Six days ago, Paul Krugman set out to understand Romneynomics. Since I am currently teaching macroeconomics 101 I have collected some quotes and facts in order to show how neoclassical ideas moved from Say to Ayn Rand to Alan Greenspan to Mitt Romney. I think that neoclassical ideas should be seen as a meme, which is like a gene something that can spread. Keynesian economics would also be meme, so please don’t be offended.
And off we go. Jean-Baptiste Say in a 1821 letter to Robert Malthus:
All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.
From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce.
The point is here that only those who produce can pay wages so it is claimed that to create money you need to produce. Money is seen as a medium of exchange and perhaps as a unit of account, but not as a store of value in any meaningful modern sense. See, money is earned by hard work producing things, and you couldn’t get money any other way. Except that in the real world you can borrow money and use it to buy things. This thought, however, plays no role in neoclassical economics as debt problems are assumed away. Money is a medium of exchange, period.
Let us now turn to Ayn Rand’s novel Atlas Shrugged which I have read some years ago. The book’s male hero (there’s a female hero, too) says:
So you think that money is the root of all evil? Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?
These ideas are the same ideas that we have seen before, only now they are part of a novel. That novel got picked up by none other than Alan Greenspan, chairman of the Fed for many years from during the late 1980s until about 2005 (who’s counting?). Writes that very Alan Greenspan in chapter two of his autobiography “The Making of an Economist“ on p. 52:
It did not go without notice that Ayn Rand stood beside me as I took the oath of office in the presence of President Ford in the Oval Office. Ayn Rand and I remained close until she died in 1982, and I’m grateful for the influence she had on my life. I was intellectually limited until I met her.
Well, after the crisis Greenspan was not so sure of his ideas anymore, as reported by The Australian:
Appearing before the House Committee on Oversight and Government Reform, the man once dubbed “The Maestro” said he had found a flaw in the “critical functioning structure that defines how the world works”. “I don’t know how significant or permanent it is but I have been very distressed by that fact,” Mr Greenspan said.
“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.“
Now we turn to the present scene. Let’s hear those infamous remarks again by Mitt Romney on the 47%:
There are 47 percent of the people who will vote for the president no matter what….who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it….These are people who pay no income tax. [...] And so my job is is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.
Again, the idea is that there are people who produce and people who don’t. The latter people deserve neither respect nor attention. Paul Krugman concludes in his article:
So there you have it. The true plan is to provide an economic stimulus in the form of Romney’s awesome awesomeness; the cover story is the pretense of having an actual program.
I think that this conclusion is not quite right. It is a misunderstanding by a skeptical economist encountering a world view based on the (19th century) idea that a) production creates money and b) any interference with the production harms the economy. That is the very essence of neoclassical theory which I could give you in more detail using a labor market to derive employment, then using the production function to determine output and move to the capital market to understand how GDP is split up between consumption and investment, thus determining savings as the mirror image of investment.
So, Mitt Romney is advised by a neoclassical economist. Actually, there are three. The NY Times reports that they all have their eyes on Ben Bernanke’s job:
A range of experts regard two of Mr. Romney’s economic advisers as the most likely candidates: R. Glenn Hubbard, who was chairman of the Council of Economic Advisers under President George W. Bush, and N. Gregory Mankiw, who followed Mr. Hubbard in that role. John B. Taylor, a Stanford University economics professor and outspoken critic of Fed policy, also is mentioned frequently.
Not surprisingly, they are all neoclassical economists. Here are quotes from some of their papers:
Glenn Hubbard (2005): We begin by deriving analytically the effect of government debt on the real interest rate and find that an increase in government debt equivalent to one percent of GDP would be predicted to increase the real interest rate by about two to three basis points.
Gregory Mankiw (2004): President Bush has set out an ambitious agenda to ensure a continued and expanding prosperity. At the top of his economic agenda are tax reform, the reduction of the fiscal deficit, and social security reform.
John Taylor (1993). This paper examines how recent econometric policy evaluation research on monetary policy rules can be applied in a practical policymaking environment.
John Taylor (2010): The implication of the paper is that the crisis does not call for a new paradigm for monetary policy.
Let me sum up in plain English. Hubbard finds that more government spending is bad for the economy. Mankiw argues that less taxes are good for the economy. Taylor says first that a central bank should follow rules to preserve the purchasing power of those that have and then – in the crisis – finds that this is still state of the art.
Romneynomics is really just neoclassical economics in 2012.