America's judge, "Dopey Dick" Posner, discovers Keynes -- as "Chicago School" econ artists turn to macramé and flower-arranging

Here come da judge: In that pose of pontification (with his mouth closed, no less! if only he'd actually learned to keep his trap shut), where else could this photo come from but charlierose.com? America's judge has a hot tip for your economics reading list: some guy named Keynes.

"Until the banking crisis erupted, Posner hadn't bothered to investigate [Keynes's] 'General Theory.' When he picked it up, he was greatly impressed by the economic insights and practical detail it contained. 'Even though it is kind of loose -- it doesn't dot all the"'i"s and cross all the "t"s,' Keynesian economics 'seems to have more of a grasp of what is going on in the economy,' Posner said to me. Much of modern economics, by contrast is 'on the one hand, very mathematical, and, on the other hand, very . . . credulous about the self-regulating power of markets. That combination is dangerous.'"

-- from John Cassidy, "After the Blowup," in Jan. 11 New Yorker

(article abstract here; article online only in digital edition)

by Ken

I've never gotten the Richard A. Posner Industry. Here's this guy who's maybe a sixth-rate intellect and has somehow set himself up as the world's greatest judge and authority on all matters political, legal, and economic. (I've probably left out six or a dozen of his areas of supposed supreme expertise. This could wind up on the midterm, so you might want to check out his book titles. You gotta be a expert to write a book, right?) And an entire industry of make-believe journalists and academics have gone along with the gag.

I'm sure in Dopey Dick's mind, the only reasons he's not on the Supreme Court are:

* He's too smart.

* He's too outspoken.

* Any court he's on is already as supreme as it can stand to be.

Of course what he really is is a dismal, grinding hack regurgitating mindless right-wing platitudes. Maybe the one thing that's truly remarkable about Dopey Dick, that one-man morass of intellectual mediocrity, is that he's managed to pull off this scam of scams with so little to back up his claims to attention. About all I could ever figure out was the sheer audacity of his lack of self-doubt. In the land of the pseudo-intellectuals, the phony who banishes all lack of certainty from his vocabulary has a shot at being king. It's the sort of thing that made Rudy Giuliani, well, Rudy Giuliani. Mediocrity with a bullwhip.

But we're not here to bury Dopey Dick. Oh, we're here to make fun of him as opportuniity presents itself, but our real business is the slash-and-burn job John Cassidy has done on the once-lordly "Chicago School" economists, whose shining star sank out of sight along with the economy in August 2008, in a modestly presented "Letter from Chicago" in this week's New Yorker.

It's Cassidy who, in a fit of mad inspiration, leads off with "Dopey Dick" Posner, who, especially since the departure from this vale of tears of Milton Friedman, the Chicago ideological supremo who made tyrants tremble, or more likely cream in their pants, has emerged as something between the intellectual godfather and the furry mascot of the Chicago School. In the wake of Icky August, it appears that Dopey Dick has done what rats have been celebrated for doing since time immemorial: jumped ship.

Here's how Cassidy presents Posner:

A lawyer by training, Posner is also one of the country's most influential economics writers. In his 1973 treatise "Economic Analysis of Law," he applied the maxims of free-market economics to the courtroom, arguing that enforcing economic efficiency ought to be a primary goal of judges. Posner, who was then a young professor at the University of Chicago Law School, helped create the law-and-economics movement, which has populated many of America's courts with judges of similar mind. In 1981, Ronald Reagan appointed him to the Seventh Circuit Court of Appeals, and since then he has written more than two dozen books, including one defending the 2000 Supreme Court decision that gave George W. Bush the Presidency.

Earlier this year, Posner published "A Failure of Capitalism," in which he argues that lax monetary policy and deregulation helped bring on the current slump. "We are learning from it that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails," Posner writes. "The movement to deregulate the financial industry went too far by exaggerating the resilience -- the self-healing powers -- of laissez-faire capitalism." Posner also accuses professional economists, including some of his Chicago colleagues, of being "asleep at the switch." In September, he came out as a Keynesian; in a long piece in The New Republic, he hailed "The General Theory of Employment, Interest, and Money," which John Maynard Keynes published in 1936, as a "masterpiece," saying that "despite its antiquity, it is the best guide we have to the crisis."

It seems that in A Faillure of Capitalism, the new book, Dopey Dick names names, meaning those of a number of his Chicago colleagues of the "After Milton" era.

During our conversation, Posner questioned the entire methodology that [Chicago economist Robert] Lucas ["one of Friedman's most eminent successors"] and his colleagues pioneered. Its basic notions were the efficient-markets hypothesis, which says that the prices of stocks and other financial assets accurately reflect all the available information about economic fundamentals, and the rational-expectations theory, which posits that individuals and firms are hyper-intelligent decision-makers who have a correct model of the economy in their heads. In rational-expectations theory, the economy is represented in very simplified and spare fashion. Many models, includng some relied on by the Fed and other central banks, don't even feature banks or other financial intermediaries. In Posner's view, older, less dogmatic theories better explained how the problems in the financial sector dragged down the rest of the economy.

Lucas, it turns out, declined via e-mail ("I don't want to do this") to participate in Cassidy's inquiry. And Cassidy found a couple of Chicago old guardsmen, Eugene Fama and his son-in-law, John Cochrane, who, like crusty old Bolsheviks long after the fall of Communism, continue to cling to the one true credo. Fama actually takes pride in having theories he believes in criticized by Paul Krugman. "My attitude is this. If you are getting attacked by Krugman, you must be doing something right." Cochrane, pressed on the subject of Keynesian economics, points out, "We threw it out for a reason. It didn't work in the data." Ah yes, the precious data.

But then there's Nobelist James Heckman (Cassidy notes that since 1974 "more than a dozen scholars associated with the U. of C. have been awarded the Nobel Memorial Prize in Economic Sciences"), who told Cassidy: "Everybody here was blindsided by the magnitude of what happened. But it wasn't just here. The entire profession was blindsided."

The first statement ("Everybody here was blindsided by the magnitude of what happened") is easy enough to believe; the second ("But it wasn't just here. The entire profession was blindsided") is nonsense. Apparently by "the entire profession" Heckman means people like him -- and certainly not people like, say, Paul Krugman or Joseph Stiglitz, not to mention Dean Baker.

Gary Becker, a 1992 Nobelist, was a little more careful.

There are a lot of things that people got wrong, and I got wrong, and Chicago got wrong. You take derivatives and not fully understanding how the aggregate risk of derivatives operated. Systemic risk: I don't think we understood that, either -- at Chicago or anywhere else. Maybe some of the calls for deregulation of the financial sector went a little too far, and we should have required higher capital requirements.

However, Becker quickly noted, "That was not just Chicago. Larry Summers when he was at Treasury supported deregulation." As indeed he did. At least Becker doesn't try to pretend that "the entire profession" supported deregulation. He just doesn't choose to think about the economists who didn't.

Eventually Cassidy found his way to Raghuram Rajan,

a forty-six-year-old Indian-born scholar who is one of the few economists who warned about the dangers of a financial crash. At a conference organized by the Fed in 2005, he said that deregulation, trading in complex financial products, and the proliferation of bonuses for traders had greatly increased the risk of a blowup. Senior Fed officials and other prominent economists dismissed his concerns. Lawrence Summers said that Rajan's critical tone supported "a wide variety of misguided policy impulses."

Rajan, who was chief economist of the International Monetary Fund from 2003 to 2006, describes what happened as "a systemic breakdown, and we need to look more broadly at why it happened." He argues in the book he's working on "that the initial causes of the breakdown were stagnant wages and rising inequality," which created "an urgent demand for credit" among middle-class households "lagging behind the cost of living." Are you hearing this? Once upon a time Uncle Miltie would have had you run out of Chicago for mouthing left-wing claptrap like this.

Ironcially, the panic that ran through the Chicago gang a year ago has in good part subsided, because of government intervention. (Take that, Uncle Miltie!)

Thanks to government action on an enormous scale, the banking system has been stabilized and the U.S. economy is expanding, if at a moderate pace. Ironically, the rescue program has taken some of the heat out of the economic debate. In Chicago, as elsewhere, most economists have returned to their own research projects. "If this recession had got a lot worse, we would have seen two major things," [Gary] Becker said to me. "Much more government involvement in the economy and a lot more concentration in economics on understanding what went wrong."

Huh? You mean the boys, at Chicago and elsewhere (and they do seem to be all boys), are not concentrating on what went wrong? Of course we already knew that Becker's economic universe doesn't extend much beyond people who think the way he does.

"Dopey Dick" Posner knows better.

"Rational expectations and strong views of efficient markets have taken a terrific hit," Posner pointed out to me. "Keynes is back, and behavioral finance is on the march." Outside of Fama and his followers, it is hard to find anybody, even in Chicago, who believes that speculative bubbles aren't a serious problem, or that the U.S. economy automatically adjusts to full employment. And even most of the diehards now support efforts to regulate Wall Street more effectively.

I'm guessing that this will still come as news to the great minds of the Republican Party, and to many of the economically captive minds in Congress. And this comes only from the mouths of what's left of the Chicago gang. We never do hear from or about economists elsewhere who were saying all along that these people were full of shit.

And I do wish Cassidy had taken one more careful look through his notes. Surely at some point in their conversations Dopey Dick said something along these lines: "You know, man, until this mess I really had no idea how full of shit I was. I've been sounding off for decades now without a damn clue what the hell I'm talking about. It's a wonder anybody paid the slightest attention to me! I was so full of shit all these decades, I was a walking plumbing emergency waiting to happen."

Could you just give it one more look-see, John? Surely the judge must have said it at some point. Here, let me just riffle through your notebook. It's got to be there, wouldn't you think?

#