Root cellar, Theodore Roethke

Nothing would sleep in that cellar, dank as a ditch,
Bulbs broke out of boxes hunting for chinks in the dark,
Shoots dangled and drooped,
Lolling obscenely from mildewed crates,
Hung down long yellow evil necks, like tropical snakes.
And what a congress of stinks!
Roots ripe as old bait,
Pulpy stems, rank, silo-rich,
Leaf-mold, manure, lime, piled against slippery planks.
Nothing would give up life:
Even the dirt kept breathing a small breath.

Entrevista com James Heckman

I interviewed Heckman by telephone in late October. I began by referring to a piece in the University of Chicago Magazine in which he appeared to absolve Chicago economics of any blame in causing the financial crisis. How did he react, then, to the recent criticisms of Chicago School economics from Joseph Stiglitz, Paul Krugman, and others?



James Heckman: Well, I want to distinguish between two different ideas. The Chicago School incorporates many different ideas. I think the part of the Chicago School that has been justified is the claim that people react to incentives, and that incentives are important. Nothing in what has happened invalidates that idea. People did react to incentives—clearly they did. It turned out that the incentives they were reacting to weren’t socially beneficial, but they definitely reacted to them. The other part of the Chicago School, which Stiglitz and Krugman have criticized, is the efficient-market hypothesis. That is something completely different.

I think it is important to put it into historical perspective. In the late nineteen-forties and nineteen-fifties, when Keynesianism was really dominant, that sort of Keynesianism—so-called hydraulic Keynesianism—completely ignored incentives and the way people reacted to them. What Chicago did—Milton Friedman, George Stigler, and others—was to redress that balance. They did a whole lot of empirical studies that showed how people did react to incentives, such as changes in taxes or prices. That was incredibly influential, and it is still is.

In the early nineteen-seventies, Martin Feldstein, of Harvard, showed how changes in unemployment benefits had a big impact on labor supply. That had an enormous impact on policy, and it was an application of Chicago economics. Feldstein said he read [Friedman’s] “Capitalism and Freedom” when he was at graduate school in Oxford, and it had an enormous influence on his thinking. That was the Chicago influence, and it still stands up. Linking empirical work to theory, and showing how things like taxes and government programs impact behavior.

O.K. People were reacting to incentives—the mortgage lenders, the Wall Street bankers, the homebuyers—I agree. But weren’t market prices sending them the wrong signals, and isn’t that an indictment of Chicago economics, which, going back to Hayek, at least, has stressed the role of prices in coordinating behavior?

I tend to think of it more in terms of the market reacting too slowly. Certainly, from the end of 2007 onwards, when it was clear that problems were emerging, many Wall Street professionals steered away from mortgage securities. For a long time, though, the market was sending the right signals. People made a lot of money—the traders, and so on. It turned out not to be socially optimal, but that is a different issue.

[Heckman then criticized behavioral economists, such as Berkeley’s George Akerlor and Yale’s Robert Shiller, for suggesting that the roots of the crisis lay in irrational behavior: overconfidence, animal spirits, and so on. For the most part, individuals responded to market incentives and reacted rationally, he insisted.]

Look, I could subsidize people to murder children, and if I offered enough money I don’t think I would find much trouble finding a ready supply of murderers.

Also, I think you could fault the regulators as much as the market. From about 2000 on, there was a decision made in Washington not to regulate these markets. People like Greenspan were taking a very crude and extreme form of the efficient-markets hypothesis and saying this justified not regulating the markets. It was a rhetorical use of the efficient-markets hypothesis to justify policies.

What about the rational-expectations hypothesis, the other big theory associated with modern Chicago? How does that stack up now?

I could tell you a story about my friend and colleague Milton Friedman. In the nineteen-seventies, we were sitting in the Ph.D. oral examination of a Chicago economist who has gone on to make his mark in the world. His thesis was on rational expectations. After he’d left, Friedman turned to me and said, “Look, I think it is a good idea, but these guys have taken it way too far.”

It became a kind of tautology that had enormously powerful policy implications, in theory. But the fact is, it didn’t have any empirical content. When Tom Sargent, Lard Hansen, and others tried to test it using cross equation restrictions, and so on, the data rejected the theories. There were a certain section of people that really got carried away. It became quite stifling.

What about Robert Lucas? He came up with a lot of these theories. Does he bear responsibility?

Well, Lucas is a very subtle person, and he is mainly concerned with theory. He doesn’t make a lot of empirical statements. I don’t think Bob got carried away, but some of his disciples did. It often happens. The further down the food chain you go, the more the zealots take over.

What about you? When rational expectations was sweeping economics, what was your reaction to it? I know you are primarily a micro guy, but what did you think?

What struck me was that we knew Keynesian theory was still alive in the banks and on Wall Street. Economists in those areas relied on Keynesian models to make short-run forecasts. It seemed strange to me that they would continue to do this if it had been theoretically proven that these models didn’t work.

What about the efficient-markets hypothesis? Did Chicago economists go too far in promoting that theory, too?

Some did. But there is a lot of diversity here. You can go office to office and get a different view.

[Heckman brought up the memoir of the late Fischer Black, one of the founders of the Black-Scholes option-pricing model, in which he says that financial markets tend to wander around, and don’t stick closely to economics fundamentals.]

[Black] was very close to the markets, and he had a feel for them, and he was very skeptical. And he was a Chicago economist. But there was an element of dogma in support of the efficient-market hypothesis. People like Raghu [Rajan] and Ned Gramlich [a former governor of the Federal Reserve, who died in 2007] were warning something was wrong, and they were ignored. There was sort of a culture of efficient markets—on Wall Street, in Washington, and in parts of academia, including Chicago.

What was the reaction here when the crisis struck?

Everybody was blindsided by the magnitude of what happened. But it wasn’t just here. The whole profession was blindsided. I don’t think Joe Stiglitz was forecasting a collapse in the mortgage market and large-scale banking collapses.

So, today, what survives of the Chicago School? What is left?

I think the tradition of incorporating theory into your economic thinking and confronting it with data—that is still very much alive. It might be in the study of wage inequality, or labor supply responses to taxes, or whatever. And the idea that people respond rationally to incentives is also still central. Nothing has invalidated that—on the contrary.

So, I think the underlying ideas of the Chicago School are still very powerful. The basis of the rocket is still intact. It is what I see as the booster stage—the rational-expectation hypothesis and the vulgar versions of the efficient-markets hypothesis that have run into trouble. They have taken a beating—no doubt about that. I think that what happened is that people got too far away from the data, and confronting ideas with data. That part of the Chicago tradition was neglected, and it was a strong part of the tradition.

When Bob Lucas was writing that the Great Depression was people taking extended vacations—refusing to take available jobs at low wages—there was another Chicago economist, Albert Rees, who was writing in the Chicago Journal saying, No, wait a minute. There is a lot of evidence that this is not true.

Milton Friedman—he was a macro theorist, but he was less driven by theory and by the desire to construct a single overarching theory than by attempting to answer empirical questions. Again, if you read his empirical books they are full of empirical data. That side of his legacy was neglected, I think.

When Friedman died, a couple of years ago, we had a symposium for the alumni devoted to the Friedman legacy. I was talking about the permanent income hypothesis; Lucas was talking about rational expectations. We have some bright alums. One woman got up and said, “Look at the evidence on 401k plans and how people misuse them, or don’t use them. Are you really saying that people look ahead and plan ahead rationally?” And Lucas said, “Yes, that’s what the theory of rational expectations says, and that’s part of Friedman’s legacy.” I said, “No, it isn’t. He was much more empirically minded than that.” People took one part of his legacy and forgot the rest. They moved too far away from the data.

Sociedade, Caridade e Verdade

Otima apresentação do importante - mas pouco conhecido - conceito de desenvolvimento integral.



A encíclica papal “Caridade na Verdade” aponta luzes, soluções, saídas para novo modelo de sociedade. Vejamos os princípios que regem o desenvolvimento integral, segundo Bento XVI, para a construção de uma nova mentalidade.

1. O mundo é uma família. Somos imagem e semelhança de Deus, somos irmãos e não apenas vizinhos. A comunidade internacional é uma grande família porque é possível a relação entre os povos, a integração a comunhão. Quanto mais reciprocidade tanto mais nos relacionamos como irmãos, vivendo o bem comum.

2. O primado do “capital humano”. Nossa grande riqueza é a vida, a pessoa, a sociedade. Este é o capital mais precioso a defender. A “lógica do mercado” destrói as riquezas humanas e sociais e cria novas pobrezas: desigualdades sociais, absolutismo do mercado e da técnica, o consumismo, a competição internacional. O “capital humano” consiste em ser mais, conviver como irmãos na confiança mútua, respeito, credibilidade. O “capital social é que importa porque é o desenvolvimento integral e a paz.

3. O principio da gratuidade. É a economia da comunhão que se fundamenta na “lógica do dom” e se expressa na solidariedade, na partilha, na comunhão fraterna. A “economia da gratuidade” significa democratização do sistema econômico, ir além do lucro, superar a corrupção e a criar riquezas para todos. Os ricos devem rever seus abusos, desvios, desperdícios, burocracias, especulações. A economia de comunhão se apóia no da “responsabilidade de proteger”, isto é, dar atenção aos pobres, rever o desarmamento, melhorar a segurança alimentar, regular as migrações, proteger o meio-ambiente.

4. A força do amor. a Doutrina Social da Igreja tem no amor sua via mestra. O amor torna verdadeira a relação humana pessoal e internacional. Cria diálogo, comunhão, confiança e responsabilidade social. O amor vai além da justiça significa “dar do que é meu”. Justiça é dar ao outro o que é dele. A justiça é o primeiro passo do amor. Sabemos que amar é querer o bem do outro. O amor é a possibilidade do bem comum que é caminho político do amor. Este amor fraterno é expressão do amor de Deus. A força do amor possibilita a partilha dos bens, a reciprocidade dos povos, o primado da vida e da pessoa. O amor cuida do outro.

5. A mobilização do coração. O desenvolvimento deve nos levar a “ter mais para ser mais”. Este é o coração da mensagem cristã. Anuncia Cristo, seu evangelho e seu reino, é colaborar com o desenvolvimento. A técnica e as instituições não conseguiram construir um desenvolvimento humano global, integral. Cresce a riqueza e aumenta a pobreza. Vivemos num “hiperdesenvolvimento técnico e num subdesenvolvimento moral”. Os “prodígios da técnica e das finanças” geraram a crise, econômica mundial.
O homem precisa reencontrar-se a si mesmo, reconhecer a lei natural no seu coração. Um coração novo nos dá olhos novos. Novo humanismo se faz com homens novos com novo coração.

6. A fidelidade à verdade. Este é o remédio contra a corrupção. A fidelidade ao homem exige a fidelidade à verdade que é garantia da liberdade. O verdadeiro humanismo é aberto a Deus, à ordem natural, ao bem comum. A exploração, a exclusão, a ilegalidade, as desigualdades sociais vem da perda de valores, do relativismo, da ausência de Deus. Fechados a estes valores estamos sem respiro e inventamos um “humanismo desumano”. Somos prisioneiros da moda. Não pode haver desenvolvimento pleno, nem bem comum sem o bem espiritual e moral. A razão é purificada pela fé e a religião é purificada pela razão para que encontremos o autêntico rosto humano. A verdade promove a “civilização da economia” que consiste em ir além do lucro.

Dom Orlando Brandes

Fonte: CNBB

Entrevista com Gary Becker

I met Becker in his office at the economics department. I began by telling him I had been speaking with his friend and co-blogger Richard Posner, and I asked whether he agreed with Posner that the events of the past two years had called Chicago School economics into question.


Gary Becker: No. I think the last twelve months have shown that free markets sometimes don’t do a very good job. There’s no question, financial markets in the United States and elsewhere didn’t do a good job over this period of time, but if I take the first proposition of Chicago economics—that free markets generally do a good job—I think that still holds.

If I were running an economy, and I was looking for the best way to run it, I would do what India and China did—move much more to a free-market economy. The second proposition of Chicago economics—that governments don’t do a good job. I really don’t understand how, if Posner said that had been undermined, he can infer that. I don’t think the government did a good job in the run-up to the crisis. Posner has himself criticized Alan Greenspan’s low-interest-rate policy. The S.E.C. should have done a lot of things it didn’t do. It’s hard to sustain the belief that governments do well.

What I have always learned to be the Chicago view, and taught to be the Chicago view, is that free markets do a good job. They are not perfect, but governments do a worse job. Again, in some cases we need government. It is not an anarchistic position. But in general governments do a worse job. I haven’t seen any reason to change that other than, yes, we’ve seen another example where free markets didn’t do a good job: they did a bad job. But to me there is no evidence the government did a good job either, leading up to or during the process.

Posner says that the government’s interventions have staved off another Great Depression.

Well, that’s a separate argument. Market economists—take my teacher and close friend Milton Friedman: [he was] a big advocate that the government should have done more during the Depression. The Fed should have done more. It was too passive and the money supply dropped, and so on. So it’s been long recognized that there are situations when you need very strong, temporary government interventions. [Policymakers] did come in here, and they did help. It was a very mixed bag of different policies. I don’t blame them too much for that. It was a novel situation and they were experimenting a lot. I definitely think they helped, though, overall in averting a much more serious recession. A lot of people, including Posner, thought that things were going to turn out a lot worse. We had a bunch of arguments about that on our blog.

Two of the big theories associated with Chicago are the efficient-markets hypothesis and the rational-expectations hypothesis, both of which, some say, have been called into question. How do you react to that?

Well, these are not areas that I have particularly specialized in, but let me give you my reaction. The people who argue that markets were always efficient and there was no problem, that was an extreme position—something a lot of people at Chicago had recognized before. The weaker notion that markets, particularly financial markets, usually work pretty well, and it’s very hard to beat them by investing against them, that I think is still very powerful.

What I think we experienced, and where I think we went wrong, is that we’d developed a lot of new financial instruments, derivatives, and the like. Neither some of the people that developed them nor the practitioners really understood how these derivatives worked in different situations. Like mortgage-backed securities—I don’t think you are going to see them being very popular in the future. So, there were innovations. They had good aspects, but they had aspects that didn’t work out very well, and so the markets weren’t very efficient in these cases.

Yeah, markets aren’t fully efficient. Expectations go wrong. We’ve seen many other episodes in the past where expectations have gone wrong, where it looks like there were bubbles that happened. Certainly, in the housing market it did look like there was a bubble going on, and people were anticipating prices still going up. Nevertheless, the notion that people are forward looking and try to get things right, and often they do get things right—I still think that comes through O.K. You just have to be more qualified and more careful in how you state it.

That would be my interpretation. Yes, weakened in terms of simple mechanical application, but the general thrust that markets are more efficient than any alternative—that aspect I don’t think is going to be changed. I don’t think you are going to see the world moving away from markets, including financial markets…. I don’t see China or Brazil, or a lot of other developing countries, making any radical changes in their movements towards the market, and I think for good reason.

If you take the last twenty or thirty years—take the good and the bad, including this big recession—growth rates are pretty good…. That’s not only due to markets, but, certainly, market orientation and trade were the major factors responsible for that.

But what about speculative bubbles? I recall interviewing Milton Friedman, in 1998, I think, and he said he thought the stock market was in a bubble. The idea that Chicago economists don’t believe in bubbles—was that more Greenspan?

Absolutely. I think bubbles have been recognized. Certainly, Friedman and others, including myself, said there are phenomena that are hard to explain without thinking it’s a bubble. The people working in macro theory have had difficulty deriving these bubbles from any reasonably rational set of actors that are somewhat forward looking, although there are models that can do it now. That’s an analytical challenge. But the fact that there have been episodes throughout history that were clearly bubbles, that foreign-exchange rates overshoot and undershoot their real values—yes, I don’t think there’s any question about that. I don’t think that most Chicago School economists thought that these things didn’t happen. I think most Chicago economists recognized that, and, certainly, Milton Friedman did.

Lots has changed at Chicago in recent years. What if anything is distinctive about Chicago economics these days?

It’s not as distinctive as it was when I graduated with my Ph.D. from Chicago. In those days, there was a great belief in the price system, in people’s incentives, and in linking theoretical research to empirical research. That wasn’t common at most of our competitors. Both in micro and in macro, there were major differences. Chicago was hostile to Keynesian economics when I was in graduate school. Now there’s been a lot of convergence, particularly in the micro side of things. Chicago is less unique than it used to be.

But I do think there is still a considerable distinctiveness about what might be called Chicago economics. One is skepticism about governments—that governments can organize activities well…. I think that is still a much stronger view in Chicago than in most other places.

Two, more from the micro economists who analyze markets and how people respond to incentives, I think Chicago economists still consider that more important than most other places and don’t believe you can begin to understand how economies work, either empirically or theoretically, without giving that a major role. That’s not as sharp a difference as it was, but I still think it is significant enough to say there is a difference between Chicago and other places.

Are these differences reflected in teaching?

It’s certainly reflected in our course. [Becker and his colleague, Kevin Murphy, teach a graduate course in price theory.] Students tell us they haven’t had a micro course like this before. It would be reflected in a number of courses taught in both the business school and the economics department, and also in the law school courses, including some of Posner’s.

So the rest of the world has moved closer to Chicago?

No question. Quantitative work linked to theory and incentives—that’s much more commonly found at our competitors. When I went out on the job market, there were some places that wouldn’t hire a Chicago economist, like Berkeley, for example. For decades they didn’t hire a graduate of Chicago. Harvard wasn’t too thrilled with the idea either.

Do Chicago economists now get hired more widely?

Well, much more so than they did. Harvard has a number of Chicago people, liked Ed Glaeser and others. M.I.T. has several Chicago people. Princeton has several. Even Berkeley has one or two. I’m not sure. Stanford certainly does.

What about the notion of rationality and economics, which you yourself are closely associated with. How much of that is still valid?

I think most of it is still valid. It depends on what you mean by rationality. But if you take the view that consumers, on the whole, react to incentives in the way you would predict they would respond—you get very misled in the world if you don’t put a lot of emphasis on that.

Now there’s behavioral economics, which has two strands. One is extending the motives of people, which I worked a lot on from my dissertation on. Chicago was a pioneer in that. It’s gone further, but Chicago was a pioneer.

The other aspect is that consumers make a lot of mistakes. I think there is no question that consumers make mistakes, and I think some of the behavioral-economics literature has made useful contributions in pointing out some of the types of mistakes…. That has been very useful but it certainly doesn’t overthrow the notion … one, that consumers most of the time make pretty good choices for themselves; and two—now I come back to the government—they generally make better choices than a government body would make for them. That thing we started our discussion with, I think has to be brought into play in evaluating the implications of, say, behavioral economics or books like “Nudge.”

A lot of behavioral economics has been devoted to finance. What about investors—are they rational?

Well, in the following sense. Not all investors are—surely not. But I think it’s not very easy to do better than the market. If you look at the behavioral economists who run hedge funds, I don’t think, on the whole, they have done much better than others.

It’s not easy. Yes, there are a lot of mistakes made, but to take these mistakes and make money from them…. Some trends have been found—the small stock bias, and so on. It shows there are trends that can persist. But on the whole, if you look at financial markets they do a pretty good job—not a perfect job. And I think pointing that out has been a useful contribution. There was some theology built into the efficient-markets literature—some of it in Chicago. It became more theological than based on empirical evidence. So I think the attacks on it didn’t eliminate the real heart of it—these markets work pretty well—but there have been things that are puzzling to explain in a simple efficient-markets hypothesis.

What about the revival of Keynesianism, which, again, Posner is associated with? That goes directly against the Chicago School. What is your response to that?

Well, firstly, as a factual matter, there certainly has been a strong resurrection. That led me to believe that ninety per cent or so of economists were closet Keynesians all along, but they were afraid to admit it.

How much it has been resurrected? I have a bit of an open mind on that…. A lot of the more explicit Keynesian remedies, like stimulus spending and the like, will need an evaluation of what they did in stemming the tide…. I’m not yet convinced that fiscal policy was very effective in containing this recession. Take the fiscal stimulus package—eight hundred billion dollars. They’ve hardly spent any of it yet. The traditional argument against fiscal stimulus spending, even from those that believed in it, was that by the time Congress got around to deciding how to spend it the recession was pretty much over, so you were spending it at the wrong time. Some of that is going to be happening now…. I think history will say, once we understand it, that it wasn’t very effective. The flexibility in financial response—it was understate in a lot of the previous literature, Keynesian and unKeynesian. That turned out to be important, I think. That’s why I think the Fed, despite some mistakes, did a pretty good job.

What about the area of macro-economic theory. I know it’s not your field…

It’s not Posner’s field either. (Laughs)

The models that Bob Lucas is associated with—rational expectations, dynamic general equilibrium models, and so on. Some people now say that they omitted so much—the entire financial sector was excluded—that they left the economics profession unprepared for this type of eventuality.

Well, I think [Lucas] made a major contribution. I think there is no doubt about it. On the other hand, I think some of the dynamic general equilibrium models that were being promoted in macro didn’t turn out to be that helpful in helping us to understand what to do to combat a major recessionary event. If you look at the policies that were being advocated, both here and elsewhere, they were based on more traditional, I would say Friedmanite, type arguments. So I think there is some validity to that conclusion.

Obviously, other people took that approach even further than Lucas.

Yes, they did. And now we know that you’ve got to add more things into it. And I think we are going to improve macros, but I think some of the models were too simplistic. They captured important parts of the economy, but they weren’t really preparing us for how to handle a crisis, I think that is pretty clear, particularly financial crises.

Surely, the models weren’t merely designed not to handle crises. These models and their builders ruled crises out by assumption, did they not?

Well, some [did]. I don’t think Bob would be one, because I think Bob always thought that money was important. Maybe some of his disciples, or others in the field, did, but I think you’ve got to make a distinction. I don’t think everybody was on the same page on that. Some people did rule out the whole financial sector, seeing money as being unimportant. I think that stuff just turned out to be wrong.

The whole argument of money as a “veil”?

Right.

How do you think that the financial crisis will change economics? The nineteen-thirties revolutionized economics. Do you see that sort of change?

No, not of that magnitude. If this recession had got a lot worse, we would have seen two major changes: much more government intervention in the economy and a lot more concentration in economics in trying to understand what went wrong. Assuming I’m right and, fundamentally, the recession is over—a severe recession but maybe not much greater than the 1981 recession, or those in the nineteen-seventies—I think you are not going to see a huge increase in the role of government in the economy. I’m more and more confident of that. And economists will be struggling to understand how this crisis happened and what you can do to head another one off in the future, but it will be nothing like the revolution in the role of government and in thinking that dominated the economics profession for decades after the Great Depression. The Great Depression was a great depression by any measure you want to take—unemployment, decline in output, and so on. This recession pales in comparison. As a result, I think we are not going to have anything like the reaction we had at that point.

You already see it. There’s been a backing away from some of the things that were being talked about. Pay controls—we are getting some, but less severe ones than people were talking about at the height of the recession.

Do you think that Wall Street needs re-regulating?

Well, I do. I think some additional regulation is needed, and I’ve called for some. But I don’t think you can rely on regulators, because they fail along with the market. If we install rules for capital requirement that would work more or less automatically—I think there is a good case for that, particularly for larger institutions which we know we are going to bail out if they get into trouble.

Some people at Chicago don’t accept the too-big-to-fail doctrine. They say, “Let them go.”

There are two questions. What we should be doing and what we actually will be doing. I don’t think we are going to let them go. We didn’t let them go. We never let them go. Continental Illinois bank we bailed out at a time when it wasn’t such a crisis situation. We bailed out Chrysler. So if you accept that we are going to bail them out you’ve got to do something to reduce the probability that we are going to have to bail them out.

Number two, should we bail them out? I think in this crisis we had to do it. I don’t accept the view that in this crisis we should just have let everything fall where it may. Yeah—the economy would have picked itself up, but I think it would have been a much more severe recession.

So, you are in favor higher capital requirements on banks. Anything else?

Increase capital requirements. I would have a differential requirement for bigger institutions, so they can’t get as big a multiple on their assets. Maybe derivatives markets—those are things I don’t feel very expert on, but I follow the literature a little bit, and I think some changes are needed.

There are a number of things we should be thinking about. But one thing I should stress: I don’t think the regulators did very well during this period, and we don’t want policies that depend on a group of people living in Washington deciding on whether we should be doing something now or not. They didn’t do it well this time. There is no reason to believe they are going to be any smarter the next time, because it’s not going to be exactly the same situation that arises next time.

Do you favor a return to some sort of Glass-Steagall framework? Should we try to separate deposit taking from speculation?

I don’t believe so. I think there are some advantages to combining them. But you may want to force derivatives to go through an organized market. Capital requirements. Swaps—you may want to have some controls on. I hesitate to say more. There are a lot of people out there who know a lot more than I do. But those are the directions I would go in.

A historical question. Chicago was always known for advocating deregulation of various industries—trucks, airlines, and so on. At the time, did people here talk much about deregulating the financial markets as well?

Absolutely. We got rid of Regulation Q—interest rate controls. Milton Friedman and most of us were big advocates of that. Glass-Steagall, there was a lot of opposition to. Derivatives—they came in during the nineteen-seventies, and they weren’t fully understood…. But on the whole, in the nineteen-seventies, there is no doubt that there was support for deregulation of many aspects of the financial markets.

In retrospect, was that position right? Isn’t finance different from other industries?

It depends. We’ve always had regulations on bank reserves and so on. So, clearly, yes, there are differences. You don’t want to think in terms of free banking. I don’t think people at Chicago ever thought… I’ll speak for myself. I never thought, even outside the financial sector, that there should be no regulation. There are externalities. There’s pollution. There are a lot of things you can do. In the education area, the government financing students, and all that. Those things go back a long time. So it was never zero regulation. It was just an observation that in many sectors regulation seemed to be throttling industry—like the airline industry, the trucking industry, all the stock-market regulations: prices were kept up. Nobody wants to go back to the time when you had a cartel and price-setting.

So people at Chicago did accept the need for dealing with externalities? What about Ronald Coase? [Coase, an English transplant who won the Nobel Prize in 1991, is famous for arguing that, under some circumstances, bargaining in the market will take care of externalities.]

Chicago didn’t deny that there were externalities in the world. Chicago people were not anarchists. They always believed there was a significant role for government, and not simply in the obvious areas, like law and the military, and so on. In the educational area, take the vouchers system. It is government financed. There may be competition among providers, but it is government financed. Some help at the college level for people from poor backgrounds—there were many policy areas where Chicago economics tried to analyze what was wrong, and how you should go about fixing it, finding a better way to do it.

Was there anything, looking back, that Chicago got wrong?

(Laughs) There are a lot of things that people got wrong, that I got wrong, and Chicago got wrong. You take derivatives and not fully understanding how the aggregate risk of derivatives operated. Systemic risk. I don’t think we understood that fully, either at Chicago or anywhere else…. Maybe some of the calls for deregulation of the financial sector went a little too far, and we should have required higher capital standards, but that was not just Chicago. Larry Summers, when he was at the Treasury, was opposed to that. It wasn’t only a Chicago view. You can go on. Global warming. Maybe initially at Chicago there was skepticism towards that. But the evidence got stronger and people accepted it was an important issue.

But it hasn’t changed my fundamental view, and I think [the view of] a lot of people around here, that, on the whole, governments don’t manage things very well, and you have to be consistent about that. So I supported, say, the invasion of Iraq. In retrospect, I think that was a mistake, not only because things didn’t go that well, but because I didn’t really take into account enough that governments don’t manage things very well. You really have to have strong reasons for going in.


Fonte: New Yorker

Why not socialism? G.A. Cohen

O grande filosofo marxista(analitico) G.A.Cohen, apresentou em uma Seminário na UCL, em 2008, uma versão do que viria a ser seu último trabalho recentemente publicado:Why not socialism? Comprei meu exemplar na Amazon. com, em 4 de novembro, mas ainda não o recebi . Incrível, mas não tinham em stock e quando finalmente conseguiram enviar um exemplar já estavamos no natal... dai... Vale a leitura, principalmente, para aqueles acostumados com a qualidade sofrivel do marxismo nos dois lados do rio pinheiros.


The question that forms the title of this short book is not intended
rhetorically. I begin by presenting what I believe to be a compelling preliminary case for socialism, and I then ask why that case might be thought to be merely preliminary, why, that is, it might, in the end, be defeated: I try to see how well the preliminary case stacks up on further reflection.
To summarize more specifically: In Part I I describe a context, called “the camping trip”, in which most people would, I think, strongly favour a socialist form of life over feasible alternatives. Part II specifies two principles, one of equality and one of community, that are realised on the camping trip, and whose realisation explains, so I believe, why the camping trip mode of organization is attractive. In Part III, I ask whether those principles also make (society-wide) socialism desirable. But I also ask,in Part IV, whether socialism is feasible, by discussing difficulties that face the project of promoting socialism’s principles not in the mere small, such as within the confined time and space of a camping trip, but throughout society as a whole, in a permanent way. Part V is a short coda

Para ler o resto clique aqui

Annabel Lee, Edgar Allen Poe

It was many and many a year ago,
In a kingdom by the sea,
That a maiden there lived whom you may know
By the name of Annabel Lee;
And this maiden she lived with no other thought
Than to love and be loved by me.

She was a child and I was a child,
In this kingdom by the sea,
But we loved with a love that was more than love -
I and my Annabel Lee -
With a love that the wingéd seraphs of Heaven
Coveted her and me.

And this was the reason that, long ago,
In this kingdom by the sea,
A wind blew out of a cloud, by night
Chilling my Annabel Lee;
So that her highborn kinsmen came
And bore her away from me,
To shut her up in a sepulchre
In this kingdom by the sea.

The angels, not half so happy in Heaven,
Went envying her and me: -
Yes! – that was the reason (as all men know,
In this kingdom by the sea)
That the wind came out of the cloud, chilling
And killing my Annabel Lee.

But our love it was stronger by far than the love
Of those who were older than we -
Of many far wiser than we -
And neither the angels in Heaven above
Nor the demons down under the sea,
Can ever dissever my soul from the soul
Of the beautiful Annabel Lee: -

For the moon never beams, without bringing me dreams
Of the beautiful Annabel Lee;
And the stars never rise but I see the bright eyes
Of the beautiful Annabel Lee:
And so, all the night-tide, I lie down by the side
Of my darling, my darling, my life and my bride,
In the sepulchre there by the sea -
In her tomb by the side of the sea.

Enrevista com John Cochrane

I interviewed John Cochrane in his office at the Booth School of Business, and I began by asking him about the economics of today’s Chicago, and how it differed from the strident free-market school of a bygone era—the Chicago of Milton Friedman and George Stigler.



John Cochrane: This is not an ideology factory. This is a place where we think about ideas and evidence. Gene Fama is in the next-door office. Dick Thaler is across the hall. Rob Vishny is just down the corridor. The Chicago of today is a place where all ideas are represented, thought out, argued. It’s not an ideological place. The real Chicago is about thinking hard and arguing with evidence... We like good quality stuff no matter where it comes from.

And you have some banking experts who can, perhaps, claim to be among the few economists that warned us about this crisis. Raghu Rajan, and so on?

(Laughs) Well, every conference I go to lately, everybody says, “The crash proved my last paper right.” But Raghu and Doug (Diamond) have a better claim to that than most people.

But there is still a Chicago view of the world, even if it is not as dominant as it once was, is there not? One that favors free markets?

Well, many of us at least view free markets as a good place to start, because of the centuries of experience and thought that it reflects. All science is, to some extent, conservative. You find one butterfly that looks weird, you don’t say, “Oh, Darwin was wrong after all.” We have a similar centuries-long experience that markets work tolerably well, and governments running things works pretty disastrously. We have got to think hard before we throw all of that out.

Even our behavioralists are not jumping into “the government needs to run everything.” They are pretty good about (saying) well, if we’re irrational, the guys who are going to regulate us are just as irrational, and they are subject to political biases too. You don’t jump from “We are irrational” to “the federal government is the father who can come and make everything right again.”

Did the government have to step in and save the banks, or should it have let them collapse? Isn’t the free-market view that if Citigroup had been allowed to collapse, Citigroup 2 would quickly have arisen from the ashes?

Yes, this is a good debate we can have. I tend to be fairly sympathetic to that view. Though, in some sense, the government had painted itself into a corner. We did not wake up on September 24 (of 2008) with a completely free market that collapsed. We had a mortgage market that was very much run by the federal government, a very regulated banking system, and everybody expecting that the government was going to bail out the big players.

To say, “wake up on September 24, 2008 and get some spine” is a very different recommendation to saying we need to build a system in which there is less government intervention. If everybody expects you to bail them out than not doing so is much harder.

So, given the circumstances of the time, do you think the federal government did the right things?

No. I don’t want to criticize personalities. If I’m the captain of the Titanic and I’m woken up and somebody says there’s an iceberg two hundred yards ahead, would I have done any better? I don’t know. But I’ve been on the record saying that the TARP policy and the TARP idea—that the key to stabilizing the system was buying up mortgage-backed securities on the secondary market—was a bad idea. Those speeches provoked the panic, probably more than the fact of Lehman going under. When you get the President going on national television and saying, “The financial markets are near collapse,”...if you weren’t about to take all of your short-term debt out of Citigroup, you are going to do so now.

Do you think that what we witnessed was a government failure rather than a market failure?

I think it was a combination, a failure of both. The government set up some regulations. The banks were very quick to get around them. Lots of people did not think enough about counterparty risk, because they thought the government will take care of it. But this was hardly a libertarian paradise gone wrong.

What about today? Do we need more regulation, or should Wall Street be deregulated further, like trucking or telecoms?

Not completely, but a lot more than it is now. And the path we are headed on is allowing the great big banks to do whatever they want with a government guarantee, basically. And then future regulators are going to be so much smarter than the last ones that they’ll keep the banks from getting in trouble, even though we all know we are guaranteeing their losses. This strikes me as a recipe for disaster.

The right and the left agree on that, no?

Yes. (Laughs) If you are going to guarantee them, you can’t guarantee and not regulate. A central bank, a lender of last resort, deposit insurances with the supervision that comes with it—these are reasonable regulations. If you just say regulation versus no regulation that becomes an undergraduate 2 A.M. bullshit fest. Talking about “regulation” vs. “deregulation” in the abstract is pointless. We have to talk about specifics if we want to get anywhere. Stuff like, Do you think credit default swaps should be forced on to exchanges? It’s all very boring to your readers, but unless you are specific you don’t get anywhere... If you are vague, it sounds kind of fun: ideology, Chicago versus Harvard, and so on. But to get anywhere you have to be specific.

The banking research that was done in Chicago before the crisis, about liquidity and so on: Did it attract much internal attention here?

Goodness gracious, yes. It was central. I regard what we went through as not something special or new. We’ve had regular banking panics since at least about 1720. The Diamond and Dybvig paper—(“Bank Runs, Deposit Insurance, and Liquidity,” the Journal of Political Economy, 1983)—which Doug and Phil should have got the Nobel Prize for already, described the fragility of assets where you can run. I don’t think we have systemically dangerous institutions. I think we have systemically dangerous contracts, and bank deposits are one of them, as Doug described. A bank can have risky assets but tell you, “We’ll always pay you a dollar, first come first served.” Doug described how that thing can cause problems, and I think that’s basically what happened.

Doug’s here for a reason. We all said, “Wow, that’s great!” And he’s devoted a career to deepening that analysis. He’s been one of our stars ever since he came here, which must be thirty years ago now.

The two biggest ideas associated with Chicago economics over the past thirty years are the efficient markets hypothesis and the rational expectations hypothesis. At this stage, what’s left of those two?

I think everything. Why not? Seriously, now, these are not ideas so superficial that you can reject them just by reading the newspaper. Rational expectations and efficient markets theories are both consistent with big price crashes. If you want to talk about this, we need to talk about specific evidence and how it does or doesn’t match up with specific theories.

In the United States, we’ve had two massive speculative bubbles in ten years. How can that be consistent with the efficient markets hypothesis?

Great, so now you know how to define “bubbles” for me. I’ve been looking for that for twenty years.

So you take the Greenspan view that bubbles can’t be identified except in retrospect? In 2005, you didn’t think there was a housing bubble?

I think most people mean by a “bubble” just, “Prices were high and I wish I sold yesterday.” The efficient markets (hypothesis) never told you that wasn’t going to happen. What efficient markets says is that prices today contain the available information about the future. Why? Because there’s competition. If you think it’s going to go up tomorrow, you can put your money where your mouth is, and your doing it sends (the price) up today. Efficient markets are not clairvoyant markets. People say, “nobody foresaw saw the market crash.” Well, that’s exactly what an efficient market is—it’s one in which nobody can tell you where it’s going to go. Efficient markets doesn’t say markets will never crash. It certainly doesn’t say markets are clairvoyant. It just says that, at that moment, there are just as many people saying its undervalued as overvalued. That certainly seems to be the case.

Ok, now you know what “efficient markets” means. What is there about recent events that would lead you to say that markets are inefficient? The market crashed, to which I would say, we had the events last September in which the President gets on television and says the financial markets are near collapse. On what planet do markets not crash after that?

There are things, by the way, that I saw last year that say markets are not efficient, but not the ones you had in mind. The interesting things about efficiency are going to be more boring to your readers. There were lots of little arbitrages. For example, you could buy a corporate bond or you could write a credit default swap and buy a Treasury (bond). Those are economically the same thing, but one of those was trading about three per cent higher than the other: one was eighty-two, the other was eighty-five.

So there were arbitrage opportunities?

Well, close to arbitrage opportunities. The problem was that you need funding. You needed to be able to borrow money to buy the corporate bond, and it was hard to borrow money. Those are, strictly speaking, violations of efficiency. Two ways of getting the same thing for a different price—that smells. You’ve gotta rethink some part of your theory. What we saw were funding and liquidity frictions. Those were really interesting last winter.

But that’s not: Why did we see house prices go up and come down? Why did we see stock prices go up and come down? Those things are not new. We saw stock prices go up and come down in the nineteen-twenties, the nineteen-fifties, the nineteen-seventies...

You appear to be saying that the efficient markets hypothesis doesn’t have any implications for the absolute level of prices, just relative prices. How can that be a theory of pricing?

It does have implications for absolute pricing, and the focus of rational/irrational debate is exactly on this question. But last fall was not a particularly new and puzzling data point. The phenomenon of prices going up and coming down is something we have been chewing on for twenty years. So here are the facts:

When house prices are high relative to rents, when stock prices are high relative to earnings—that seems to signal a period of low returns. When prices are high relative to earnings, it’s not going to be a great time to invest over the next seven to ten years. That’s a fact. It took us ten years to figure it out, but that’s what (Robert) Shiller’s volatility stuff was about; it is what Gene (Fama)’s regressions in the nineteen-eighties were about. That was a stunning new fact. Before, we would have guessed that prices high relative to earnings means we are going to see great growth in earnings. It turned out to be the opposite. We all agree on the fact. If prices are high relative to earnings that means this is going to be a bad ten years for stocks. It doesn’t reliably predict a crash, just a period of low returns, which sometimes includes a crash, but sometimes not.

Ok, this is the one and only fact in this debate. So what do we say about that? Well, one side says that people were irrationally optimistic. The other side says, wait a minute, the times when prices are high are good economic times, and the times when prices are low are times when the average investor is worried about his job and his business. Look at last December (2008). Lots of people saw this was the biggest buying opportunity of all time, but said, “Sorry, I’m about to lose my job, I’m about to lose my business, I can’t afford to take more risk right now.” So we would say, “Aha, the risk premium is higher!”

So that’s now where this debate is. We’re chewing out: Is it a risk premium that varies over time, or is it psychological variation? So your question is right, but it is not as obvious as: “Stocks crashed. We must all be irrational.”

And if the explanation is time-varying risk premiums, it could all be consistent with rationality and market efficiency?

Yes. Now, how do you solve this debate? This is supposed to be science. You need a model. You need some quantifiable way of saying, “What is the right risk premium?” or, “What is the level of irrationality—optimism or pessimism?” And we need that not to be a catchall explanation that says, “Oh, tomorrow if prices go up it must mean there is a return to optimism.” That’s the challenge. That’s what we all work on. Both sides say, “We don’t have that model yet.”

(Later in the interview, I brought up the efficient market hypothesis again. This time, Cochrane argued that in some ways what happened to the credit markets was a vindication of the theory, because it showed investors generally can’t beat the market without taking on more risk. Here is what he said:)

If you listened to Eugene Fama and believed that markets are efficient, you wouldn’t have invested in auction rate securities that claimed to be as good as cash, but which offered fifty extra basis points. You wouldn’t have invested in a Triple A rated mortgage-backed securities pool that said this is as good as Treasuries, but offered fifty extra basis points of yield. The whole point of efficient markets theory is that you can’t beat the market without taking on more risk. People (here) were saying for years, if you invest in hedge funds that make abnormally high returns there is an earthquake risk, a tail risk, that nobody is telling you about.

What about the rational expectations hypothesis? Richard Posner is a Keynesian now?

I don’t want to comment on Posner. He’s a nice guy. But I spend my life trying to understand this stuff. My last two papers, which took me three years, were on determinacy conditions in New-Keynesian models. It took me a lot of time and a lot of math. If Posner can keep with that and with Law and Economics, good for him. (Laughs)

Rational expectations. Again, it is good to be specific. What is rational expectations? It is the statement that you fool all the people all the time. In the nineteen-sixties, people said the government can give us a burst of inflation, and that will give us a little boom in output because people will be fooled. They’ll think inflation means they are getting paid better for their work and they’ll be fooled into working harder. The rational expectations guys said, “Well that may happen once or twice, but sooner or later they will catch on.” The principle that you can’t fool all the people all the time seems a pretty good principle to me. So, again, I say be specific. What do you see about the world that invalidates the theory of rational expectations?

O.K. The rational expectations hypothesis by itself is a technical device. But when you marry it to what is, basically, a market-clearing model, which is what Bob Lucas and others did, there is no room for involuntary unemployment, for example. Recessions are a matter of workers voluntarily substituting leisure for work. Is that realistic?

O.K. Now, we are going beyond Lucas to Ed Prescott and the real business cycle school. Today, there is no “freshwater versus saltwater.” There is just macro. What most people are doing is adding frictions to it. We are playing by the (Finn) Kydland and Prescott rules but adding some frictions.

But unemployment is now ten percent. That seems to be inconsistent with a market-clearing model, no?

It’s not as simple as that. Unemployment is job search. I think the rational expectations guys made incredibly valuable contributions. First, the way you do macro. You don’t just write down consumption, investment, and so forth. You really write down an economy. You talk about people and what they want. You talk about their productive opportunities. You talk about market structure. That revolution in macroeconomics remains. New-Keynesians? One hundred per cent, yes: this is how we do things.

The second valuable contribution: As of the seventies, people took for granted is that the way the economy should work is that potential output always looks like this. (Cochrane stood up at the chalk board and drew and straight line rising from left to right.) And anything that looks like this (Cochrane drew a line that zig-zagged as it rose from left to right) is bad. Unemployment should always be constant. Well, wait a minute. That’s not true. The upward trend comes from productivity, and where is it written on tablets that productivity grows at 3.0259 percent constantly. In the nineteen-nineties, you discover the Internet, and it makes sense for output to grow faster, and for everybody under the age of thirty to spend twenty hours a day writing websites. So the baseline of an economy working well will include some fluctuations, and the baseline of an economy well will also include some fluctuations in unemployment.

When we discover we made too many houses in Nevada some people are going to have to move to different jobs, and it is going to take them a while of looking to find the right job for them. There will be some unemployment. Not as much as we have, surely, but some. Right now, ten percent of people are unemployed. Many of them could find a job tomorrow at Wal-Mart but it is not the right job for them—and I agree, it is not the right job for them. That doesn’t mean the world would be right if they took those jobs at Wal-Mart. But some component of unemployment is people searching for better fits after shifts that have to happen. The baseline shouldn’t be that unemployment is always constant. So that is a big and enduring contribution—some amount of fluctuation does come out of a perfectly functioning economy. Now have to talk about how much, not just look at any unemployment and say markets are busted.

Is ten per cent the right number? Now we are talking opinions. My opinion is I agree with you. What we are seeing is the after-effects of a financial crisis that is socially not optimal—agreed one hundred per cent. But what we need is models, data, predictions to really talk about this. Not my opinion versus your opinion.

Years ago, Bob Lucas said something similar to what you are saying about the Great Depression—that many of the unemployed could have taken jobs at lower wages.

Yes, but it wasn’t the right thing for them to do. Let me not even hint that this is the right thing now. We had a financial crisis last fall which was socially not optimal. This is probably where the Minnesota crowd would disagree. It seems to me pretty obvious that we had a financial crisis last fall, a freezing up of short-term credit markets, a flight to quality. As a result of that financial crisis, we saw a lot of real effects that didn’t have to happen. Businesses closed and people lost their jobs. It didn’t have to happen. Now in a way, this is what we saw in 1907, 1921, 1849—you can say we’ve seen these things before. There I would agree with you, rather than with some mythical figure from Minnesota who says finance is just totally irrelevant. That makes no sense.

Is that the lesson here—that we need to integrate finance into macroeconomics?

Well, yeah...I’ve been preaching that for twenty years. I do half finance and half macro. I see this as a great research opportunity. People who are trained in macro, they think about the interest rate. They don’t think about variation in credit spreads or risk premiums. In my finance (research), I see risk and risk premiums as being what matters most. Macro until a couple of years ago wasn’t really thinking about risk and risk premiums. It was just, oh, the Fed and the level of interest rates. So I’ve thought these things should marry each other for a long time. But that’s an easy thought to have. Doing it is the hard part.

Has anybody got anywhere on it?

Oh yeah, but it’s hard. Asking big questions, talking about fashionable ingredients is easy, it’s the answers that are hard, actually cooking the soup. People also say economics needs to incorporate the insights of psychology. Great. Thanks. I’ve heard that from (Robert) Shiller for thirty years. Do it! And do it not just in a way that can explain anything. Let’s see a measure of the psychological state of the market that could come out wrong. That’s hard to do. Calling for where research should go is fun, but I think it’s far too easy.

Back to John Maynard Keynes. Judge Posner is not the only who has rediscovered him and his policy prescriptions. You have been very critical of the Obama administration’s stimulus package and of the Keynesian revival. Why?

Look, evaluating economic models is a lot harder than just staring out the window and saying, “This is going on. Keynes was right.” Nothing in the incoming data has removed the inconsistencies that plagued Keynesian economics for forty years until it was thrown out. I mean, we threw it out for a reason. It didn’t work in the data. When inflation came in the nineteen-seventies that was a major failure of Keynesian economics. It was logically incoherent.

What happened is the government wanted to spend a lot of money. They said “Keynesian stimulus” and people got excited. What event, what data says we’ve got to go back to Keynesianism? Again, I’m going to throw it back on you. What about it other than that Paul Krugman thinks we need another stimulus tells us that this is an idea to be rehabilitated?

You don’t believe stimulus packages work. You are arguing what—every dollar the government dissaves somebody else saves with an eye to the future tax burden? The so-called “Ricardian equivalence” argument: Is that it?

I would go further. Ricardian equivalence is a theorem, a theorem whose “ifs” are false. But it is a nice background theorem. In the world of that theorem, deficit finance spending has no effect whatsoever—really, no effect different from taxing people now and spending—because, as you mentioned, people offset it by saving more. Now, we know that theorem is false. One of the ifs is “if the government raises taxes by lump sum payments.” In fact, the government raises money by taxes that distort incentives, so, if anything, you are going to get a negative multiplier—a bad thing. However, government spending also changes the composition of output. You build roads. There are lots of models where you can have a positive effect, so I don’t want to say exactly zero. But if you want to get a multiplier you have to say exactly which “if” is false, exactly what friction you think the government can exploit to improve things by borrowing and spending and how.

What do you think the fiscal policy multiplier is?

I think it is the wrong question. In many models with positive multipliers it is socially bad to do it. Just because you get more output doesn’t mean it is a good thing. People have pointed to World War II and (said), oh, there’s a case where we had lots of output. “Well, let’s fight World War II again” is not socially good.

So is that your argument against the stimulus? Or you just don’t think it will work?

The claim was that this would, on net, reduce unemployment, create jobs, improve the economy in some quantifiable way. I just don’t think it is going to happen. My guess is (that the impact is) a lot closer to zero, and probably slightly negative, for deficit spending right now.

Why? What is the mechanism that prevents it from working?

It is even deeper than saying people will respond by saving. First of all, there’s this presumption that spending is good and saving is bad—except that we also want saving to be good and consuming bad. Let me try to put it (like this): You save money. It goes into a bank, which lends it out to somebody to buy a forklift. Why is that bad, but you buying a car with the same money is good? So, presumption number one, that consuming rather than saving is good for the economy, I don’t get that. The Chinese are investing fifty per cent of their income, and they seem to be booming.

Second, just on basic accounting: I’m going to be the government, I’m going to borrow from you, and I’m going to spend it. So over here, that’s more output. But you were going to do something with that dollar, which is now invested in government debt. Now, what else were you going to do with it? Well, you were going to buy a mortgage backed security; you might have bought a car. You were going to do something with that money. So, on basic dollar accounting, if I take that money that’s a dollar more demand, but you have a dollar less demand.

Barro’s theorem is about tax vs. debt financing having no effect whatsoever. This is a deeper point. If you were going go buy a car, and I, the government, go and build a road, we have one less car and one more road, so there is an effect. But we have one less car. That money has to come from somewhere. That’s what people miss out when they think about the stimulus.

What about if foreign investors are buying the government bonds, as they are in the U.S. case? Surely, they are not crowding out domestic demand?

Well, that makes it harder to explain. We have to go through the fact that trade is balanced. If they were not buying the bonds, they were going to do something with that money, and blah, blah, blah. You can shuffle resources around, but you can’t create anything out of thin air.

The other reason I’ve been against the stimulus: it’s pretty clear what the problem with the economy was. For once, we know why stock prices went down, we know why we had a recession. We had a panic. We had a freeze of short-term debt. If somebody falls down with a heart attack, you know he has a clogged artery. A shot of cappuccino is not what he needs right now. What he needs is to unclog the artery. And the Fed was doing some remarkably interesting things about unclogging arteries. Even if (the stimulus) was the solution, it’s the solution to the wrong problem.

If I were Keynes, I would say we are in a recession; we are not the potential output level. There are unemployed resources out there. You’re argument may be correct at full-employment, but when there are unemployed resources out there we can make something out of nothing.

Possibly, but it’s not obvious how “stimulus” is going to help this recession. Think about an unemployed accountant in New Jersey, fired from a big bank. How is going to build a road in Montana going to help him? Keynes thought of a world in the nineteen-thirties where labor was more amorphous labor. If you hired people to dig ditches, that would solve the unemployment line in the car industry. We have very specialized labor, and just hiring people doesn’t resolve the problem. Somebody who lost their job in a bank—building more roads is not going to help them.

It’s a long logical leap from the fact of unemployed resources to the proposition that the federal government borrowing another trillion dollars and spending on pork is going to make those resources employed again.

So what should the government response have been?

Not making so many mistakes. First rule: do no harm. What we experienced was a fairly classic bank run, panic, whatever. There were good things the government did. The Fed intervened very creatively, in sort of a classic lender of the last resort way. We also did a lot of stuff—lots of bailouts—that didn’t need to be done. I think the TARP was silly. The equity injections were silly. Lender of the last resort—get frozen markets going again, and get out of the way—is probably plenty.

And don’t cause more panic. There was lots of confusion and uncertainty about: What’s the government going to do? When is it going to do it? Who is going to get bailed out? Who isn’t going to get bailed out? That doesn’t help.

Where should we go from here? If you were hired as head of the White House Council of Economic Advisers, what would you tell the President?

I’d get fired in about five minutes. I’d start with a broad deregulatory approach to health care reform. There, I just got fired. Financial deregulation, yes, but going in the opposite direction to where they are going. Financial regulation based on getting out of this too-big-to-fail cycle. Setting it up so that those things that have to be protected are, but in as limited a way as possible. Simple, transparent reform.

And I think the government needs to encourage Wall Street to solve its own problems. Let’s go back to Bear Stearns. Here we had a proprietary trading group married to a brokerage. We discovered you could have runs on brokerage accounts—that was the systemic thing. So what I thought would happen after that is that Wall Street would say, “Oh wow, we’ve got a problem!” Marrying proprietary trading to brokerage is like managing gambling to bank deposits. What I thought Wall Street would say is: “We’ve got to separate these things. Customers want to know that their brokerage isn’t going to get dragged down by the proprietary trading desk, and we want to separate them fast so that Washington doesn’t come in and regulate us.” Unfortunately, that’s not what happened. What happened is that everybody said, “Aha, the Fed is going to bail us all out. We can keep this game going forever.”

So what I would like to see is a strong (statement): “You guys have got to set this us so it can go bankrupt next time around. And we are going to set it up so we don’t even have the legal authority to bail you out, so you’d better get cracking.”

You mean a new Glass-Steagall act for Wall Street? Or some version thereof?

Yeah...Glass Steagall itself had a lot of problems, but some of the basic ideas are good.

But the same principle—separating the casino from the utility?

Separating the casino from the dangerous contracts—yes. We all understand that you can’t run an institution that offers bank accounts and gambling in the same place. We are trying to do that now in the hope that the regulators will watch the gamblers. That’s not going to work.

It appears that there is liberal and conservative agreement on this issue.

Yes. Which brings me back to where you started. It’s not about liberal or conservative, and analysis of these things doesn’t have to be ideological. Let’s just think through what works and look hard at the evidence.


Fonte: New Yorker

Entrevista com Eugene Fama

I met Eugene Fama in his office at the Booth School of Business. I began by pointing out that the efficient markets hypothesis, which he promulgated in the nineteen-sixties and nineteen-seventies, had come in for a lot of criticism since the financial crisis began in 1987, and I asked Fama how he thought the theory, which says prices of financial assets accurately reflect all of the available information about economic fundamentals, had fared.



Eugene Fama: I think it did quite well in this episode. Stock prices typically decline prior to and in a state of recession. This was a particularly severe recession. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient.

Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst.

I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.

That’s what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It’s easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.

Are you saying that bubbles can’t exist?

They have to be predictable phenomena. I don’t think any of this was particularly predictable.

Is it not true that in the credit markets people were getting loans, especially home loans, which they shouldn’t have been getting?

That was government policy; that was not a failure of the market. The government decided that it wanted to expand home ownership. Fannie Mae and Freddie Mac were instructed to buy lower grade mortgages.

But Fannie and Freddie’s purchases of subprime mortgages were pretty small compared to the market as a whole, perhaps twenty or thirty per cent.

(Laughs) Well, what does it take?

Wasn’t the subprime mortgage bond business overwhelmingly a private sector phenomenon involving Wall Street firms, other U.S. financial firms, and European banks?

Well, (it’s easy) to say after the fact that things were wrong. But at the time those buying them didn’t think they were wrong. It isn’t as if they were naïve investors, or anything. They were all the big institutions—not just in the United States, but around the world. What they got wrong, and I don’t know how they could have got it right, was that there was a decline in house prices around the world, not just in the U.S. You can blame subprime mortgages, but if you want to explain the decline in real estate prices you have to explain why they declined in places that didn’t have subprime mortgages. It was a global phenomenon. Now, it took subprime down with it, but it took a lot of stuff down with it.

So what is your explanation of what happened?

What happened is we went through a big recession, people couldn’t make their mortgage payments, and, of course, the ones with the riskiest mortgages were the most likely not to be able to do it. As a consequence, we had a so-called credit crisis. It wasn’t really a credit crisis. It was an economic crisis.

But surely the start of the credit crisis predated the recession?

I don’t think so. How could it? People don’t walk away from their homes unless they can’t make the payments. That’s an indication that we are in a recession.

So you are saying the recession predated August 2007, when the subprime bond market froze up?

Yeah. It had to, to be showing up among people who had mortgages. Nobody who’s doing mortgage research—we have lots of them here—disagrees with that.

So what caused the recession if it wasn’t the financial crisis?

(Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.

Let me get this straight, because I don’t want to misrepresent you. Your view is that in 2007 there was an economic recession coming on, for whatever reason, which was then reflected in the financial system in the form of lower asset prices?

Yeah. What was really unusual was the worldwide fall in real estate prices.

So, you get a recession, for whatever reason, that leads to a worldwide fall in house prices, and that leads to a financial collapse...

Of the mortgage market…What’s the reality now? Everybody talks about a credit crisis. The variance of stock returns for the market as a whole went up to, like, sixty per cent a year—the Vix measure of volatility was running at about sixty per cent. What that implies is not a credit market crisis. It would be stupid for anybody to give credit in those circumstances, because the probability that any borrower is going to be gone within a year is pretty high. In an efficient market, you would expect that debt would shorten up. Any new debt would be very short-term until that volatility went down.

But what is driving that volatility?

(Laughs) Again, its economic activity—the part we don’t understand. So the fact we don’t understand it means there’s a lot of uncertainty about how bad it really is. That creates all kinds of volatility in financial prices, and bonds are no longer a viable form of financing.

And all that is consistent with market efficiency?

Yes. It is exactly how you would expect the market to work.

Taking a somewhat broader view, the usual defense of financial markets is that they facilitate investment, facilitate growth, help to allocate resources to their most productive uses, and so on. In this instance, it appears that the market produced an enormous amount of investment in real estate, much of which wasn’t warranted...

After the fact...There was enormous investment across the board: it wasn’t just housing. Corporate investment was very high. All forms of investment were very high. What you are really saying is that somewhere in the world people were saving a lot—the Chinese, for example. They were providing capital to the rest of the world. The U.S. was consuming capital like it was going out of sight.

Sure, but the traditional Chicago view has been that the financial markets do a good job of allocating that capital. In this case it, they didn’t—or so it appears.

(Pauses) A lot of mortgages went bad. A lot of corporate debt went bad. A lot of debt of all sorts went bad. I don’t see how this is a special case. This is a problem created by a general decline in asset prices. Whenever you get a recession, it turns out that you invested too much before that. But that was unpredictable at the time.

There were some people out there saying this was an unsustainable bubble…

Right. For example, (Robert) Shiller was saying that since 1996.

Yes, but he also said in 2004 and 2005 that this was a housing bubble.

O.K., right. Here’s a question to turn it around. Can you have a bubble in all asset markets at the same time? Does that make any sense at all? Maybe it does in somebody’s view of the world, but I have a real problem with that. Maybe you can convince me there can be bubbles in individual securities. It’s a tougher story to tell me there’s a bubble in a whole sector of the market, if there isn’t something artificial going on. When you start telling me there’s a bubble in all markets, I don’t even know what that means. Now we are talking about saving equals investment. You are basically telling me people are saving too much, and I don’t know what to make of that.

In the past, I think you have been quoted as saying that you don’t even believe in the possibility of bubbles.

I never said that. I want people to use the term in a consistent way. For example, I didn’t renew my subscription to The Economist because they use the world bubble three times on every page. Any time prices went up and down—I guess that is what they call a bubble. People have become entirely sloppy. People have jumped on the bandwagon of blaming financial markets. I can tell a story very easily in which the financial markets were a casualty of the recession, not a cause of it.

That’s your view, correct?

Yeah.

I spoke to Richard Posner, whose view is diametrically opposed to yours. He says the financial crisis and recession presents a serious challenge to Chicago economics.

Er, he’s not an economist. (Laughs) He’s an expert on law and economics. We are talking macroeconomics and finance. That is not his area.

So you wouldn’t take what he says seriously?

I take everything he says seriously, but I don’t agree with him on this one. And I don’t think the people here who are more attuned to these areas agree with him either.

His argument is that the financial system brought down the economy, and not vice versa.

Well then, you can say that about every recession. Even if you believe that, which I don’t, I wonder how many economists would argue that the world wasn’t made a much better place by the financial development that occurred from 1980 onwards. The expansion of worldwide wealth—in developed countries, in emerging countries—all of that was facilitated, in my view, to a large extent, by the development of international markets and the way they allow saving to flow to investments, in its most productive uses. Even if you blame this episode on financial innovation, or whatever you want to blame, would that wipe out the previous thirty years of development?

What about here in Chicago—has there been a lot of discussion about all this, the financial crisis, and what it means, and so on?

Lots of it. Typical research came to a halt. Everybody got involved.

Everybody’s got a cure. I don’t trust any of them. (Laughs.) Even the people I agree with generally. I don’t think anybody has a cure. The cure is to a different problem. The cure is to a new problem that we face—the “too-big-to-fail” problem. We can’t do without finance. But if it becomes the accepted norm that the government steps in every time things go bad, we’ve got a terrible adverse selection problem.

So what is the solution that problem?

The simple solution is to make sure these firms have a lot more equity capital—not a little more, but a lot more, so they are not playing with other people’s money. There are other people here who think that leverage is an important part of they system. I am not sure I agree with them. You talk to Doug Diamond or Raghu Rajan, and they have theories for why leverage in financial institutions has real uses. I just don’t think that those effects are as important as they think they are.

Let’s say the government did what you recommend, and forced banks to hold a lot more equity capital. Would it then also have to restructure the industry, say splitting up the big banks, as some other experts have recommended?

No. If you think about it...I’m a student of Merton Miller, after all. In the Modigliani-Miller view of the world, it’s only the assets that count. The way you finance them doesn’t matter. If you decide that this type of activity should be financed more with equity than debt, that doesn’t particularly have adverse effects on the level of activity in that sector. It is just splitting the risk differently.

Some people might say one of the big lessons of the crisis is that the Modigliani-Miller theory doesn’t hold. In this case, the way that things were financed did matter. People and firms had too much debt.

Well, in the Modigliani-Miller world there are zero transaction costs. But big bankruptcies have big transaction costs, whereas if you’ve got a less levered capital structure you don’t go into bankruptcy. Leverage is a problem...

The experiment we never ran is, suppose the government stepped aside and let these institutions fail. How long would it have taken to have unscrambled everything and figured everything out? My guess is that we are talking a week or two. But the problems that were generated by the government stepping in—those are going to be with us for the foreseeable future. Now, maybe it would have been horrendous if the government didn’t step in, but we’ll never know. I think we could have figured it out in a week or two.



So you would have just let them...

Let them all fail. (Laughs) We let Lehman fail. We let Washington Mutual fail. These were big financial institutions. Some we didn’t let fail. To me, it looks like there was not much rhyme or reason to it.

What about Ben Bernanke and Hank Paulson’s argument that if they hadn’t taken action to save the banks the whole financial system would have come crashing down?

Maybe it would have—for a week or two. But it pretty much stopped for a week or two anyway. The credit markets stopped for more than a week or two. But I think that was really a function of increased uncertainty about the future.

Did you think this at the time—that the government should let the banks fail?

Yeah—let ‘em, let ‘em. Because the failures of, like, Washington Mutual and Wachovia—other banks came swooping in to pick up their deposits and their other good assets. Of, course, they didn’t want their bad assets, but that’s the nature of bankruptcy. The activities that these banks were engaged in would have continued.

Why do you think the government didn’t just step back and let it happen? Was the government in hock to Wall Street, as many have claimed?

No. I think the government, Bernanke...Bob Lucas, I shouldn’t quote Bob Lucas, but what he says is “not on my watch.” That, basically, there is just a high degree of risk aversion on the part of people currently in government. They don’t want to be blamed for bad outcomes, so they are willing to do bad things to avoid them. I think Bernanke has been the best of the performers.

Back to Chicago economics. Is there still anything distinctive about Chicago, or have the rest of the world and Chicago largely converged, which is what Richard Posner thinks?

The rest of the world got converted to the notion that markets are pretty good at allocating resources. The more extreme of the left-leaning economists got blown away by the collapse of the Eastern bloc. Socialism had its sixty years, and it failed miserably. In that way, Chicago theory prospered. Milton Friedman and George Stigler were fighting that battle pretty much alone in the old days. Now it is pretty general. An experience like we’ve had rehabilitates the remnants of the old socialist gang. (Laughs) Unfortunately, they seem to be in control of the government, at this point.

In the old days, a person like (Richard) Thaler would have had trouble getting a job here. But that was a period of time when Chicago economics was basically under attack the world over. There was a kind of a bunker mentality. But now we’ve become more confident. Now, our only criterion is we want the best people who do whatever they do. As long as they are honest about it, and they respect other people’s work, and we respect their work, great.

I know the business school has a lot of diversity, but is that also true of the university economics department?

Sure. John List is over there. He’s a behavioral economist. Steve Levitt is a very unusual type of economist. His brand of economics, which is an extension of Gary’s is taking over microeconomics.

I spoke to Becker. His view is that what remains distinctive about Chicago is its degree of skepticism toward the government.

Right—that’s true even of Dick (Thaler). I think that is just rational behavior. (Laughs) It took people a long time to realize that government officials are self-interested individuals, and that government involvement in economic activity is especially pernicious because the government can’t fail. Revenues have to cover costs—the government is not subject to that constraint.

So you don’t accept the view, which Paul Krugman, Larry Summers, and others have put forward, that what has happened represents a rehabilitation of government action—that the government prevented a catastrophe?

Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs)

And Larry Summers?

What other position could he take and still have a job? And he likes the job.

What is your view on regulating Wall Street? Do we need more of it?

I think it is inevitable, if you accept the view that the government will bail out the biggest firms if they get into trouble. But I don’t think it will work. Private companies are very good at inventing ways around the regulations. They will find ways to do things that are in the letter of the regulations but not in the spirit. You are not going to be able to attract the best people to be regulators.

That sounds like an old-fashioned Chicago argument—skepticism about regulation.

Yes. We have Ragu (Rajan), Doug Diamond—they are as good banking people as there are in the world. I have been listening to them for six months, and I would not trust them to write the regulations. In the end, there is so much uncertainty, and so much depends on how people will react to certain things that nobody knows what good regulation would be at this point. That is what is scary about government bailouts of big institutions.

So what should we do? If the President called you tomorrow and said, “Gene, I don’t think our way is working. What should we do?” How would you respond?

I don’t know if these are even the big issues of the time. I think that what is going on in health care could end up being more important. I don’t think we are going down the right road there. Insurance is not the solution: it’s the problem. Making the problem more widespread is not going to solve it.

When all this (the financial crisis) started, I joined the debate. Then I stepped back and said, I’m really not comfortable with my insights into what the best way of proceeding is. Let me sit back and listen to people. So I listened to all the experts, local and otherwise. After a while, I came to the conclusion that I don’t know what the best thing to do it, and I don’t think they do either. (Laughs) I don’t think there is a good prescription. So I went back and started doing my own research.



Couldn’t we just ban further bailouts, passing a constitutional amendment if necessary? That would be in line with your views, wouldn’t it?

Right, but is that credible? It’s very difficult to explain how A.I.G. issued all the credit default swaps it issued if people didn’t think the government was going to step in and bail them out. Government pledged, in any case, have little credibility. But that one—I think it’s pretty sure that we they couldn’t live up to it.

What will be financial crisis’s legacy for the subject of economics? Will there be big changes?

I don’t see any. Which way is it going to go? If I could have predicted that, that’s the stuff I would have been working on. I don’t see it. (Laughs) I’d love to know more about what causes business cycles.

What lessons have you learned from what happened?

Well, I think the big sobering thing is that maybe economists, like the population as a whole, got lulled into thinking that events this large couldn’t happen any more—that a recession this big couldn’t happen any more. There’ll be a lot of work trying to figure out what happened and why it happened, but we’ve been doing that with the Great Depression since it happened, and we haven’t really got to the bottom of that. So I don’t intend to pursue that. I used to do macroeconomics, but I gave (it) up long ago.

Back to the efficient markets hypothesis. You said earlier that it comes out of this episode pretty well. Others say the market may be good at pricing in a relative sense—one stock versus another—but it is very bad at setting absolute prices, the level of the market as a whole. What do you say to that?

People say that. I don’t know what the basis of it is. If they know, they should be rich men. What better way to make money than to know exactly about the absolute level of prices.

So you still think that the market is highly efficient at the overall level too?

Yes. And if it isn’t, it’s going to be impossible to tell.

For the layman, people who don’t know much about economic theory, is that the fundamental insight of the efficient market hypothesis—that you can’t beat the market?

Right—that’s the practical insight. No matter what research gets done, that one always looks good.

What about the findings that long periods of high returns are followed by long periods of low returns?

Now, there is no evidence of that...The expected return on stocks is just a price—the price people require to bear the market risk. Like any price, it should vary from time to time, and maybe it should vary in predictable ways. I’ve done a lot of work purporting to show there’s a little bit of predictability in overall market returns, but that branch of the literature has so many statistical problems there’s not a lot of agreement.

The problem is that, almost surely, expected returns vary through time because of risk aversion—wealth, everything else varies through time. But measuring that requires that you have a good variable for tracking (risk aversion) or good models for tracking it. We don’t have that. The way that people do it, including me, is by using kind of ad hoc variables to pick it up. All the argument centers on whether what’s picked up by these variables is really what’s there, or whether it is just kind of a statistical fluke. There’s a whole issue of the Review of Financial Studies with people arguing very vociferously on both sides of that. When that happens, you know that none of the results are very reliable.

Do you and Dick Thaler discuss this stuff when you are playing golf?

Sure. We don’t want to discuss his golf game, that’s for sure.

Has the advance of all this behavioral stuff, behavioral finance, made you rethink anything?

Yes, sure. I’ve always said they are very good at describing how individual behavior departs from rationality. That branch of it has been incredibly useful. It’s the leap from there to what it implies about market pricing where the claims are not so well-documented in terms of empirical evidence. That line of research has survived the market test. More people are getting into it.

But you are skeptical about the claims about how irrationality affects market prices?

It’s a leap. I’m not saying you couldn’t do it, but I’m an empiricist. It’s got to be shown.

Thanks very much. Finally, before I go, what about Paul Krugman’s recent piece in the New York Times Magazine, in which he attacked Chicago economics and the efficient markets hypothesis. What did you think of it?

(Laughs) My attitude is this: if you are getting attacked by Krugman, you must be doing something right.

Fonte: New Yorker

Entrevista com Posner

I[John Cassidy] spoke to Posner in his chambers at the Federal courthouse in downtown Chicago, where he sits on the United States Court of Appeals for the Seventh Circuit. I began by telling him that I was researching an article about how the financial crisis had affected Chicago economics, and, indeed, economics as a whole.


At this distance from the financial blow up, what was the nature of the intellectual challenge it presented?

I think the challenge is to the economics profession as a whole, but to Chicago most of all.

Has there been much self-analysis, or critical reassessment of long held positions, here in Chicago?

I don’t think so. There are people here who are not part of the orthodox Chicago School—the Bob Lucas/Gene Fama crowd—people like Raghu Rajan, Luigi Zingales, and Dick Thaler. But I don’t think there has been much in the way of re-examination.

What about your critique of some aspects of Chicago economics, which you detailed in your recent book, “A Failure of Capitalism?” Have you received much of a reaction to that?

I’ve had an exchange with Lucas and Fama—some of it on my blog at The Atlantic. It’s all very civil: not angry. But I think they are pretty much sticking to their guns. (Laughs.) Even before this, macro was seen as quite a weak field, and the efficient markets theory had taken a lot of hits: the behavioral finance school—Andrei Shleifer, Bob Shiller. Already, the orthodox Chicago position had been under criticism. But last September’s financial collapse came as a big shock to the profession.

What is Chicago macroeconomics? And what went wrong with it?

Going back to Milton Friedman, there was the idea that the Great Depression was a product of inept monetary policy and could have been avoided if only the Fed had not tightened the money supply. That remains very controversial, but also it didn’t prepare anybody for what has happened recently. The concern then was that the Fed had raised rates prematurely during the Depression. But now the concern is that the interest rates were too low during the early 2000s, and that is what precipitated all the trouble. For that, the monetarists were unprepared. When the crisis began Bernanke reduced the federal funds rate essentially to zero and nothing happened. That was the point at which Friedman’s macro theory, along with Lucas’s macro theory, did not have a clue as to what had happened. That was pretty bad.

Also, and more interesting to me, it called into question a whole approach to economics—one that is very formal, making very austere assumptions about human rationality: people have a lot of information, a lot of foresight. They look ahead. It is very difficult for the government to affect behavior, because the market will offset what it does. The more informal economics of Keynes has made a big comeback because people realize that even though it is kind of loose and it doesn’t cross all the “t”s and dot all the “i”s, it seems to have more of a grasp of what is going on in the economy.

In the fall, you wrote a big piece in The New Republic in which you declared yourself to be a Keynesian. What was the reaction to that article?

I haven’t got much of a reaction from my colleagues. Bob Barro (a conservative economist at Harvard) sent me an email in which he referred me to an early article of his. It was a good article.

I think there is a question of whether modern economics, including Chicago economics, is too formal and too abstract. Another question is whether modern economists have lost interest in or feel for institutional detail that might be very important. I don’t know how many of these economists really knew anything about how modern banking operates, how the new financial investments operate—collateralized debt obligations, credit default swaps, and so on.

So modern economics is too formal, and it has lost interest in institutional reality: is that what you are saying?

You don’t want to characterize all of economics in that way. What we tend to think of as the Chicago approach is great skepticism about government and faith in the self-regulating characteristics of markets: that’s the essential outlook of Chicago. In addition, there is the increasing mathematization of economics. That is not necessarily Chicago-led. Chicago once resisted that—people like Ronald Coase and George Stigler. Even Gary Becker—he’s more mathematical than they are, but he’s not as mathematical as, say, M.I.T. and Berkeley economists.

Modern economics is, on the one hand, very mathematical, and, on the other, very skeptical about government and very credulous about the self-regulating properties of markets. That combination is dangerous. Because it means you don’t have much knowledge of institutional detail, particular practices and financial instruments and so on. On the other hand, you have an exaggerated faith in the market.

That was a dangerous combination.

But that is not all there is in economics. There is also behavioral economics, which has made a lot of progress. It’s about challenging the assumptions about markets because of human irrationality. I don’t much like it myself, because I think they are very vague about what they mean by rationality. They use terms like “fairness,” which are really contentless. But some of their skepticism is warranted. And behavioral finance, I find very convincing. It’s obvious if you look at how people trade in markets: they are not calculating machines that flawlessly discount future corporate profits.

I put a lot of emphasis on the Frank Knight (a famous Chicago economist who taught at Chicago from the nineteen-twenties to the nineteen-sixties) and Keynes view of uncertainty. That makes economists very uncomfortable, because it is very hard to model. Once you introduce uncertainty, it means that a lot of consumer behavior is not going to be easily modeled as cost-benefit analysis.

In that sense, then, your version of Keynesianism is what some professional economists would refer to as “Post-Keynesianism”?

Yes. I’ve read Davidson. (Paul Davidson, a professor at University of Tennessee is a leading post-Keynesian.) I’ve read some of those people. But I don’t really get much out of it that isn’t in Keynes. I’m kind of stalled in the General Theory and his essay in the Q.J.E. (In 1937, a year after the publication of The General Theory of Employment, Interest, and Money, Keynes wrote an expository article in the Quarterly Journal of Economics.)

So, in sense, you see yourself reviving an older Chicago tradition—Knightian economics—which in some ways is closer to Keynes?

Not only that, but there is a curious link between Keynes and Coase, even though they are at opposite ends of the political spectrum. I never heard Coase mention Keynes, but I am sure he would have regarded him as a dubious left-wing character Coase is very, very conservative. But they are very similar in their informality. Coase was always saying that he didn’t believe in utility maximization. He didn’t believe in equilibrium. Both of them, they are not concerned with the kind of axiomatic reasoning where you start with human beings assumed to have rational calculators inside them. They are much more likely to take people as they are.

And Knight was not at all a formal economist. His book “Risk, Uncertainty, and Profit,” I read it for the first time. It really was excellent. There’s no math. Coase in his later work: no math. Keynes in the General Theory: some math, but it’s not central to his argument.

Do you regard yourself as an economist?

No. (Smiles) I’m not a professional economist. I don’t have any economics training. But I’m interested in it. I’m not bashful about writing about it.

You’ve received some criticisms from professional economists—from Brad De Long, of Berkeley, and from others.

Yes. These people are impossible. I haven’t read (DeLong’s) academic work, just his blog. His criticism of me was crazy. He had me fighting a last-ditch stand for Chicago—the exact opposite of what I wrote.

It does bother me about economists—not just (Paul) Krugman and De Long; it’s not just a liberal versus conservative thing. Some conservative writing bothers me also. They are not at all reluctant about taking extreme positions in an Op-Ed, or in blogs, and so on. It really demeans the profession. Krugman is obviously a good economist. He’s got this book, “The Return of Depression Economics.” It’s very good...But his column for The New York Times is really irresponsible, nasty. Sometimes on his blog he makes accusations. In one of his columns, he suggested that conservatives were traitorous. He used the word “treason.” I’m bothered by that. If you have a very politicized academic profession, you lose your confidence in their objectivity

Well, some Chicago economists also express very strong views. John Cochrane (a professor at Chicago’s Booth School of Business) for example, says that government stimulus programs don’t have any impact at all on unemployment and G.D.P.

That’s another reason to be distrustful of the profession. You have irresponsible positions about the stimulus on both sides. What are people supposed to believe?

Has your critique of the efficient markets hypothesis made you rethink your view of markets outside of finance?

Even before this, I had become less doctrinaire about markets. For example, one of the topics Gary Becker and I debated on our blog was New York City’s ban on transfats. I supported that. The country has an obesity problem. I didn’t think that just listing the amount of transfats on a menu would deal with it—people don’t know this stuff. I thought a ban, even though it violated freedom of contract, made sense.

What has been Becker’s reaction to your views?

You mean about the economy, about Keynes. I think he disagrees. We had a debate before the university women’s board some months ago. He’s very down on the stimulus. Some of the things we agree about. I thought the cash-for-clunkers program was quite pointless.

Now that we appear to be coming out of the recession, the right is saying things aren’t too bad after all, and that markets are resilient. The left is saying without government intervention we would be back in the nineteen-thirties. What do you think?

It depends what you mean by government intervention. If the government had limited itself to reducing the federal funds rate and had not bailed out the banks, we could easily have gone down the route of the nineteen-thirties. On the other hand, if there had just been a bank bailout and no stimulus, then, no, we would not have gone down as far as the nineteen-thirties, because the economy is different now. In particular, (there’s been) the shrinkage of the construction and manufacturing industries. That is where unemployment was highest in the Depression. And we have the automatic stabilizers—unemployment insurance, and so on. It wouldn’t have been as bad, but it could have been considerably worse without the stimulus. You can never be certain how far down an economy will spiral.

After all the federal government has done, does the amount of public intervention in the economy not worry you?

I think it is worrisome. A lot of things they have done, I don’t approve of. I don’t like the idea of taking an ownership stake in General Motors: I think that’s very bad. I don’t like this messing with compensation: that’s unhealthy. And I’m particularly concerned about the deficits, and what health reform will do to what are already massive deficits. So I don’t think the government’s handling of this has been flawless, by any means. But I think the stimulus probably was essential.

As a result of all that has happened, what has the economics profession learned?

Well, one possibility is that they have learned nothing. Because—how should I put—it market correctives work very slowly in dealing with academic markets. Professors have tenure. They have a lot of graduate students in the pipeline who need to get their Ph.Ds. They have techniques that they know and are comfortable with. It takes a great deal to drive them out of their accustomed way of doing business.

Robert Lucas takes a very hard line on this. He says the theory of depressions is something economics isn’t good at. He hasn’t been doing depression economics, so he’ll stick with what he’s doing and unapologetically.

But isn’t Lucas still offering policy advice on the basis of his theories?

Yes, he is occasionally. But he’s a real academic. He’s content with his academic career and his models and so on. And it isn’t very clear what replaces his modern vision. It isn’t as if there is a school of economics that has great ideas and techniques for dealing with our economic situation.

What about Chicago economics in particular? At this stage, what is left of the Chicago School?

Well, the Chicago School had already lost its distinctiveness. When I started in academia—in those days Chicago was very distinctive. It was distinctive for its conservatism, for its 1968 fidelity to price theory, for its interest in empirical studies, but not so much in formal modeling. We used to say the difference between Chicago and Berkeley was Chicago was economics without models, and Berkeley was models without economics. But over the years, Chicago became more formal, and the other schools became more oriented towards price theory, towards micro. So, now there really isn’t a great deal of difference.

Ronald (Coase) is alive, but he’s very, very old. He’s not active. Stigler is dead. Friedman is dead. There’s Gary (Becker) of course. But I’m not sure there’s a distinctive Chicago School anymore. Except there are probably a higher percentage of conservative people here, but not all. Jim Heckman—not particularly conservative at all. He’s very distinguished. Steve Levitt—he’s very famous. I don’t think he’s conservative. You’ve got people like (Richard) Thaler. So probably the term “Chicago School” should be retired.

There were people—people like Stigler and Coase, Harold Demsetz, Reuben Kessel, and people at other schools like Armen Alchian. They were people rebelling against the very liberal economics of the nineteen-fifties—very Keynesian, very regulatory, very aggressive anti-trust, little faith in the self-regulating nature of markets. Francis Bator, who’s a very distinguished Harvard economist, he wrote a famous essay entitled “The Anatomy of Market Failure.” And he gave so many examples of market failure that you couldn’t believe a market could exist. You have to have an infinite number of competitors, full information, you can’t have any economies of scale, and so on. It was too austere. That was what the Chicago people, with their more informal approach, rebelled against. So we had our moment in the sun, but by the nineteen-eighties the basic insights of the Chicago School had been accepted pretty much worldwide.

Where the divide continues is in macro—in business cycle economics. That’s where you have these very liberal people at Berkeley, Harvard, M.I.T., and so on, and very conservative people like Lucas, Fama, and so on, in Chicago.

You are famous for extending economic analysis, and a free-markets approach, to the law. Has the financial crisis undermined your faith in markets and the price system outside of the financial sector?

No. But of course one of the more significant Chicago (positions) was in favor of deregulation, based on the notion that markets are basically self-regulating. That’s fine. The mistake was to ignore externalities in banking. Everyone knew there were pollution externalities. That was fine. I don’t think we realized there were banking externalities, and that the riskiness of banking could facilitate a global financial crisis. That was a big oversight. It doesn’t make me feel any different about the deregulation of telecommunications, or oil pipelines, or what have you.

Talking of banking externalities, isn’t that an application of traditional price theory? Going back as far as Pigou, economists have talked about externalities in many parts of the economy.

There’s nothing inconsistent with basic economic theory in externalities. Of course, you have to know a lot about banking, and that was not the case with economists. Odd in a way, because macroeconomists and finance theorists have always been interested in banking, but I don’t think they really understood a lot about it.


Fonte: New Yorker