A Course in Economics

Long-time readers will know that I have no use for the late Milton Friedman and the cult that grew up around him at the University of Chicago.

I was surprised, therefore, that Paul Krugman (who is brilliant, irritating, and sometimes wrong) was so kind to him in this survey of economic theory and real life: How Did Economists Get It So Wrong?

Would you like to take a quick college survey course in the history of economic theory? Professor Krugman gives us one for free (or, should I say, for the cost of the New York Times Sunday edition, which you can read for free). Describing current macroeconomic thought, he divides American theory into two schools: "saltwater" economists (i.e., East Coast and West Coast) and "freshwater" economists (i.e., the University of Clueless).

... Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.” [That condescending attitude about people who are not University of Chicago economists is typical of the cult.]

Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

It's a long article, but well worth your time.