Posner on the Precipice
Richard Posner's latest conversion is both charming and alarming. It is charming because it exhibits a youthful enthusiasm for a newly discovered idea: Keynesianism. He just recently read John Maynard Keynes's book The General Theory of Employment, Interest and Money. Posner's tone echoes that of Paul Samuelson, when he says,
To have been born as an economist before 1936 was a boon — yes. But not to have been born too long before!
Then Samuelson quotes William Wordsworth:
Bliss was it in that dawn to be alive,
But to be young was very heaven!
I can see why Posner might find it liberating. In recent years, Posner abandoned his rational-choice approach in law for what he has been calling "pragmatism." Keynes also thought of himself as a pragmatic, nondoctrinaire person — one who by skillful policy would save the best of capitalism. (Of course, his antipathy to stock markets, the resource-allocation role of interest rates, and even the idea of inherent scarcity makes one wonder what he was trying to save. Let that pass.)
So Keynes enables Posner to throw off the shackles of rational choice almost completely.
It is also alarming to see Posner go this way — picking up the "latest" intellectual fashion with little regard for the mountain of scholarly criticism of Keynes's book that has accumulated since its publication. Posner is a voracious reader and a brilliant man. Has he forgotten to perform his "due diligence"? I do not know. I do know that he writes his article in the New Republic as if nothing had been written critical of Keynes. It especially disturbs me that he ignores both F. A. Hayek and Milton Friedman, each of whom had a few important things to say.
Perhaps it is too much to ask for subtlety in a magazine article. And yet Posner has been subtle in general forums of discussion in the past.
As an author of The Economics of Time and Ignorance, I am fully on board about incorporating some of the valuable insights Keynes had into my own largely Austrian perspective. I have even blogged about the similarities between Keynes's view of the method of economics and that of Hayek. They both were strong proponents of "subjectivism" and opponents of excessive formalization.
On the other hand, I can understand the dismissive attitude toward Keynes exhibited by Ludwig von Mises. Mises thought that Keynes was an enemy of the economic way of thinking. He entitled a critique of Keynesianism, "Stones into Bread: The Keynesian Miracle."
A fundamental difficulty with Keynes is that he gives us no way of determining when ordinary rational-choice microeconomics — with its concern for such mundane things as resource allocation — is appropriate and when it is not. Even in nonrecessionary times we are always threatened with sour animal spirits. Consider this statement from Posner's article:
Owing to uncertainty, businessmen even in the best of times lack "strong roots of conviction" in their estimate of what the future holds, and so a sudden change in economic conditions can paralyze them. If so, a downward spiral will develop, as falling demand and falling investment reinforce each other, causing layoffs that reduce incomes and therefore consumption and production, and so induce more layoffs. (emphasis added)
Interest rates must be kept permanently low to avoid continual falls into recession. So the idea of a market mechanism to allocate resources over time is kaput. Stock markets are casinos.
The "socialization of investment" (whatever that means exactly) must take over. The Keynesian is thus always in a position to annul microeconomics "temporarily."
I don't believe that Posner fully understands what he has accepted. Youthful enthusiasm has its virtues. But we cannot be young in spirit forever. For this we should give thanks.