Instead, Obama seems content to define his economic policy largely by contrasting it to Republicans’ neoclassical thinking. Asked how the crisis had changed his and Obama’s economic thinking, Austan Goolsbee, the chairman of the White House Council of Economic Advisers, replied: “The financial crisis of 2008, the flirtation with a Great Depression, [and] the economic pain it inflicted on every other industry and consumer in the economy discredited the notion that every regulation and rule of the road is bad for business. Removing the rules of the road almost destroyed us.”
On the night before Lord Turner’s speech, the headline address at the Bretton Woods conference came from Lawrence Summers, the former director of Obama’s National Economic Council, who still speaks frequently with the president. Summers is an accomplished academic economist whose ideas continue to heavily influence Obama’s thinking, even though he left the White House late last year. Before he spoke at Bretton Woods, Summers took media questions, and a reporter asked how his economic thinking had evolved since his time as an adviser to President Clinton in the late ’90s. “I’m sure there’s some bias toward charitable recollection in what I’m about to say,” Summers began. He went on to express some regret for underestimating the importance of inequality and to say he had “even less confidence in the self-regulating capacity of markets.” But the overall message was clear: What in his thinking had changed? Not much.
Afterward, a New York University professor, Roman Frydman, rushed up to the reporter who asked the question. “What Larry is saying is nonsense,” Frydman said. “He has been in government too long.”
The need to improve on long-held economic thinking flows from the most liberalized system of global commerce in human history—and the mounting complexities and disparities it has wrought. Large swaths of economists, regardless of ideology, have sounded alarms over the dual specters of widening income inequality (disparities afflicting rich and poor countries alike) and mounting public debt in the world’s most mature economies. The global economy has not yet kicked its hangover from the Great Recession, nor has it faced up to the lingering, underpriced risks that could cripple entire nations, such as a highly leveraged banking system and the rising threat of catastrophic climate change.
The previous huge financial crisis, the Great Depression, produced a period of conceptual ferment that overturned economics. To a striking degree, most of the policy options we now discuss without even thinking about them—deficit spending, monetary policy, the role of the Federal Reserve Board, government intervention in general—come from what economists learned by examining that period. It was thanks to the Depression that Keynes created macroeconomics. It was in response to the Depression that Milton Friedman developed his theory of monetarism, rebutting Keynes. The question now is, would Keynes or Friedman, if they lived today, have the same influence? And even if economists had something new and important to tell us, would Washington listen?
How We Got Stuck
There are plenty of policy areas where experts roundly agree but lawmakers divide along immovable partisan lines. Climate change is a good example: Democrats and Republicans disagree over whether to restrict or price carbon emissions, even though the vast majority of climate scientists believe that burning fossil fuels is warming the planet. Economics is different. As Lo of MIT notes, there is suddenly no overwhelming consensus among economists on how the global market functions.
In the past, there has generally been agreement. Up until the Great Depression, most economists believed in the so-called neoclassical model inspired by Adam Smith, the founder of modern economics. Smith wrote in The Wealth of Nations, published in 1776, that the rational self-interest of the millions of individuals who engaged in markets turned chaos into social order. The process by which these individuals bargained and haggled over prices ended up placing a rational and fair value on goods and services for all. Thus, society as a whole was led to greater prosperity and peacefulness as if “by an invisible hand” (although Smith had more caveats about the dire effects of monopolies and other free-market ills than he’s often given credit for). Later, such economists as Leon Walrus theorized that economies reach “equilibrium,” in which supply and demand come into balance, on their own, and society’s needs are thus addressed in an optimal way.
But markets kept misbehaving and breaking down, leading to repeated crises; perhaps the worst of all was the Great Depression. As a result, 150 years after Smith, another Briton, Keynes, led a counterrevolution in economics that produced an alternative model. Writing in a time of self-doubt about capitalism, Keynes argued that the irrational elements of human behavior—what he called “animal spirits,” as seen in the mania and panic of financial markets—would continue to upset markets and cause them to behave badly. That meant there was a need for constant government intervention.