Richard Posner on the Precipice

by Mario Rizzo   

Richard Posner’s latest conversion is both charming and alarming. It is charming because it exhibits a youthful enthusiasm for a newly-discovered idea: Keynesianism. He just recently read John Maynard Keynes’s book The General Theory of Employment, Interest and Money. Posner’s tone echoes that of Paul Samuelson:

“To have been born as an economist before 1936 was a boon—yes. But not to have been born too long before!”

Then Samuelson quotes William Wordsworth:

“Bliss was it in that dawn to be alive,
But to be young was very heaven!”

I can see why Posner might find it liberating. In recent years Posner abandoned his rational-choice approach in law for what he has been calling “pragmatism.” Keynes also thought of himself as a pragmatic, non-doctrinaire person – one who by skillful policy would save the best of capitalism. (Of course, his antipathy to stock markets, the resource-allocation role of interest rates, and even the idea of inherent scarcity makes one wonder what he was trying to save. Let that pass.)  

So Keynes enables Posner to throw off the shackles of rational choice almost completely.  

It is also alarming to see Posner go this way – picking up the “latest” intellectual fashion with little regard for the mountain of scholarly criticism of Keynes’s book that has accumulated since its publication. Posner is a voracious reader and a brilliant man. Has he forgotten to perform his “due diligence”? I do not know. I do know that he writes his article in The New Republic as if nothing had been written critical of Keynes. It especially disturbs me that he ignores both F.A. Hayek and Milton Friedman, each of whom had a few important things to say.  

Perhaps it is too much to ask for subtlety in a magazine article. And yet Posner has been subtle in general forums of discussion in the past.  

As an author of The Economics of Time and Ignorance, I am fully on board about incorporating some of the valuable insights Keynes had in my own largely Austrian perspective. I have even blogged about the similarities between Keynes’s view of the method of economics and that of Hayek. They both were strong proponents of “subjectivism” and opponents of excessive formalization.  

On the other hand, I can understand the dismissive attitude toward Keynes exhibited by Ludwig von Mises. Mises thought that Keynes was an enemy of the economic way of thinking. He entitled a critique of Keynesianism, “Stones into Bread: The Keynesian Miracle.”   

A fundamental difficulty with Keynes is that he gives us no way of determining when ordinary rational-choice microeconomics – with its concern for such mundane things as resource allocation – is   appropriate and when it is not. Even in non-recessionary times we are always threatened with sour animal spirits. Consider this statement from Posner’s article:  

“Owing to uncertainty, businessmen even in the best of times lack “strong roots of conviction” in their estimate of what the future holds, and so a sudden change in economic conditions can paralyze them. If so, a downward spiral will develop, as falling demand and falling investment reinforce each other, causing layoffs that reduce incomes and therefore consumption and production, and so induce more layoffs.” (Emphasis added.)  

Interest rates must be kept permanently low to avoid continual falls into recession. So the idea of a market mechanism to allocate resources over time is kaput. Stock markets are casinos. The “socialization of investment” (whatever that means exactly) must take over. The Keynesian is thus always in a position to annul micro-economics “temporarily.”  

I don’t believe that Posner fully understands what he has accepted. Youthful enthusiasm has its virtues. But we cannot be young in spirit forever. For this we should give thanks.

11 thoughts on “Richard Posner on the Precipice

  1. Posner’s intellectual journey reflects what has happened to Chicago School economics. If your colleagues offer nothing but Panglossian bromides on the crisis, you will look elsewhere. This past Spring, Posner and I were both at a conference on the crisis. Most of his comments were sound, and he seemed to appreciate my comments and interventions.

  2. Posner’s pragmatism comes under strong criticism in Albert Alschuler’s 2002 study _Law Without Values: The Life, Work, and Legacy of Justice Holmes_.

  3. I don’t think Posner ever recognized the full extent of the information problem for government agents. He typically ignores Hayek’s seminal insight. Neither does he pay much attention to public choice issues. Most of what he says about the government implies that its agents are both all-knowing and altruistic.

  4. Skimming Posner’s article it seems that his argument for prosperity lies with the Keynesian multiplier. He should read Mark Skousen’s “Economics on Trial” or Murray Rothbard’s “Man, Economy, and State” for devastating criticisms of the Keynesian multiplier.

    Posner’s arguments are of the old fashion Keynesian variety that have been destroyed many times in the past. At least his arguments are nothing to be alarmed about.

  5. Mario,
    your quote of Posner’s contains two of the common but very revealling notions that have become very popular in this recession.

    1) Business confidence is extremely brittle and prone to collapse or semi-collapse at any moment – given some sort of bad news or inexplicable “sudden change in economic conditions” that can “paralyze” the thought of business investors in a collective manner. What evidence exists for these beliefs? What evidence exists that shows business investors are mainly concerned about the future prospects of the economy, rather than their own firms, whose prospects may be very different to the general state of confidence? More generally, what is the scientific status of the notion of ‘animal spirits’ as theory of business investment? It sounds like voodoo economics to me.

    2. “If so, a downward spiral will develop, as falling demand and falling investment reinforce each other, causing layoffs that reduce incomes and therefore consumption and production, and so induce more layoffs.”
    Where will it all end?! This is one of the other popular ideas of late – that a decline in demand is self-perpetuating – that it has no logical end without government intervention. Not even crude Keynesianism suggests that. Simply considering the stablizing affect of the loss of supply with business failure (and not just loss of demand) should be enough to slay the cognitive monster of downward demand spiral. If Posner cannot manage that, he is no economist.

  6. Business men lack strong convictions in everything that do not report immediate money. That is why they do not trust economists. They don’t care about Posner. Keynesian or youthful enthusiasm or not.

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