by Sandy Ikeda
At the Colloquium lunch on Monday, one of my esteemed colleagues wondered aloud whether Paul Krugman’s insistence that the humongous stimulus package needs to be much bigger wasn’t evidence of madness. Then, something came up during the actual colloquium – with Larry White, with whom we were discussing a chapter, dealing with Hayek versus Keynes in the 1930s, from his forthcoming book on the “clash of economic ideas” in the 20th century – that helped a non-macro-guy like me better understand, from a sociological perspective, why economists on different sides of the bailout/stimulus debate often just don’t seem to get each other.
Keynes in his General Theory evidently was little concerned with the causes of the Great Depression, at most invoking the “animal spirits” of private investors to explain the volatile behavior of capitalist economies, which essentially means there really is no rational explanation. Given that, he radically changed the terms of the debate by arguing that the most important thing is to do whatever is necessary to overcome these irrationalities and not worry so much about their causes. He then harnessed his considerable intellect to find interventionist strategies to do just that. Call this the “Keynesian mindset.”
But Hayek and other economists at the time saw their main job as precisely to come up with a theory of the boom and the turning point, e.g., monetary manipulation resulting in unsustainable malinvestment. Moreover, Hayek and most of those today working within the Austrian tradition view the downturn as the inevitable consequence of the boom as well as a period of recovery. Thus they zero in on the incentives and rules of the game that generate the boom and lead to the bust. Call this the “Austrian mindset.”
In his first press conference the other night President Obama, informed by his economic advisors, was emphatic in stating that with respect to the debate over the stimulus bill what he called “doing nothing” is not a respectable option (which implies that doing anything would be better) after eight years of failed “free-market policy. But of course Austrians do basically recommend what might unfairly be called “doing nothing,” just as often the best advice to someone suffering from a hangover is to just sleep it off. Deliberate adjustments to ward off a secondary depression perhaps, but nothing approaching the enormity of the just-passed stimulus package.
Perhaps there’s nothing exceptional in any of this. But I think seeing these fundamentally different mindsets as still underlying two sides (I guess there are others) of the bail-out/stimulus debates reveals another source of the deep frustration on one side and the dismissiveness on the other. (Not hard to guess which is which.)
So while there’s heated argument, there’s really no “clash of ideas” because the debate at a deeper level, the level of mindsets and assumptions, has not been joined. Instead, heads shake on each side at the utter, seemingly willful, blindness and stupidity of the other. The other side isn’t mad or stupid though — it just looks that way.