There is nothing like a really big economic crisis to separate the Cassandras from the Panglosses, the horsemen of the apocalypse from the Kool-Aid-swigging optimists. No, the last year has shown that all is not for the best in the best of all possible worlds. On the contrary, we might be doomed.
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At such times, we do well to remember that most of today's public intellectuals are mere dwarves, standing on the shoulders of giants. So, if they had e-mail in the hereafter, which of the great thinkers of the past would be entitled to send us a message with the subject line: "I told you so"? And which would prefer to remain offline?
Adam Smith has had a bad year. Karl Marx had had a good one.
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A special mention is also due to early 20th-century Marxist theorist Rudolf Hilferding (1877–1941), whose
Das Finanzkapital foresaw the rise of giant "too big to fail" financial institutions.
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Joining Smith in embarrassed silence, you might think, is Friedrich von Hayek (1899–1992), who warned back in 1944 that the welfare state would lead the West down the "road to serfdom." With a government-mandated expansion of health insurance likely to be enacted in the United States, Hayek's libertarian fears appear to have receded, at least in the Democratic Party. It has been a bumper year, on the other hand, for Hayek's old enemy, John Maynard Keynes (1883–1946), whose 1936 work
The General Theory of Employment, Interest and Money has become the new bible for finance ministers seeking to reduce unemployment by means of fiscal stimuli. His biographer, Robert Skidelsky, has hailed the "return of the master." Keynes's self-appointed representative on Earth, New York Times columnist Paul Krugman, insists that the application of Keynesian theory, in the form of giant government deficits, has saved the world from a second Great Depression.
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The biggest intellectual losers of all, however, must be the pioneers of the theory of efficient markets – economists still with us. . . . Now, with so many quantitative hedge funds on the scrap heap, their ideas don't seem quite so capital.
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And the biggest winners, among economists at least? Step forward the "Austrians" – economists like Ludwig von Mises (1881–1973), who always saw credit-propelled asset bubbles as the biggest threat to the stability of capitalism.
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Of course, history offers more than just the lesson that financial accidents will happen. One of the most important historical truths is that the first draft of history – the version that gets written on the spot by journalists and other contemporaries – is nearly always wrong. So though superficially this crisis seems like a defeat for Smith, Hayek, and Friedman, and a victory for Marx, Keynes, and Polanyi, that might well turn out to be wrong. Far from having been caused by unregulated free markets, this crisis may have been caused by distortions of the market from ill-advised government actions: explicit and implicit guarantees to supersize banks, inappropriate empowerment of rating agencies, disastrously loose monetary policy, bad regulation of big insurers, systematic encouragement of reckless mortgage lending – not to mention distortions of currency markets by central bank intervention.
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Consider this: The argument for avoiding mass bank failures was made by Friedman, not Keynes. It was Friedman who argued that the principal reason for the depth of the Depression was the Fed's failure to avoid an epidemic of bank failures. It has been Friedman, more than Keynes, who has been Bernanke's inspiration over the past two years, as the Fed chairman has honored a pledge he made shortly before Friedman's death not to preside over another "great contraction." Nor would Friedman have been in the least worried about inflation at a time like this. The Fed's balance sheet may have expanded rapidly, but broader measures of money are growing slowly and credit is contracting. Deflation, not inflation, remains the monetarist fear.