It’s not every day you read a review that begins like this:
Note: After writing this, I read Brad DeLong’s better review of Posner’s book (hat tip Felix Salmon). I won’t be offended if you go read that instead.
That extraordinarily self-effacing line comes from Baseline Scenario’s James Kwak who has written what at very least is a thorough two-part assessment of Richard Posner’s new book “A Failure of Capitalism” and accompanying blog. (Posner fans, see also the Becker-Posner blog).
In his first part, Kwak focuses on Posner’s discussion of the concept of blame. In Tuesday’s post, he tackles Posner’s approach to some policy questions:
Posner’s crisis book is boldly titled “A Failure of Capitalism.” The problem is that when the lens through which you see the world is capitalism — or, more precisely, a flavor of economics that works out to justify capitalism in virtually every instance — it’s not clear what’s left over when capitalism fails.
Posner’s method is simple, and I can do it, too. Basically, for any policy, extrapolate out its effect until you can demonstrate that it will lead to a bad (and preferably non-intuitive) outcome — typically by changing the incentives for rational actors so that they no longer maximize profits and thereby social utility. When you do this enough, it becomes such second nature that you forget to spell out your arguments.
Kwak concludes:
So in the end, Posner’s answer to the question he poses, “How Should the Banking Industry Be Regulated?,” is “not any way that anyone has suggested so far.” It seems that instead of using his talents to defend free-market capitalism, he is using those talents to shoot down any proposal anyone might make as hopelessly naive. Which is unfortunate, because I’m sure he could contribute more to the debate.
DeLong, by contrast, starts at full gallop in his review of Posner’s book for The Week, thus:Richard Posner, leader of the Chicago School of Economics and Fourth Circuit Court of Appeals judge, uses his new book, “A Failure of Capitalism,” to try to rescue the Chicago School’s foundational assumption that the economy behaves as if all economic agents and actors are rational, far-sighted calculators. In some sense, Posner must try. For without this underlying assumption, the clock strikes midnight, the stately brougham of Chicago economic theory turns into a pumpkin, and the analytical horses that have pulled it so far over the past half- century turn back into little white mice.Posner’s effort, says DeLong, “looks to me like an earlier effort to ‘save the appearances’ in the face of discomforting contradiction”:
The Jesuit astronomers of 17th-century Rome wanted above all to maintain the assumption that the sun revolved around the earth—for if it did not then the Bible’s declaration that Joshua called on God to make the sun stand still in the sky was a lie, and a Bible that lies even once cannot be the inerrant foundation of faith.
Ouch. What do you really think, Brad?
At any rate, Posner, having already done battle with a range of commentators and critics including Paul Krugman, will undoubtedly come out swinging, again.
In the meantime, Posner explains himself and his ideas in unusually (for him) brief, simple terms here, in response to questions the other day from the Economist’s blog, Democracy in America. Among his key points:
I hadn’t realised before the banking collapse how inherently risky banking is and how central to the economy a solvent banking industry is, and the deregulation movement in banking, coupled with regulatory laxity and an exaggerated faith in the self-regulating character of private business, allowed the banks to take risk that while rational from their private standpoint was irrational from the broader macroeconomic standpoint. I continue to support deregulation (and privatisation), but I think we went too far in deregulating the banking industry and in failing to enforce with sufficient vigour the remaining regulatory controls. I also think we failed to realise how easy it is for a central bank (the Federal Reserve) to screw up the economy with a few mistakes in its control of short-term interest rates.
On what you might call the “Posner phenomenon,” however, the last word here might go to Christopher Shea, writing on a blog called Brainiac back in February:
How fast does the prolific law professor and appellate judge Richard Posner write? Faster than the Harvard University Press can edit. Posner, as is his wont, has jumped on the news and produced a book, this time about the financial crisis… Like the crisis, however, the book is a target in motion. Harvard got the rights to the book on the condition that it could turn it around by April; Posner finished the manuscript on January 30. Everything was on track, with bound galleys ready for reviewers last week. Posner, however, just kept on writing: He submitted an additional 10,000 words on events that followed the submission of his first draft, which editors hastily reviewed and added…
Posner’s still not finished, however: Starting one week after the book’s publication, he will begin posting weekly updates to it on a new website… in a sense, then, the book will continue to evolve. This isn’t the judge’s first foray into the blog world: He already co-writes one with the Nobel-winning economist Gary Becker. But with the Harvard book-and-blog project, it’s official: Posner’s thinking is too fast moving, too generative, to be captured between hard covers.