On Economic History

Brad DeLong's new book Slouching Towards Utopia offers a corrective to months of madness.

Keats and Yeats are on our side.

I reviewed Brad DeLong's long-awaited Slouching Towards Utopia for the good people at Dissent. It's a long review of a long book, and I won't summarize it here except to say that I liked it very much, with a few caveats that are inevitable in a book of such ambition. Go read my review, then go read Brad's book.

What I will do here, however, is make a few observations about economic history. For obvious reasons I feel a great deal of sympathy for the plight of the economic historian, particularly the economic historian who bothers to navigate the difficulties of developing a popular audience. 

Brad started this project in the 1990s, and had to change its direction several times as the course of events forced him to rethink the arc of his narrative. To most editors in the publishing world, that kind of thing sounds like trouble -- either you have something to say or you don't, and if you have to keep reformulating your thesis, then you probably don't. 

But Brad is an exception to this rule. He knew he was swinging for the fences and he cared about getting it right. There's an intellectual flexibility at work in the book that I find really admirable, even when I don't necessarily agree with where he's taking things. 

Economic history is an unusual field. Good economists study it closely, but there is nevertheless an allergy to history in some corners of the discipline. Economists who love math think stories about the past are unscientific, and they’re right. But numbers without narrative are meaningless. For the models and equations that guide the profession to have any substantive value, they must be grounded in concepts that actually correspond to the real world, and the only way to verify that is by studying the real world. Since real-time experiments are next to impossible, that leaves us with history.

Understanding economics from an historical perspective helps demystify it — we come to grips with how different economic policy initiatives are supposed to work, and what problems they were developed to solve. And the best economic history is also intellectual history. Economists don’t just look at the facts come to conclusions. They have beliefs about how the world works, and those beliefs influence the design and development of economic policy. Economic history can help us understand why other people in other places and times have not embraced the economic assumptions of our own day, which can help us evaluate our own views when the world doesn’t seem to fit our expectations — which, any good economist can tell you, happens all the time. History discourages the dogmatism that leads many economists to retreat from the distressing complexities of the real world into the realm of comfortable abstractions.

Starting with the financial crisis of 2008, a lot of smart people who had taken the economic orthodoxy of the 1990s for granted started to look more carefully at its intellectual and political roots. Slouching Towards Utopia is the latest of several popular books written over the past decade or so that have reframed our understanding of the economic present by investigating the past. This renewed interest in economic history informed the policy responses to the COVID-19 pandemic and the Russian invasion of Ukraine. It helped establish something like a new intellectual consensus that discarded the strictest elements of the 1990s orthodoxy for free trade and balanced budgets in favor of more creative approaches. Even fairly conservative thinkers have acknowledged that budget deficits are not the apocalyptic threat they were once presented to be. There has been much broader acknowledgement that monetary policy is not the ideal or only appropriate tool for economic management, that austerity is politically dangerous, and that under-investment and unemployment are the most serious economic problems facing the world. Nobody likes inflation, of course, but an understanding seemed to have developed that inflation was one type of economic problem among many, rather than conclusive proof that the end of the world was imminent.

Over the past few months, however, we've watched central banks in Europe and the United States pivot to what strikes me as an indefensibly bleak view of economic management -- the insistence that higher interest rates and higher unemployment are not only an effective way to combat inflation, but also somehow humane and, in any case, unavoidable. This program has been combined with effusive rhetoric about the fate of the economically disadvantaged. One day Larry Summers says we need sustained, high unemployment to cure inflation, and the next he points out that unemployment is jet fuel for fascism. Jason Furman rails against student debt relief as a 0.2 percent tax on the poor, and then calls to add more than four million names to the unemployment rolls. If you are concerned about the plight of the poor, in my view, it is a bad idea to throw them out of work by the millions, especially if you think doing so will enhance the appeal of authoritarian politics.

This sudden enthusiasm for imposing profound hardship on millions of people could be defensible if it were scientifically necessary. There are a lot of sad things in the world beyond our control. But when we look under the hood, we find an intellectual mess.

In June, Federal Reserve Chairman Jerome Powell was thoughtfully emphasizing the limits of monetary policy — particularly its inability to bring down energy prices, and the damage that high interest rates deliver to the job market. He even went so far as to argue that inflation expectations — the vaguely defined boogeyman haunting today’s most aggressive austerians — are driven by gas prices. When gas prices go up, according to this thinking, people expect all prices to go up, and start raising prices to fit those expectations. But gas prices are down dramatically since June, and to the limited extent that inflation expectations can be quantified in financial markets, those expectations have been falling for months. And yet with no apparent revision to his summertime framework, Powell abruptly vowed in September to continue tightening monetary policy until inflation disappears, all consequences for employment, investment and social stability be damned.

Nor is this a strictly American problem. As Jon Sindreu has noted for The Wall Street Journal, The European Central Bank's stated justifications for higher rates in the face of soaring wartime energy prices are simply incoherent. The obvious problem in Europe is energy, the obvious problem in the U.S. is housing, and higher interest rates will at best do nothing to address either. By discouraging private investment, higher rates will ultimately exacerbate long-term inflationary pressures in both arenas.

None of the frustrations I’ve just detailed are quantitative. They’re conceptual. Nobody can really say why we have to throw so many people out of work, but apparently everyone really wants to do it.

I don’t know what Brad prescribes for the present economic situation. His book doesn’t offer a mathematical formula to save the world or prove its inevitable demise. It instead reminds us what economics is for, how it has worked in the past, and how it has failed. The book is not without flaws, but it is a refreshing dose of intellectual seriousness at a moment of poor economic leadership.

And do read the review.