In a potential death blow to the foundation of liberal economic theory Alan Greenspan testified today before the house that myopic self interest would not lead to the creation of the New Jerusalem here on earth. In a paraphrase he said with reference to the prevalent ideology underpinning liberal economic theory: “yah it was dangerously wrong-headed.” For the transcript of Greenspan’s written testimony click here. For his exchange with Rep Waxman click here.
In a tense exchange with Representative Henry A. Waxman, the California Democrat who is chairman of the committee, Mr. Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy.
“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
Jefferey Sachs came out on the BBC and said that this was something liberal economists had known since the Great Depression. That may be, but whenever they had the chance to actually do policy deregulation, soft regulation, and an underlying belief in the magical powers of self interest was the more potent policy impulse–how could it not be: it is the basic ontological model. Needless to say after Sachs helped Russia achieve one of the largest peace time contractions–output fell and life expectancy rates also plumeted–Sachs learned apparently what his section of the profession had apparently known since the 1930s.
It would appear therefore that the real significance of Greenspan’s testimony today is that it proves that only a massive blunder with huge human suffering can dissuade the liberal section of the economics profession the degree to which (a) their ideological instincts are no better than anyone else; (b) by extension their policy paradigm is no more scientific than anybody else; (c) their proximity to power makes them more dangerous than other economists; and crucially (d), they are not smarter than everybody else.
However, I expect the general arrogance of that section of the economics profession is so culturally ingrained that points A through D are not going to make a debut in the economics text books anytime to soon. The fixed costs are just too high.