CUP Web site

RSS Feed

New Books

Author Interviews

Author Events

Keep track of new CUP book releases:

For media inquiries, please contact our
publicity department

CUP Authors Blogs and Sites

American Society of Magazine Editors

Roy Harris / Pulitzer's Gold

Natalie Berkowitz / Winealicious

Leonard Cassuto

Mike Chasar / Poetry and Popular Culture

Erica Chenoweth / "Rational Insurgent"

Juan Cole

Jenny Davidson / "Light Reading"

Faisal Devji

William Duggan

James Fleming / Atmosphere: Air, Weather, and Climate History Blog

David Harvey

Paul Harvey / "Religion in American History"

Bruce Hoffman

Alexander Huang

David K. Hurst / The New Ecology of Leadership

Jameel Jaffer and Amrit Singh

Geoffrey Kabat / "Hyping Health Risks"

Grzegorz W. Kolodko / "Truth, Errors, and Lies"

Jerelle Kraus

Julia Kristeva

Michael LaSala / Gay and Lesbian Well-Being (Psychology Today)

David Leibow / The College Shrink

Marc Lynch / "Abu Aardvark"

S. J. Marshall

Michael Mauboussin

Noelle McAfee

The Measure of America

Philip Napoli / Audience Evolution

Paul Offit

Frederick Douglass Opie / Food as a Lens

Jeffrey Perry

Mari Ruti / The Juicy Bits

Marian Ronan

Michael Sledge

Jacqueline Stevens / States without Nations

Ted Striphas / The Late Age of Print

Charles Strozier / 9/11 after Ten Years

Hervé This

Alan Wallace

James Igoe Walsh / Back Channels

Xiaoming Wang

Santiago Zabala

Press Blogs


University of Akron

University of Alberta

American Management Association

Baylor University

Beacon Broadside

University of California

Cambridge University Press

University of Chicago

Cork University

Duke University

University of Florida

Fordham University Press

Georgetown University

University of Georgia

Harvard University

Harvard Educational Publishing Group

University of Hawaii

Hyperbole Books

University of Illinois

Island Press

Indiana University

Johns Hopkins University

University of Kentucky

Louisiana State University

McGill-Queens University Press

Mercer University

University of Michigan

University of Minnesota

Minnesota Historical Society

University of Mississippi

University of Missouri


University of Nebraska

University Press of New England

University of North Carolina

University Press of North Georgia

NYU / From the Square

University of Oklahoma

Oregon State University

University of Ottawa

Oxford University

Penn State University

University of Pennsylvania

Princeton University

Stanford University

University of Sydney

University of Syracuse

Temple University

University of Texas

Texas A&M University

University of Toronto

University of Virginia

Wilfrid Laurier University

Yale University

June 21st, 2012 at 10:45 am

A View on the Failures of New Classical Economics from The Economists’ Voice 2.0

The Economists' Voice 2.0After the financial crisis of 2008, economists debated the applicability of New Classical Economics. Did this macroeconomic theory with its faith in markets fail to predict or understand looming economic problems? Paul Krugman criticized New Classical Economics while University of Chicago Professor defended it. In his essay from The Economists’ Voice 2.0: The Financial Crisis, Health Care Reform, and More, “If It Were a Fight, They Would Have Stopped It in December of 2008,” Robert J. Barbera responds to Carey Mulligan. You can also read Mulligan’s response to Barbera in The Economists’ Voice 2.0.

The facts on the ground, however, refused to cooperate. In the fourth quarter of 2008, as Professor Mulligan penned his words, 1.68 million payroll jobs were lost, and the unemployment rate jumped by a full percentage point, to 7.2 percent. Needless to say, more than 90 percent of the job losers worked outside the financial sector. All of this carnage was already looming when Professor Mulligan wrote his Times essay. The conclusion I am forced to come to is that the new classical economics framework seems to be an impediment not only to prediction but to description.

To be sure, a single forecasting error is not sufficient grounds to dismiss either a framework or a forecaster. Indeed, if getting a predic­tion wrong was all it took for dismissal, the unemployment rate among forecasters would be awfully close to 100 percent. At the same time, if unwavering faith in a framework blinds you to both the po­tential for crisis and to its actual arrival, you have a big problem.

Worse still, if you and your framework have the ear of policy mak­ers, you might well become a problem for all of us. To put it bluntly, it is dangerous to pretend that bank runs cannot happen—especially when you are knee deep in one.

Isn’t it reasonable for all economists to acknowledge that the events of the past year were a whopping big natural experiment? In the after­math of the failed Lehman Brothers rescue effort, two very distinct story lines appeared. Shouldn’t we all care about which narrative car­ried the day?

Keynesian economists, comfortable with the elaborations of Hy­man Minsky and Charles Kindleberger, declared in late 2008 that we were experiencing a Minsky moment. The signs were there: bank run dynamics in the repo market and a collapsing commercial paper mar­ket. Panic hoarding of cash by companies on Main Street was des­tined to follow. This would produce a slashing of orders and a sharp rise in joblessness. A massive bank rescue effort might well prevent a depression from happening again, but a tough recession was baked in the cake.

New Classical economists could not have disagreed more. “Forget the banks,” they explained; pension funds and insurance companies will wisely step in and prevent a contagion. Companies will continue to see their pro.ts rise and will be comfortable depending on inter­nally generated funds for working capital. Economists need only focus on the heady marginal product of capital in place in 2007 and 2008. On that basis they should be willing to argue that 2009 would surprise on the upside. Faith in unfettered markets and the New Classical tradition would be rewarded when 2009 turns out to be fine.


The results, of course, have come in.

A modern-day bank run unfolded in the repo market. The contagion infected risky asset markets in areas far removed from housing or banking. Pension funds, university endowments, and banks were engulfed in the crisis and in no mood to step up as lenders. Companies hoarded cash and were universally unwilling to depend on internally generated funds. The result was a global plunge of activity and employment. A worldwide rescue of banks ensued; and then, in classic Kindlebergian form, an unmistakable revival in risky asset markets; and, most recently, signs of economic recovery.

Professor Mulligan, of course, interprets the past year very dif­ferently. Undaunted by his fantastic forecasting error, his December 2009 essay recasts the story of the period 2008–2009. For Mulligan, notwithstanding “the current recession’s capital market theatrics . . . much of the action is with the labor supply residual.” What caused the labor supply shock? Mulligan notes “that the minimum wage was hiked three consecutive times.” But the important point to re­member, as I see it, is not what Professor Mulligan asserted last month but instead what he counseled in late 2008. Sadly for him and for all of us, everything he expected to happen did not come to pass. Everything he dismissed as unlikely actually happened in spades.

Am I missing something? I am sure that many real-business-cycle zealots think I have missed almost everything. But for the majority of economists, those who use theory to try and make sense of the world, shouldn’t we all agree that the New Classical framework failed in spectacular fashion last year?


For me, the hard part in all of this is to figure out how anyone is still willing to make a rational case for New Classical Economics. My best explanation arrives via my own experience as a baseball fan. I have been a Mets fan since 1963, surrounded by an extended family of Yankee fans. This exercise in masochism has caused me untoward humiliation and embarrassment for de cades. But my commitment occurred in my formative years, and I just can’t bring myself to ac­knowledge the long-standing and readily observable superiority of the Yankee tradition. It is not rational for me to remain a Mets fan, but my emotional attachment wins out over my rational self.

Is it rational for real-business-cycle enthusiasts to defend a model that missed the biggest economic event of our lifetimes? Or are emo­tions getting the better of them?

Post a comment