The Greenspan: for 40 years I laboured under a bad ideology

Travis Fast,

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.

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4 thoughts on “The Greenspan: for 40 years I laboured under a bad ideology

  1. It is the tragedy of the commons – sold off piece by piece. “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.
    Must be careful with Sachs as he talks one way now but lead in another. He would more inclined to tinker around the edges than change the underlying model that is broken.
    Why I brought up the tragedy of the commons is that fundamental flaw in thinking – that private ownership is better at protecting “the commons” than public ownership and regulation which than moves to environmental protection.
    Private enterprise is about making a profit and as we have seen again, the environment should not be left to vagaries of the market.

  2. It is interesting until today I thought that guys like Greenspan and Sachs were cynical. You know savvy. Sure the ideology was over the top but there was a lot of money to be made. But today, after listening to a pathetic Greenspan, I realized for the first time he was a true believer.

  3. And then today we were graced with the sour notes of our own home-grown right-wing fundamentalist, a much smaller potato, but no less a true believer, David Frum. Indeed, earlier today he hosted CBC radio’s, The Current, and spent the morning interviewing right-wing economists intent on picking up the pieces that their fallen god had left behind. Apparently, the worst is behind us, and in this fear-driven flurry of activity, we must be most fearful that we will swing too far in the opposite direction…socialism. It was like hearing McCain stump. There is no chance that the mainstream of economics will acknowledge any culpability, any kind of ideological blindness. But this should not come as much of a surprise – these are not honest men, intellectually or otherwise. This of course is the deceptive irony and nature of this brand of faith – that it should apparently be grounded in reason and that reason should be nowhere to be found.

  4. Did I see some one allude to free markets? What rot was that? There’s nothing even close to a free market in North America. Even the free market of ideas has some regulation.

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