May 7, 2013Keynesian Bets: What's Out There
May 6, 2013Keynesian Bets Bleg
May 6, 2013The Pyramid of Macroeconomic Insight and Virtue
May 2, 2013A Natalist Provision
May 1, 2013I Was a Teenage Misanthrope
May 5, 2013John Thacker on Vaccinations and the Sequester
May 3, 2013Chef Rudy's Virtues Project
May 2, 2013My take on Reinhart and Rogoff
May 1, 2013Medicare Kills a Program
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Frequently Asked Questions
A review copy of Markets on Trial: The Economic Sociology of the US Financial Crisis, edited by Michael Lounsbury and Paul M. Hirsch. One of the essays, by Ezra Zuckerman, says,
He proceeds to hedge this statement, and to discuss some other possibilities. Shortly thereafter, there is a printing error, where a blank page occurs, leaving a gap in the text. There is also at least one other blank page/gap elsewhere in the book. [UPDATE: I received the following from the publicist:
My main complaint about the book so far (it is nearly 700 pages, and I have read about 20 percent of it and skimmed another 50 percent) is that there is not much sociology. I would have liked to see some analysis of regulators as a class, of financial executives as a class, of the relationship between the two, and of their cultural norms. Instead, for my taste, the book contains too much narrative about the structure and growth of the mortgage-backed securities markets.
More comments below the fold.
I admit to suffering from a fear that just about anything counts as economic sociology--that the paradigm imposes no constraints on its practitioners. You get some scientific-sounding jargon to employ, which you can use to express whatever prejudice you choose.
For example, there are several chapters applying something called "normal accident theory" to the financial crisis. However, Charles Perrow, the originator of that theory, denies that the financial crisis fits his model, indicating that he prefers something else:
The book is filled with criticisms of economic liberalism and the "Chicago school" (always using scare quotes). However, the authors seem to have no direct experience with reading any conservative or liberatarian economic thinkers. The economist most often cited is Paul Krugman. I would say that getting your view of conservative economics by reading Krugman is like getting your view of the Obama Administration from Glenn Beck.
One of the few authors who even refers to works by conservative economists does not appear to have read the works that he cites. John L. Campbell writes,
Campbell and others in this volume accuse market-oriented economists of doing bad economics. Campbell writes,
I wonder whether this sociology will stand up empirically. Most of the regulatory changes that took place, including repeal of Glass Steagall and adoption of risk-based capital requirements, were not sold in terms of ideology. The stated goals were not to free markets but instead to modernize regulatory structures in light of technological change.
Were classical liberal economists on the inside? I think you will find that the financial regulatory agencies are staffed by people who believe in regulation, not by free-market ideologues.
The Shadow Regulatory Committee, which truly did represent the real Chicago school, was on the outside looking in when it came to policy. They argued for reining in Freddie Mac and Fannie Mae. They correctly predicted that risk-based capital requirements that were based on agency ratings of securities would lead to the corruption of those ratings.
The sociologists want to argue that regulators were market purists and yet were captured by the large banks. For example, Neil Fligstein and Adam Goldstein write,
Yet on the very next page they write,
Two pages later, they write,
Throughout this book, there seem to be two views of regulators. One view is that they were devoted to free-market ideology. Another view is that they were captured by large banks. Those views are only reconcilable if you believe that the interests of large banks coincide with the position of free-market economists. This is simply not the case. Again, I refer you to the history of the Shadow Regulatory Committee for the positions actually taken by free-market economists in the 1980's and 1990's.
If the regulators were blindly devoted to ideology, it was not the ideology of free markets but the ideology of "affordable housing." This motivated the creation and expansion of the secondary mortgage market. It motivated quotas and goals that pushed regulated institutions into riskier markets. It kept regulators from questioning the wisdom of the lending practices that emerged in the years leading up to the meltdown. As Fligstein and Goldstein put it,
I assume they are talking about Countrywide.
Basically, the mortgage industry ran out of good borrowers in 2004, as prudent households became less active during the housing bubble. Instead, lenders discovered the subprime borrower. Regulators did not fight against this change. If anything, they cheered it on. The reasons for that are worthy of some investigation by empirical sociology.
But empirical sociology is exactly what is missing in this volume. Even if you are inclined to endorse the view that the crisis was caused by economic liberalism and deregulation, you will search in vain for empirical evidence. Where is the content analysis of regulations issued and their accompanying statements? Where is the social network analysis of the staffing of regulatory agencies? Where are the case studies of proposals made by free-market economists evolving into regulatory practice at financial agencies?
This book is worth reading, because market-oriented economists ought to try to understand what economic sociology is before we criticize it. I wish that economic sociologists felt the same way about market-oriented economics.