I’ve emerged this morning to report on some of what’s transpired recently. I’m not referring to whatever might have happened yesterday and overnight at major centers of research in neoclassical macroeconomics, such as the University of Minnesota. I’m referring to a new book by John Quiggin entitled Zombie Economics: How Dead Ideas Still Walk Among Us, which was published late last week by Princeton University Press. While this book is not meant to be on the cutting edge of research, it will hopefully help to bring popular discussion of mainstream macroeconomics and its foibles up to date, adopting a welcome skeptical attitude to this controversial subject.
The book deals in part with developments in macroeconomics that began in the 1970s, with the emergence of the New Classical approach to macroeconomics at places like the “U,” as it is sometimes known in the Twin Cities. This new type of macroeconomics quickly became associated in the public mind with ideas like “rational expectations,” a technical assumption that seemed to lead to some preposterous conclusions, including the claim that monetary policy had no effect on unemployment and economic output. Its adherents often saw the Keynesian economists of the day as moving down the tracks just a little more slowly than themselves. It is fair to say that at the time, other mainstream schools of macroeconomics had lost a great deal of their momentum and had found themselves increasingly on the defensive. Much more recently, some key members of the New Classical school have been among those objecting in the media to stimulus packages and the Federal Reserve’s “quantitative easing.”
Some of the best previous critical work about the New Classical school of macroeconomics has been done by Esther-Mirjam Sent, who wrote The Evolving Rationality of Rational Expectations: An Assessment of Thomas Sargent’s Achievements (Cambridge University Press 1998, paperback 2008). This book is far more technical than the new one by Quiggin, and is largely a case study in the history of economics. (By the way, Quiggin’s book also contains some arguments about academic economics that might be tough going for a reader who has not taken at least one or two economics courses.) Few interesting and accessible discussions like this new one exist for those who just need an entertaining introduction to the main new orthodox approach to macroeconomics that has emerged during the past 30 or 40 years. The theories covered in the book are now accepted by many antagonists of the New Classical school, including some who style themselves as Keynesians.
Zombie Economics has some especially interesting discussions of the author’s own research (some of it coauthored with Simon Grant) on the privatization of government programs from the perspective of public-sector economics and especially public finance. This topic may be important next year as debate begins in earnest over proposals to be considered by the new Congress. Quiggin’s critique of the case for privatization also touches on the “equity-premium puzzle,” an important topic in finance, as well as claims about the social costs of the business cycle, which Robert Lucas and many other economists believe to be negligible. The book also has some interesting observations on economic inequality, the Efficient Markets Hypothesis, and other matters relevant to the Great Recession, the housing bubble, and the financial crisis.
There has been a bit of a barrage of articles and columns arguing that recent macroeconomic ideas are largely to blame for policy mistakes that led to the 2007–08 financial crisis. The book argues effectively in favor of this thesis, but it also provides a broader and deeper perspective on exactly what the various theories are than is available in most of the mainstream media. When it comes to providing a better understanding of the financial crisis, Quiggin is a fan of behavioral economics, as well as the late Hyman Minsky, who was mentioned in our last post.
There are a few gaffes in the book, and I have some differences of opinion with the book’s arguments on economics and public policy. This makes me hesitant to recommend the book unconditionally, but the book’s flaws are minor and will probably not be important for most potential readers. I am glad that I read Zombie Economics, and I found much to learn from in it, despite the fact that I have done much research in macroeconomics from a critical perspective.
Of course, the books discussed above are available at the usual booksellers and perhaps your local library.