Why Tyler Cowen is my favorite bourgeois economist

It actually surprising how hard it is to describe why something like this tickles me so much at the same time as it annoys me. Here's an attempt: it's the way we musters rhetorical turns of self-conscious sophistication--"multiple equilibria," "quality of institutions," "rebuilding trust," "classes beyond 101," "empirics of public choice"--that are more typical of critics of neoclassical economics in order to argue for mostly orthodox (even, as Marx would say, vulgar) neo-liberal positions. He is like a walking disproof of the types who think the way to argue against economists' policy positions is to attack their oversimplifications of social life and human behavior. It doesn't hurt that his criticisms of left-of-center bourgeois economists are not entirely off-the-mark: there very well might not be a politically neutral, technical solution; that is to say, employment and income might not be pushed into self-sustaining growth simply by adding more aggregate demand, no matter where it comes from.

Yet here again, Cowen's sophistication is in the service of vulgarity, because it enables him to simply ignore the systemic irrationality that Keynesianism claims to provide a technical solution for. That is this: there seems simultaneously to be over 10% of the American population that wants to work but is unable to find employment and an immense quantity of money that should in principle be available for investment piling up on corporate balance sheets and in the financial system (as seen, for instance, in rising stock prices and rock-bottom interest rates on U.S. treasuries). If the two could somehow be brought together, then the overall level of economic activity would be higher and everyone would be better off. The Keynesian (and in a different vein, the monetarist) position is that this "failure of markets to clear" can be overcome by preventing large drops (or even extended stagnation) in the overall quantity of spending in the economy.

The problem with this argument is that it is far from clear that the models on which it is based are actually sufficiently accurate descriptions of the economy to make strong predictions. Instead, it often seems like models are chosen because they can possibly express some stylized fact such as the failure of labor markets to clear, regardless of whether or not the mechanism they use to get that (empirically real) result reflect the causes at work in the economy. Such for instance is the talk of sticky wages: labor markets fail to clear because the prevailing wage is too high, and everyone is reluctant to bid down the nominal rate of wages. The absurdity comes out when the left-of-center Keynesian immediately denies the obvious conclusion to cram wages down on the basis of some vague hand-waving.

The hand-waving is necessary because the conclusion is so clearly perverse to the left-of-center Keynesian: businesses are wary about investing so everyone else needs to take a pay-cut. Cowen's genius is that he embraces the perversity. So, as he liked to say for a while, it's probably the case that some significant proportion of the unemployed workforce is "zero marginal product" (ZMP). ZMP workers cannot, in any job, contribute more to the economy than it would cost to pay the overheard costs and their wages. On one level, this is trivially true in any decent model of the capitalist economy: if employing them could yield additional net revenue to any existing business, they would probably be hired by it. But this is precisely the perversity: they shouldn't (and even in our degraded age, can't really) be "fired" from the society as a whole. Just because they can't generate any marginal product profit for a capitalist firm, why shouldn't they be allowed to contribute whatever they can to economic life? After all, it's not like there isn't enough food, shelter, clothing, entertainment, and so on to provide decent lives for them.

Admittedly, the argument is more complicated than this, but Cowen doesn't address it at all. He doesn't have to. To paraphrase the introductory monologue of The Big Lebowksi, "Sometimes there's a man--I won't say a hero, 'cause what's a hero?--sometimes there's a man who, well, he's the man for his time and place, he fits right in there--and that's Tyler Cowen in the twilight of neoliberalism." He doesn't have to address the argument because he lives--we all live--in a political world in which there is no force that demands it be addressed, that can say in response to the idea that wages are too high or that the "marginal product" of employing the unemployed is less than zero that, no, it's the "wages" earned by the bosses that are too high and it's the owners whose existence doesn't contribute anything to society.

Ironically, sometimes left-of-center bourgeois economists will nostalgically warn that if their advice is ignored, such a force will reappear, and its arguments will be much less civil than those of the economists. The economistic right wing--of which Cowen is a preeminent member, not least because his impeccable sophistication separates him from so much of the rest of it--exists to eternally call their bluff, and so far they've been right.

However, to turn the wheel one last time, it's not just that the threat of political unrest is a bluff. It cannot be taken for granted that even if the threat were real--or if the bluff was fallen for--that everything would go as promised. So far in the history of capitalism, there have been four periods of prolonged economic depression, and none of them have been solved by a waving of the aggregate-demand wand to produce full employment and rising wages. The first, in the 1870s, falls suspiciously at the opening of a period of international competition among the industrial states, which carved up the world into empires and ended only in the fire of the Great War. The second, in the 1930s, continued until WWII, in which the U.S. economy was converted to a war machine and the the industrial base--along with a significant chunk of the population--was all but totally destroyed in Europe and Japan. It is true that this was also the period of the birth of the institutions that shaped the broad-based prosperity of the postwar era, in which a stable income and "middle class lifestyle" could be enjoyed by most of the working population. However, this does not mean that the institutions that enabled that trajectory of development in the context of an overall boom that was set off by and for the reconstruction of the civilian economy were themselves contributors to that boom, or even necessary conditions for it. Indeed, those very institutions were perfectly consistent--and at the very least were blamed for--the onset of the third great period of depressed growth, in the 1970s. This time, many of the post-war era's constraints on business activity and the labor market were sacrificed on the altar of "reform" meant to restore profit, and hence the incentive to invest and from that, growth. Over three decades later, probably 4/5ths of us have nothing to show for this, and now we seem to be back in another depression. The left-of-center bourgeois economists would have us believe that there is, this time, a way to restore growth and the broad-based prosperity that has been missing for decades.

Among radicals, one of the deadliest accusations has, historically, been "reformist!" This amounts to the charge of "getting in bed" with the center-left promise of a mutually fruitful capitalism. Yet, the implication of the weight of this accusation is that there is a strange intellectual infinity between the radical left and the staunchly bourgeois right. The two agree in dismissing the promises of the center-left as wishful thinking in the world as it exists; the capitalist economy is, they would both say, a harsh mistress. The left-of-center economists' vision of a rationally managed capitalism is a distraction from what the other two see as the real question: is the harshness (and the irrationality, and the perversity) part of that "realm of the necessary" that human beings have no choice but to adapt themselves to? As has been so often pointed out, this was once--at least into the middle of the twentieth century--a question of active debate, so much so that even a figure like John Stuart Mill felt obligated to concede, for instance, the principle that property rights were a construct of social convenience. Yet, now, outside academic departments--philosophy, sociology, perhaps anthropology and political science, rarely economics--it is no live question at all, so much so that a movement of at most a few tens of thousands that succeeded only in putting the mere fact of economic inequality briefly back into the newspapers and the fulminations of intellectuals and pundits is hailed as an historic achievement.

In a world like this, who can begrudge Tyler Cowen his smugly sophisticated vulgarity?

From the comments, on downturns, fiscal policy, and multiple equilibria:
From Tall Dave:

We were less wealthy than we thought we were.

Call me an AD-denier, but I still think the basic issue here is that you can’t consume more than you produce. Production exists to satisfy demand, but at the same time demand is limited by production. We had a long boom built on the notion we could boost demand and thus supply and thus demand again in a virtuous cycle, and now we are seeing the cycle work in reverse as demand/supply seek their natural levels.

One way to justify this model is in terms of multiple equilibria, and that we have been walking (bouncing our heads?) back down the escalator.  Arguably for the United States this downward bouncing is over.  Along the way we are sending signals about the quality of our institutions and thus shaping the course of the future.

In this model there is still a useful role for fiscal policy.  For one thing, fiscal policy can smooth that ride down the escalator, by spreading the losses out over time, at the cost of future debt of course.  This may be needed if only to make the political economy of decline less bitter; see Spain and Greece.   Nonetheless fiscal policy cannot make up for the output losses at will.  We are not standing in an IS-LM diagram where the difference between “what we have” and “what we could have” is thwarted only by some supposed Austerians who won’t shift the proper curve and yet somehow have taken over some of the biggest spending social democratic, insider-leaning governments in world history.  The IS-LM approach fits in nicely with the view that policy improvement is all about yakking about the obstructionists.  Instead, policy is also about rebuilding trust, not just maintaining ngdp on a decent keel.

There is another possible role for fiscal policy, as there usually is in models of multiple equilibria.  If you ran some super-duper fiscal policy, and invented the flying car, a cure for cancer, and other marvels, the market might suddenly latch its expectations on to a much more positive scenario.  There could be a significant upward bounce to a much higher equilibrium of output and employment.  In any case, the quality of fiscal policy matters, and Keynesian ditch digging probably doesn’t do much for inferences about institutional quality and for the selection of multiple equilibria.  “Spend the money, anywhere” is in my view a deeply pernicious attitude, somewhat akin to thinking you can create a good NBA team, with a strong ethic for quality and work, by tanking for better draft picks at the end of every season.  But no, the internal ethic matters and cannot be first destroyed and then recreated at will.  Good teams don’t usually work that way, and neither do good fiscal policies.

Right now we Americans are building back up to better equilibria, slowly, by showing that our economic institutions are not totally crummy.  This process can take a good while, but in fact our recovery is going better than many people believe.  The eurozone is far — very far — from being on that kind of rebuilding track.

There is plenty of talk about various commentators don’t understand the lessons of Econ 101.  There is a reason why we teach classes beyond 101, and why we spend so much time studying institutions and the theory and empirics of public choice.