Today all that is changed. As the introduction to Demand Side, the book, 2nd ed. I have drafted the following characterization of who I am and what I'm about.
Look, I wanted to study economics. But even as an undergraduate I could see that Academic economics, at least at the large state university I attended, was ill-suited to the real world. It seemed to be a place people went to study things nobody else could understand so they would have job security. In four years I heard the name Keynes mentioned only twice in lecture, and then it was mispronounced.
Perhaps I was convinced they were hiding something, so I persevered with good results on the GPA scorecard. But when it came time to make a decision for graduate school, I came up against a personal reality. I was already in my forties with family.
The Neoclassical main line was not difficult to reject. The assumptions of perfectly competitive markets and perfect information plainly did not correspond to even one real world situation. Monopoly and oligopoly ruled. Even restaurants were rewarded more for location and less for quality of food or service. Prices in the real world were not supply and demand, except in limited circumstances, but manipulated by market power or government regulation and subsidy.
The mathematics and statistics I learned were useful in themselvs, but economics I could see even then was a science of human behavior. The mathematics was suited for thermodynamics, but plainly in a system that was not closed and where there were no independent variables unless by assumption, applying math meant results that worked only in a hypothetical world. And for all the precision of the econometric models, the results in terms of forecasting were not good. Perhaps I should say they were very good when applied to the past, but very poor when applied to the future.
The economic lions of the day were at the University of Chicago. Milton Friedman and Robert Lucas and the others. Friedman advocated a policy of increasing the stock of money at a steady pace to control prices. But it was back in Macro 101 we looked at the equation PQ = MV, and Friedman was plainly ignoring the V. The great experiment of Paul Volcker in bringing down inflation in the late 1970s and early 1980s was premised on Friedman's assurances that constraining the quantity of money would certainly move prices quickly and painlessly down. The severe recession of 1981 was not quick and was very painful for people I knew. Plus it was relieved only when oil prices fell and the money stock came out from under the Fed's thumb by way of credit cards.
Robert Lucas described a scheme called Rational Expectations. Here, too, the fallacy was right up front. Rational Expectations requires economic actors who are prescient beyond possibility and certainly beyond any historical evidence.
Efficient Markets and the claims for them by their Chicago School advocates were belied by the results. "Efficiency" needed a very narrow definition to make the theory work. Agriculture, for example, had all the elements of perfect competition -- homogenous products and a multitude of producers, low barriers to entry and the rest -- yet the efficient market impoverished everyone. Admittedly, my "efficiency" was a social outcome, while that of the Chicago School was a price outcome. Still, the assumption that the two converged was implicit and was contradicted every time I looked out the window.
Perhaps it was my experience in the real world, where I had a list of jobs longer than yours, from cabs, to restaurants, to mines, to forestry, to municipal government. I was keenly aware that these theories were flowers appropriate only in hothouses and other controlled environments.
I am not claiming any special insights. It is my firm belief that many if not most of my fellow students found them equally invalid, or at least dreadfully uninteresting. Certainly the Business School and the Economics Department did not cross-pollinate.
So in terms of graduate school I was hard up against the orthodoxy. I had done well in the undergraduate curriculum by granting it the benefit of the doubt. I think I was convinced that once we got through the fundamentals and the weak in spirit were weeded out, the elect would emerge into a realm where the absurd assumptions were removed and the tools became applicable. Never happened.
And as I said, I was personally up against being forty-something with a family. I did not have the time or patience to continue down a road without some more sound assumptions being made explicit. My particular school did not have a parallel course for heretics. There were no other schools in our region. Nothing in economics. Some in business applications, but a cursory look at that showed it to be more than a little contrived. It would be math and facile theory or nothing.
The choice I made was to take my high grades and new degree to work with me on the bus. (To be completely candid, I did have the opportunity to become a budget analyst for the County, but declined in preference for purity of macro purpose, a purpose probably misplaced.)
In any event, in order to study Keynesian or even the successes of the economy during and following World War II, I needed to study on my own. John Kenneth Galbraith, John Maynard Keynes, an early chair of the Council of Economic Advisers and prominent New Dealer named Leon Keyserling, Joseph Stiglitz, James K. Galbraith, George Soros, and now Hyman Minsky. There is a lineage of economic thought that has progressed and become more useful. Fortunately, some of it survived in the U.S. House of Representatives and had some access to policy. But Demand Side became confused with the success of the New Keynesians such as Paul Samuelson and James Tobin. (What Joan Robinson referred to as "Bastard Keynesianism." And it was dominated later by the rise of the Monetarist, Rational Expectations, Supply Side and Efficient Market nonsense. But it exists. And it informs very well what is going on now.
My studies quickly began to pay off. I was able to predict -- following closely the work of others -- the end of the Clinton New Economy. I was able to identify bubbles when we were inside them -- a feat much less remarkable than those at the Fed would have you believe. And I came to know what questions to ask, who to listen to, and who to discount.
It is much more surprising to me that the decline of U.S. industry and the stagnation of median incomes, the decline of social infrastructure and the rise of a parasitic financial sector, has been considered a golden period, the Great Moderation, by most economists. High Academia and the halls of Wall Street seemed to become the repository for self-serving ignorance, not for workable economics. This was perhaps as surprising to me as my claim of knowledge is to you.
Nevertheless, I recently returned to my alma mater in hopes that the housing bust, financial meltdown, socialization of the financial sector and bleak prospects going forward would have opened a parallel path for at least a few heretics. In response to a description of my success in forecasting, my work on state tax policy and my interest in the theory of multipliers and productivity (which appear later in this volume), the reply was pointed:
One presumes the theory is not Keynesian. Certainly the mathematics has been disgraced by the absence of results, and indeed the creation of loss, in the real world. While I have good skills in all three areas, this response clearly indicated the department, having started down the road of irrelevance, would not be detouring any time soon.Dear Mr. Harvey,
Thank you for your email, it is always good to hear from former students, especially ones who have retained a deep interest in Economics.
But I regret that the answer to your question about fitting into the Ph.D. program is almost certainly negative. Like most other Economics departments, our Ph.D. program has become increasingly theoretical and mathematical over time. As a result, we generally accept only individuals who have taken a heavy dose of calculus, linear algebra, and mathematical statistics in the recent past, because a solid foundation in all three is necessary to master the first-year core courses.
On one hand, it would be logical to be discouraged and frustrated. So I am. On the other hand, How much more to learn and trust these fallacies and then be forced to the choice of either admitting a life spent in error or denying reality. At least my forecasts work and my studies build on each other to a more complete understanding.
We see around us the rubble of an intellectual conceit, yet at the highest points still standing the debate is dominated by the architects who built the structure and claimed it would last forever. Here I hope to offer the views of those not favored by academic elites or corporate subsidies. I hope to consolidate the views of those who make sense, display the evidence that proves them right, and do it in a way that is accessible and useful to the reader's own understanding.
It is not simply that we must escape the errors of the past, no matter how great. We must also move aggressively into a productive and sustainable future. Standing around waiting will only serve the interests of the entrenched interests and increase the damage of the collapse now in progress.