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It's therapy. Okay, maybe a little of both. Fritz Perls, not Carl Rogers.
In "DeLong Smackdown Watch: Paul Rosenberg Sings Talking Heads' "Once in a Lifetime" Department", Brad DeLong takes note of my two recent diaries, "Same as it never was: Economics as if the 20th Century never happened" and "A World Upside Down?"--a field biology approach to economic chaos". His quotation of the first diary ends with this:
Originally, I was going to offer some critique of DeLong's blind spots. But... another paper has been published which does a remarkable job of making sense of what ultimately befuddles DeLong. It's not centered on Obama's circle, but it encompasses that circle as it illuminates a much broader shift in the dynamics of economic hegemony. I'll discuss that paper, "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson, in a diary later today or tomorrow.
and he says that the latter diary fails to deliver, arguing:
Finance is a very powerful interest group, and finance is interested in deregulation. But finance is not interested in austerity.
Back before World War I finance was interested in austerity: their assets were primarily nominal debt, and relatively safe nominal debt as well. They wanted hard money. They did not care much about capacity utilization or employment. But nowadays finance's portfolios are as diversified as anybody's, and financiers lose as much from slack capacity and low demand as anybody.
So right now we have Austerians--our Pointless Pain Caucus--without there being any politically-powerful investor group that benefits from austerity.
I clearly wasn't clear enough in making my argument. But I also think Brad knows better himself. In one context, he surely knows that finance has become decoupled from the underlying economy. But in this context he seems to forget. The argument is not that financiers or investors want austerity out of any particular rational motive. It's that they can make money either way, which allows for what might otherwise be trivial or irrelevant factors or motives to sway them. Or possibly even no factors or motives at all, merely the force of habit. That's what the oligopoly argument is all about.
I clearly wasn't clear enough in making my argument. But I also think Brad knows better himself. In one context, he surely knows that finance has become decoupled from the underlying economy. But in this context he seems to forget. The argument is not that financiers or investors want austerity out of any particular rational motive. It's that they can make money either way, which allows for what might otherwise be trivial or irrelevant factors or motives to sway them. Or possibly even no factors or motives at all, merely the force of habit.
That's what the oligopoly argument is all about--a decoupling of in-group interests from out-group interests along with the intensification of in-group power. Furthermore, the decoupling of interests is not just a static, one-time thing, or a matter of disposition. It's driven by autocatalytic processess reflecting what our friends at the Situationist blog would no doubt call, "the situation of oligopoly," and as they've repeatedly argued, situationist factors routinely trump dispositionist ones.
As I said, in one context, DeLong surely understands this. He's no believer in rational expectations trumping irrational exuberance. He knows that derivative markets can become radically disconnected from the underlying commodities. He must surely know, for example, that there's a great deal of money to be made from green technology, but that there's relatively scant financial market motivation to chase after that money when you can make so much more just churning derivatives all day long. But somehow, this knowledge has become compartamentalized for him. It's not the sort of causation he's looking for, and so he just doesn't see it.
What he's looking for is something that fits into the schema he described in his recent Project Syndicate commentary, "The Retreat of Macroeconomic Policy", where he wrote:
One disturbing thing about studying economic history is how things that happen in the present change the past - or at least our understanding of the past. For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue.
Governments before World War I - and even more so before WWII - did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons, all of which vanished by the end of WWII.
First, there was a hard-money lobby: a substantial number of rich, socially influential, and politically powerful people whose investments were overwhelmingly in bonds. They had little personally at stake in high capacity utilization and low unemployment, but a great deal at stake in stable prices. They wanted hard money above everything.
Second, the working classes that were hardest-hit by high unemployment generally did not have the vote. Where they did, they and their representatives had no good way to think about how they could benefit from stimulative government policies to moderate economic downturns, and no way to reach the levers of power in any event.
Third, knowledge about the economy was in its adolescence. Knowledge of how different government policies could affect the overall level of spending was closely held. With the exception of the United States' free-silver movement, it was not the subject of general political and public intellectual discussion.
All three of these factors vanished between the world wars. At least, that is what I said when I lectured on economic history back in 2007. Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low.
With these factors gone, we should just be fixing things. It's a no-brainer. And yet we are not. That's DeLong's dilemma. And the answer just doesn't look like one expects it too. It's a telepathic Ganymedean slime mold, not a proper multi-celular bipedal chordate like you'd expect. A field exo-biologist wouldn't have a problem recognizing this, but most of us certainly would.
Still, DeLong is closer to getting there than he realizes. When he gets around to talking about "Nietzschean Ressentiment" as a potential causal explantion, he's put his finger on a key ingredient--a micro-psychological factor that just doesn't care who's "better off", so long as someone else is worse off. The problem is, this is only one piece of the puzzle. But it's the right sort of piece and it's the right puzzle. The power of oligopoly that Ferguson and Johnson describe is a more macro-level view of what the puzzle's picture is. The oligopolists aren't the ones feeding on ressentiment, but they sure make a lot of money off of it. And it's fairly likely that Akerloff's work on identity economics could even help to make some degree of sense of all this in the sort of language that DeLong understands very well.
This is not a full-blown course of therapy, I admit. It's barely a beginning. But I hope there's enough here to indicate that it is a beginning. And not just a failed smackdown.
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