Richard Posner Has Another Book?
By James Kwak
Fresh on the heels of A Failure of Capitalism, the new title is A Crisis of Capitalist Democracy. Maybe the next will be The Downfall of Everything Good in the World.
I haven’t read it. BusinessWeek has a curious review (curiously titled “Slapped by the Invisible Hand” . . . which is the title of Gary Gorton’s book). Here’s the funny bit:
“Posner, who less than a year ago began his dissection of the crisis of 2008 with A Failure of Capitalism (Harvard, May 2009), has enormous credibility when he casts a skeptical eye on Wall Street. As an influential free-market thinker, he helped shape the antiregulatory ideology that inspired so much public policy since 1980. Belatedly he admits error.”
Wait a sec. Being wrong for decades gives you “enormous credibility”? So if, say, James Inhofe were to admit that he is wrong and that climate change is occurring, then he would suddenly be an important voice on what to do about it?If James Gilleran (former director of the OTS) were to write a book about the problems with lax regulation and what needs to change, would you buy it?
This particular marketing angle is probably not Posner’s fault, but he should still be embarrassed by it. Here’s what he said in an interview:
“1. The general wisdom is that you switched from a laissez-faire approach to one that accepts the role of government regulation to stabilize the economy. What has changed your view of capitalism?
“This has really been only since September 2008—since the crisis, when I took another look at everything. There was erroneous monetary policy and much too low interest rates, which encouraged excessive borrowing. And then there’s this very lax regulation of financial institutions, which reflects a failure to recognize that the financial industry is very unstable and requires regulation. It is connected to everything in the economy—consumers and businesses alike depend on it—so when it collapses, you’ve got real problems. A lot of people failed to see that. The financial backbone of the economy is a corner of capitalism that requires more intrusive and careful regulations than a lot of economists thought. Because of the centrality of credit in a capitalist economy, a capitalist economy is inherently unstable. This instability can become catastrophic unless you have something in place to mitigate it. Unfortunately no one seems to have very many great ideas on how to do this.”
A lot of people failed to see that? More intrusive and careful regulations than a lot of economists thought? No one seems to have very many great ideas? Posner wants to pretend that this was some deep, dark mystery, like relativity; it’s hard to criticize physicists before Einstein for not figuring out relativity. But it wasn’t. There has been a debate over free market principles and their applicability to the real world (including finance) for decades (see the books by Justin Fox, John Cassidy, or Joseph Stiglitz for more), and Posner was on the wrong side of that debate. He wasn’t a Newtonian physicist who wasn’t quite as smart as Einstein. He was part of the problem, and he made it worse.
Readers may wonder why I have it in for Richard Posner, of all people. The reason is that I am in law school, and as a result I have had to read multiple opinions in which Posner smugly reflects on the production of efficient equilibria through the operation of incentives, without bothering to sully his logic with the faintest scrap of empirical evidence. Posner is also in part responsible for the hegemony of the law-and-economics theory of vast areas of the law, which I described on an exam this way:
“What you end up with is judges who know little about economics making uninformed guesses about economic tradeoffs, and then being upheld by appeals courts who (a) know just as little about economics and (b) wouldn’t find reversible error in any case.”