Posner, "A Failure of Capitalism"

Richard Posner has been a leading scholar of the impact of regulatory law on the economy.  In his most recent book, "A Failure of Capitalism," Posner describes the descent of the U.S. economy into depression and gives its proximate causes.  Although I do not agree with all his conclusions, he makes a valuable contribution.  The book is an easy read for principles students and tells a coherent story about our nation's current economic crisis.  As might be gathered from the title, he believes that individuals acting rationally by responding to the incentives they faced caused the depression.  He also faults policy of both the Clinton and Bush administrations; the former for excessive deregulation of the banking industry and the latter for a hands-off approach to regulation in place. 

In a chapter titled, "The Economics Profession Asleep at the Switch," he describes the interaction between political bias and empirical testing.  Economists do try to let the data form their opinions, but it is neither a painless nor perfect process.

Economics understanding of the causes and cures of depressions has not longer influences analysis. When good arguments, and some evidence, are presented on both sides of an economic debate that engages the political passions that economists share with other people, but the debate cannot be resolved by empirical testing, preconceptions shaped by ideology with exert a mesmerizing influence on the debaters. Still, this depression, like the last, is likely to stimulate fresh thinking by economists, as well as to provide new data for empirical analysis. It has already stimulated a good deal of fresh thinking – on the part of Bernanke, for example. He is a conservative economist, and conservative economists don’t like deficit-spending programs, or at least their public-works and transfer-payment component, which expand the government’s economic footprint. Yet he supports the stimulus program, having come to doubt that a depression can be averted or cured by monetary policy alone. Many economists have been converted – virtually overnight – from being Milton Friedman monetarists to being J.M. Keynes deficit spenders, as they see monetary policy failing to deliver us from the depression. Economists are influenced by ideology, but they are not impervious to evidence. The thirteenth-century change of name of the English town of Middleton de Keynes to Milton Keynes may have been prophetic. But the speed of the profession’s conversion (not that it is complete) from Friedman to Keynes suggests that the intellectual foundations of depression economics are unstable.

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