxes, among business leaders desiring minimal public oversight (and risk that they might be sent to jail), and among bankers who prefer high interest rates on their loans, if not their deposits. Indeed the confluence and harmony among these constituencies and their allies in academic life is so great that lines of causation are sometimes suspected, by the deeply cynical, to run from the money to the ideas and not the other way around. (p. 15)
It was (and always is) the purpose of an ideology --- of a set of ideas --- to reach out beyond those who were buying and those who were bought, to convince a much larger group with no direct financial stake in policy outcomes. (p. 15)
Conservatives routinely refer to Chavez as a dictator, as they did to Allende, even though both were democratically elected in fair and free elections and ruled according to law. (p. 16)
A great many Americans actually do define themselves by the
kind of shopping they do, as they fill their homes with the shopping that they
have done. Similarly, a great many people loathed the Soviet Union and the
countries of
Presiding over the choices one is free to make, mediating between the choosers and the chosen in the world of buy and sell, is a vaporous but omnipotent institution: the market. The market is the necessary counterpart to economic freedom; it is the broker, the means of detached and dispassionate interaction between parties with opposed interests. The market ensures that one person¡¯s freedom interferes with no other. Buyers want a low price; sellers want a high price. The market works out the price that exactly balances these desires, a price that is fair because it is the market price.
But this raises the question: What exactly is a market? What does it do? How does it work? The ¡°market¡± in modern usage is not some physical location. It is no longer a place on the village square, a flea market, a supermarket, or a Wal-Mart. It is not a place which one can go. It is not a person, a judge before whom one can appear, a jury before whom one must argue. Unlike the government, or a business enterprise, or a court, the market has no specific legal of procedural properties. Is it really an institution at all? Or is it something else, something more general? What, in other words, is the social and political function of this word? ¡ Because the word lacks any observable, regular, consistent meaning, marvelous powers can be assigned. The market establishes Value. It resolves conflict. It ensures Efficiency in the assignment of each factor of production to its most Valued use, and of each consumable good or service to the customer who wants it most, provided, always, he or she can pay. From each according to Supply, to each according to Demand. The market is thus truly a type of God, ¡°wiser and more powerful than the largest computer,¡± its enthusiasts say --- somehow resolving the inchoate mass of differing individual preferences into a common best outcome. Markets achieve effortlessly exactly what governments fail to achieve by directed effort. No fuss, no muss, no budget, no time wasted in discussions, no voting and no appeal. ¡
O f course, economics would not exist at all if the economist did not make some effort to study the organization of markets --- their conduct, structure, and performance. And this study leads to doubts and questions. To achieve everything of which they are supposed to be capable under ideal conditions, markets must ¡°work¡±. And if they do not? If monopoly, oligopoly, monopsony, asymmetric information, or externalities or the fundamental irrationalities of the behavior of real people stand in the way? These problems fill economics textbooks and journals, and academic economists have been preoccupied with them for decades. For this reason many academic economists are not in fact the enthusiastists of leaving everything to markets that their public image supposes them to be. But such issues have to be minimalized in political discussions because they open the door to intervention. For the purpose of the conservative economics in the policy realm, an imperfect market is as impermissible as a tolerable government, for once one admits imperfections, something has to be called to rescue, and alas, only government is available for that purpose. And at that point, ¡°freedom¡± is sunk. (p. 19)
The achievement of the conservative economics, as we have already seen, has been to make it the ticket of entry into reputable political discussion, a rite of passage for anyone who wants to be taken seriously on the public stage. ¡
Can anyone in modern American politics actually oppose the market? Of course not. Can anyone deny its relevance, or even its existence? To do so would be political suicide --- precisely like denying the existence of God, and for the same reasons. Though there are many private doubters, the private doubts are edited out of the public sphere. In politics the atheist makes a show of going to church. ¡ To profess skepticism or disbelief is to disqualify oneself on the face of it. Thus, we see the grip of ¡°free-market economics¡± on the public stage: to be taken seriously, one must be able to profess a belief in magic with a straight face.
¡ Many people appear to believe that the best they can do under the circumstances is to hedge and qualify, at the margins. That is, they can aver that the market may be imperfect, that under certain conditions it may fail, that it might function better given the aid of fuller information or certain constraints on behavior. And this position, ¡ has become the ¡°liberal¡± position in debates over markets, linked to the slogan ¡°Making markets work.¡± (p. 21)
Fixed exchange rates and
The Brenton Woods rules provided
that if the
The Bretton Woods system started
to collapse on August 15, 1971, when Richard Nixon closed the Gold window and
devalued the dollar. This was an unprecedented step for the
So from 1971 onward, a worldwide inflation (of dollar
prices) was under way, not directly because of
Congress passed the deficit-reduction package in the late fall of 1993. Given the supposed importance of this action to the climate of expectations, long-term interest rates should have fallen when the one-vote margin to make the bill law was secured. Instead they rose. The policy sequence of cutting budget deficits in order to reassure credit markets and lower long-term interest rates was tried. It did not work.
The recovery took root anyway, and one can pinpoint the date it really began --- precisely --- to February 4, 1994. On that date, Alan Greenspan raised the short-term interest rate, allowing short rates, allowing short rates to begin to catch up to the rise in long-term rates that had been under way for some months by that time. Normally, raising short-term interest rates is a contractionary measure, with negative consequences for growth. But the circumstances in 1994 were special. The nation¡¯s largest banks by that point had been in a state of near-insolvency for half a decade and had been slowly rebuilding their balance sheets by a simple device: milking the government for high interest rates on long-term bonds while paying out very low rates to their depositors. The very steep yield curve then prevailing ¡ meant that a bank could do this, and make at least a modest profit, without lending to business at all. The rise in short rates squeezed the banks¡¯ costs, which had the effect of forcing them to cover their costs with riskier commercial and industrial loans, which up to that moment they had not been willing to make. (p. 60)
Instead of being company men, top executives became, first and foremost, members of a tiny circle of their own. (p. 123)
What had formerly held together as a collective enterprise would now become, in many instances, a game of everyone for himself. (p. 123)
The great corporate scandals that unfolded in the 1990s and in the early 2000s were, in essence, an attack from above on corporate structures already weakened by competition from imports, by the movement of the technologists into their own companies, and by the decline of countervailing power. (p. 124)
Each such collapse was initially rewarded, not punished, by the financial markets. In no case did the financial markets detect the fraud. Quite the contrary, the markets converted the fraudulent enterprise into a performance standard by which other corporations in the same field were to be judged. Nor did any large accounting or auditing firm blow the whistle; again to the contrary, all the major frauds had their books cleared by reputable accountants. Nor did the ratings agencies, then or later, intervene. In this way, the financial markets and the institutions that are supposed to foster their reputations actually propagated the pressure for fraud, if not fraudulent conduct itself, from one firm to the next. (p. 124)