The 'New' Economics: Is Anything Really New?

When it comes to managing the business cycle, Keynesian and laissez faire economics have failed rather spectacularly, their prescriptions leading to increasingly violent bubbles and busts. For this reason there have been calls for a “new economics.” To get there, perhaps we just need to rediscover forgotten economists like Hyman Minsky and Ludwig von Mises.

I was intrigued by an article by Mark Whitehouse in the Wall Street Journal last week. He described how concepts like “leverage” and “collateral,” crucial to understanding credit and commonly discussed by financial economists, remain foreign to mainstream economics.

These are concepts that Minsky understood as far back as the ’60s. His Financial Instability Hypothesis precisely describes the credit bubble and bust we’ve just been through.

Today Minsky is more frequently discussed in investment circles, but his ideas remain largely ignored by academic economics. And they certainly don’t inform policy.

Then there is Mises, who Mark Spitznagel writes in this weekend’s Wall Street Journal “predicted the depression” yet remains totally ignored by the mainstream: “How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale?”

Most likely so, since Mises is generally dismissed as a “sound money” quack.

My favorite forgotten economist is L.M. Holt, who described the debt deflationary theory of depressions in 1897. (For easier reading, I retyped it.)

Irving Fisher, who is credited with that theory thanks to a paper published in 1933, only came to it after being crushed, financially and intellectually, by the Great Crash. (Days before it he declared that stocks had reached “a permanently high plateau.”) Had Fisher read Holt, he might have understood that the market peak was a debt-financed mirage.

Instead of learning from Fisher’s mistake, economists are repeating it, advocating the inflation of a new public debt bubble to replace the private one that just burst.

This is unfortunate. If mainstream economists had the intellectual honesty to admit that their theories don’t properly account for debt, if they gave “fringe” thinkers like Minsky and Mises a fair hearing, we might discover the “new” economics that has been under our noses for a hundred years.

Comments

[bob adamson:]

Mr. Winkler alludes to Hyman Minsky. Minsky was a very interesting thinker (how could he be otherwise given that he drew with inspiration on such disparate sources as Marx, Schumpeter and Keynes for his concepts; and did so with intelligence and perception). Minsky argued that Keynes had been misapplied during the quarter century following WW II because the core of Keynes’s insight was not a bag of monetary and fiscal tricks and tools to fine-tune the economy when recessions threatened but rather it was that the economy was inherently unstable because markets were driven by intrinsic uncertainty about the future and consequent dynamic shifting of market sentiment as populations changed their educated guesses, often instantaneously, about the likely future course of the economy. Minsky suggested that the role of government and central banks was not simply to flood the economy with effective liquidity at moments of recessionary crisis. In fact Minsky observed that one of the key errors of central bankers and governments after WW II was to simply smooth over such mini-crises thereby allowing structural problems in the economy to persist, multiply and deepen. Does this not describe the situation we now face?

Nov 09 09:29 PM

[untrusting ...:]

Rolfe,
Yes, it would probably worthwhile to give serious consideration to the folks you mention and perhaps some of their concepts..

But, until the US brings massive fraud, corruption, misrepresentation, and numerous other financial shenanigans under control, it just will not matter what theories are looked at. It is simply too profitable to game the system for billions/trillions of dollars.

Our suggestion is:
1) Rico Laws - enforce the Rico laws and vigorously prosecute financial crimes. Use total asset consfiscation and serious jail time as the method to reign in financial crimes.
2) Special Prosecutors - Dept. Of Justice is conflicted and understaffed to handle this.
- set up a new SP, staffed by thousands of lawyers and FBI agents.
- use a private sector model - pay for performance or contingency fees. No taxpayer funding or cost. Let SP keep 40-50% of any assets consfiscated to fund and pay themselves. Remaining 50-60% to go directly to pay off the national debt.
- have large whistleblower fees, maybe $1-10 million for convictions and insiders turning in some of the big financial crooks.
- have serious financial and jail penalties for any SP staff convicted of collusion or improper conduct connected to financial investigations.
- give them a mandate to go after insider trading, naked short selling, front running, fraudlent financial products and misrepresentations, medicare fraud, government contractor fraud, fraudlent ratings, fraudlent mortgages generation, etc.
- they ought to be able to generate many billions of dollars annually in asset recoveries and convictions.
- when you put the fear of real consequences and real loss of assets and ongoing monitoring and prosecutions in the mind of Wall Street and financial criminals, then just maybe they will get the message.
- if we can put out rewards of up to $25 million on Sadam Hussain or Osama Bin Laden, then why can't we do the same type of thing on the many thousands of high level financial crooks in the US that are helping to destroy our economic system.

The problem is that the politicans, lobbyists, and big money interests would not be willing to set in motion some type of quasi-independent SP whose sole mandate was going after those same vested interests and big money players.

Nov 09 11:41 PM

[Mr. G:]

Looking back on the last decade, I would blame the deregulation of risk as the primary cause and affect of the current financial crises. The deregulation led to experimentation on a global basis in the banking and lending industry. They worked hand in hand to create new financial instruments on an exponential basis and when the primary thesis underpinning this expansion deflated(the value of real estate), the deflation spiraled to crisis level as the asset base became worthless.

I am tired of hearing that supply side economics answers all economic problems based on some older notions of historic models. The inability to respond to the current global environment except with infantile response seems tied more to politics than reality.

Nov 10 11:01 AM