Terry Burnham's response to Alan Greenspan's Never Saw It Coming at Foreign Affairs.
John Maynard Keynes’ last words are reportedly, “I wish I'd drunk more champagne.” One might hope that Alan Greenspan’s last words will be, “I wish I had taken the monetary champagne away before I created the financial crisis.”
Based on Chairman Greenspan’s latest book, Age of Turbulence, and his related media tour, no such admission of responsibility appears to be forthcoming.
Let us recall some of the history. Alan Greenspan was chairman of the US Federal Reserve from 1987 to 2006. Chairman Greenspan kept interest rates close to zero for years after the tech stock bubble collapsed in 2000. During this period of low interest rates, mortgage rates were also low, and housing prices rose dramatically. Soon after Chairman Greenspan left the Federal Reserve, housing prices collapsed, and the world fell into financial crises.
Five years after the collapse, what does the Maestro say for himself? He admits that he, and other economists, utterly failed to foresee the housing crises and its fallout. Second, he concludes that the reason he failed is that economics mischaracterizes human nature. The Federal Reserve models of the economy are not useful because people do not behave as economists assume.
At this point, readers of This View of Life, are likely to applaud. After more than four score years of using the wrong model of human nature, surely Chairman Greenspan has found the correct approach – that of evolutionary theory. To paraphrase Dobzhansky, nothing in monetary policy makes sense except in the light of evolution.
Unfortunately, after discarding standard economic theory, Chairman Greenspan does not mention Dobzhansky or Charles Darwin. Rather, he concludes that even though standard economic theory does not predict human behavior, humans do have behavioral regularities. His bold new suggestion is to use no theory, but simply to summarize these regularities.
After decades of stumbling around with the wrong theory, Chairman Greenspan concludes that standard economic theory is worse than no theory at all. The Chairman may be right in this pessimistic assessment of mainstream economics. However, we are also right to be disappointed that Chairman Greenspan has not turned to evolutionary theory for insight into human nature.
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