Who Knew?

this John Cassidy piece in the New Yorker has caused a stir among professional economists and policy makers. In case you missed it, the article presents us with a compendium of interviews he conducted with prominent University of Chicago economists. Famed free market ideologues like Gary Becker, Richard Posner, and Eugene Fama gives us their broad brush interpretations of the causes of the recent financial crisis.

Along the way, Cassidy does his best to remind his readers that the financial crisis is a priori proof of the failure of a free-market ideology, particularly the brand of economic thinking coming out of the Chicago School. (He goes so far as to label Eugene Fama a market “fundamentalist,” a familiar invective lobbed at those who express any hint of skepticism toward the healing powers of government.) Cassidy also suggests that one of the school’s brightest stars, Richard Posner, who recently “converted” to the John Maynard Keynes weltanschauung, should be the poster child for other free market economists. In other words, be warned: the Chicago School is losing its intellectual grip among serious thinkers and policy makers.

Who knew?

Well first of all, it makes no sense that Richard Posner’s putative conversion is even a story. He is, after all, a prominent judge and economist who studies and writes about the intersection between law and economics. And he’s done that really, really well his whole career. He is not – like Keynes was – a macroeconomist who studies interest rates, unemployment, or even money. That big difference should alarm sensible readers.

But who cares? For Cassidy and the editors at the New Yorker, Posner’s profile hits all the right marks: an economist! (doesn’t matter what kind) from the University of Chicago! (guilt by association) who converted! (it was a splendid ceremony). The editors must’ve been champing at the bit – this story is so compelling, it must be true!

Secondly, and most importantly, the part of Cassidy’s piece that’s most alarming concerns the Chicago School’s ostensible fall from policy making grace. Cassidy tells us that free market thinking was the paramount ideology governing policy making over the last couple decades, since at least the Reagan administration. And that ideology was part and parcel of the cause of the recent financial crisis.

Well, there’s an easy way to test this claim. Unfortunately, neither Cassidy nor his editors at the New Yorker bother to do so. Stanford University economist John Taylor, on the other hand, does the heavy lifting for them. And anyone who cares about getting closer to the truth should pay attention.

Here’s Taylor's graph depicting the number of PhD appointees since 1980 from both Cambridge (Harvard or MIT) and Chicago to the CEA (the president’s governing body of super-smart economists who guide economic policy making in this country):

Wow. It seems to me that the chart illustrates the complete opposite of Cassidy's claims. Remember, “in the areas of regulation, trade, anti-trust laws, taxes, interest rates, and welfare, Chicago thinking greatly influenced policymaking in the U.S. and many other parts of the world.” Who knew that you can have zero Chicago School economists in the CEA and still have a great influence shaping policy? The question then is, how do they do it?

The answer? They don’t. You see, John Cassidy and the editors of the New Yorker know that compelling stories are much better than the data, even if these stories are mostly made up.