Richard Posner Is a Suicide Pact
by David Gordon
by David Gordon
Recently by David Gordon: The Struggle for the Control of the Nation's Money
Under Discussion: A Failure of Capitalism: The Crisis of '08 and the Descent into Depression. Richard A. Posner. Harvard University Press (2009). 346 pages.
Richard Posner tells us that capitalism has failed, but his own book leads to an entirely different conclusion.
Posner, a noted federal appeals court judge, helped found the “law and economics” movement. This movement views law as a way to maximize economic efficiency. Because of his activities in this movement, as well as his status as a leading light of Chicago School economics, Posner acquired a reputation as a defender of the free market. Is it not big news, then, when a champion of capitalism must admit that something is wrong with capitalism?
But matters are not what they seem. Posner never was an unalloyed supporter of the free market, and his book does not show that capitalism has failed. True enough, Posner sometimes has opposed excessive government regulation, but he has never defended the free market consistently. Quite the contrary, Posner, a self-proclaimed “pragmatist,” has always readily jettisoned the free market, and a free society more generally, when he thought it necessary. In his Not a Suicide Pact, for example, he urges that even the slight possibility that we may be subject to terrorist attacks justifies massive intrusions on civil liberties.
More important than mistaken ideas about Posner, though, are mistaken ideas about capitalism, as these can lead to serious policy blunders. Posner says that capitalism has failed:
Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government's myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry the economy would still, in all likelihood, be in a depression; what we have learned from the depression has shown that we need a more active and intelligent government to keep a capitalist economy from running off the rails.
Posner's opinion goes directly against the evidence his own book provides. The crisis began, as everyone knows, as a collapse in the housing market. Investment in real estate, through complicated derivatives and other schemes, spread through the entire economy, so that problems in housing could not be contained. The result was a general crisis.
Posner rightly draws an analogy with the American economy in the 1920s:
A stock market bubble developed in the 1920s, powered by plausible optimism (the years 1924 to 1929 were ones of unprecedented economic growth) and enabled by the willingness of banks to lend on very generous terms to people who wanted to play the stock market. … The current economic emergency is similarly the outgrowth of the bursting of an investment bubble. The bubble started in housing but eventually engulfed the financial sector, becoming a credit bubble.
How then should we explain this crisis? Is it not obvious that we should look for a theory that takes depression to be the outcome of an investment bubble? Posner ignores so evident a point, surprisingly for someone often viewed by his acolytes as a veritable genius. He says, first, that we lack a good theoretical account of the origins of depressions:
At the root of the economics profession's failure to anticipate and respond decisively to the depression is the fact that the study of depressions is not a very satisfactory branch of economics… As [Nobel Laureate] Robert Lucas has explained, discussing the Great Depression… “We just don't have a decent theoretical model.”
But “we” lack such a model only if we are Chicago School followers like Lucas or Keynesians like Paul Krugman. There is another account on offer, of which Posner shows himself fitfully aware but never discusses in detail.
Instead, he concentrates almost entirely on the Keynesian and monetarist accounts, deemed by their own advocates to be theoretically unsatisfactory:
The two basic remedial approaches correspond to two theories of the cause of the great depression: the monetarist, that it was caused by the Federal Reserve's allowing the money supply to shrink, causing deflation — and the Keynesian — that private demand for goods and services fell drastically in the wake of the stock market crash and the bank insolvencies triggered by it and that the resulting diminution in the money supply resulted from, rather than caused, the reduction in economic activity.
He barely mentions “a third causal theory ... that the depression was the product of a credit binge in the 1920s,” even though this theory gets right, by Posner's own showing, that both the Great Depression and our current crisis stem from investment booms. He calls this theory by name, the Austrian theory, only once in the entire book.
September 14, 2009
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