17 January 2010

Hello Chicago? History is Calling

David Olive has a useful column in today's Star. In it, he describes John Cassidy's analysis in The New Yorker, explaining how the still-in-denial Chicago School of Economics not only misread, but misled American policy makers into the financial debacle from which we are still recovering. Olive notes,
It was the Chicago-influenced lawmakers who relaxed government supervision of financiers with their eyes on the main chance, oblivious of the consequences if their ego and avarice led us all over a cliff. This rankly irresponsible behaviour by the masters of the economy seemed to be validated by the Chicago school's unshakable belief in "efficient-markets hypothesis" and the "rational-expectations theory." The former assumes that the prices of stocks, houses and other assets accurately reflect all available information about economic conditions. The latter insists that all economic players, from everyday citizens to high-rolling CEOs and investors, are both acutely knowledgeable about the economy and act wisely on that knowledge.

Both theories are pure bunkum. And never has there been a shortage of experts with a sense of history to explain why – John Kenneth Galbraith, an economic adviser to three U.S. presidents – being a prime example with his steady output of corrective tomes until his death in 2006. ... What becomes evident, and is downright frightening, in Cassidy's account is how deliberately untutored are the free-market Chicago school economists in ... economics.

Cassidy's full article is behind a New Yorker paywall, but he has posted transcripts of his interviews with key Chicago School figures, including Judge Richard Posner, who has converted to Keynesianism. Well worth the read for those who want to understand what we are up against in attempting to bring the 21st century into, well, the 21st century. Remember, it was Chicago's Milton Friedman who (in)famously said, "a corporation's social responsibility is to increase its profits." To which I say, not in my book.
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