Arnold Kling  

Amar Bhide Monday

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In the Wall Street Journal, he writes,

The depressions and panics of the 19th century ended without any fiscal stimulus to speak of, as did the gloom that followed the stock-market crash of 1987. Countercyclical fiscal policy may or may not have shortened other recessions; there are too few data points and too much difference in other conditions to really know.

Read the whole thing. And listen to this week's podcast in which Russ Roberts talks with Professor Bhide. It is interesting throughout, but my favorite part is where Bhide challenges the "heroic entrepreneur" model and instead argues that the innovation process is more democratic and is based on diffuse actions and ideas.

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COMMENTS (5 to date)
MHodak writes:

As someone who teaches business history, two things are plain: (1) absent a strong central government, the economy would go through a boom and bust in each generation, and (2) with government regulation of varying degrees, the economy will continue to go through booms and busts, only now they are more irregular, but appear to be increasing in frequency.

Only a people as ignorant of history as they are of economics can consider the current boom-bust cycle a failure of laissez-faire. This is what the prophets of regulation have continuously promised us we could avoid.

El Presidente writes:

Bhide begins:

Our ignorance of what causes economic ailments -- and how to treat them -- is profound.

Perhaps it is willful. There are questions we refuse to ask and, therefore, never attempt to answer. We could defer to Kondratiev or the Austrians for some generic explanation, but why do we refuse to examine the effects of distribution on velocity and output? Why is it that we rely on a production function which explicitly accounts for only two of our three factors of production? We could use four factors, but would we then account for only three, or pick twelve and account for eleven? Seems more than a little odd. We are unlikely to appreciate the whole picture if we cover up the parts that offend our delicate sensibilities.

What's more, we set our aim on 'full employment' or growth in output but we rarely if ever consider the implicit challenge in the simple question, "What is the marginal utility of growth?" There is more to life than material wealth, and perhaps sometimes the cost of attaining more of any thing (material wealth) is too great in comparison with losing more of something else (quality of life). If we had the courage to apply the concept of opportunity costs to our demand for growth, we might seek stability and policies that help us to approach it.

Progress can only be logically defined in terms of an objective. Do we even know what our objective is? I suspect that while we cling to radical individualism we will not have any mutual objective. In that light, all of our musing about business and investment cycles seems pretty frivolous, to me.

Here's another thought worth pondering: if we know so very little about what causes contraction, can we really claim to know much of anything about what causes expansion? I believe we admit to less than we know about each because we like to straddle the line and pretend we can have our cake and eat it too.

Tyler L writes:

Bhide mentions "John Maynard Keynes's speculative conjecture about human nature." Stating that an economic downturn should be countered by a sharp fiscal stimulus that reignites the "animal spirits" of consumers and investors." The theory of Natural Selection will ignite ones "animal spirit" in due time. Our nation has already accumulated an unfathomable amount of debt, one in which we are submersed. This 800 billion dollar stimulus package is no more than a hollow reed from which we will suck oxygen from the surface, while remaining beneath the waters of debt. To have financial freedom, or swim atop the water of debt is what we should be stroking for, not the depths of the ocean.

manuelg writes:


> Only a people as ignorant of history as they are of economics can consider the current boom-bust cycle a failure of laissez-faire.

I wouldn't express it this strenuously, but it is difficult to argue with.

[but, be aware: if boom-bust cycles cannot confute laissez-faire
markets, then, equivalently, boom-bust cycles cannot confute market
regulation. If market regulation does not stop boom-bust cycles, but
meets other social goals, then regulation is working as designed, if
perhaps regulation is not working as it is being sold to the

I appreciate being on this side of the financial bubble. I now know
the hard limitations of many financial innovations:

* cheap cheap cheap lending as social policy

* credit default swaps

* mortgage securitization, or other alchemy used to turn lead into gold

* more alchemy: thinking that deregulation and/or regulation can turn
lead into gold

* swapping really existing heavy tails with negligible light tails in
modeling, for ease of modeling

* borrowing to invest, which was always speculation and always will be
speculation, begin gussied up as "savvy leverage"

* hand-waving away concerns about alleged "systems of trust" that only
reward for short-time-horizon goals

* relying on rating agencies in the pocket of those being rated

* not treating liquidity as a scare resource (in reality, you should
force people to pay dearly for liquidity *now* as opposed to liquidity
later); thinking that you can produce liquidity like producing a
rabbit from a magician's hat

* in general, trying to profit from financial instruments that *you*
don't personally understand

I didn't have the chops to puzzle out all these myself, and now I
don't have to. I am standing on the far side of the bubble.

I am weathering this current storm, not badly, not because of my
smarts, but because my father and wife are fanatically risk-adverse,
and I don't have enough energy to take them both on simultaneously.
So I am in a position to profit from lessons I am unworthy to have
granted to me.

fundamentalist writes:

Bhide: “Our ignorance of what causes economic ailments -- and how to treat them -- is profound….”

Bhide speaks for mainstream economists. Yes, their ignorance is profound. But read Hayek’s 1933 book “Monetary Theory and Trade Cycles” (available at and you’ll find that economists knew a great deal about the causes of economic ailments before Keynes came along and persuaded most of the world to ignore what had taken centuries of hard work to achieve. If economists today are ignorant about the causes of economic ailments, it’s willing ignorance.

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