Richard Posner, unsurprisingly, is the hero of the article. But Fama, as Cassidy notes, was “genial” in his dismissal of Posner’s analysis; and Fama’s “equanimity was unshaken” even when discussing Krugman’s fierce criticisms. “My attitude is this,” he said. “If you are getting attacked by Krugman, you must be doing something right.”
From the article abstract:
Earlier this year, Judge Richard A. Posner published “A Failure of Capitalism,” in which he argues that lax monetary policy and deregulation helped bring on the current economic slump. Posner has been a leading figure in the conservative Chicago School of economics for decades. In September, he came out as a Keynesian. [See this New Republic article for the “coming out.” -- KDK] As acts of betrayal go, this was roughly akin to Johnny Damon’s forsaking the Red Sox Nation and joining the Yankees. Ever since Milton Friedman, George Stigler, and others founded the Chicago School, in the nineteen-forties and fifties, one of its goals has been to displace Keynesianism, and it had largely succeeded. . . . In “A Failure of Capitalism,” Posner singles out several economists, including Robert Lucas and John Cochrane, both of the Chicago School, for failing to appreciate the magnitude of the subprime crisis, and he questioned the entire methodology that Lucas and his colleagues pioneered. . . .
In the course of a few days, the writer talked to economists from various branches of the subject. The over-all reaction he encountered put him in mind of what happened to cosmology after the astronomer Edwin Hubble discovered that the universe was expanding, and was much larger than scientists believed. The profession fell into turmoil, with some physicists sticking to existing theories, while others came up with the big-bang theory. Eugene Fama, of Chicago’s Booth School of Business, was firmly in the denial camp. He defended the efficient-markets hypothesis, which underpinned the deregulation of the banking system championed by Alan Greenspan and others. He insisted that the real culprit in the mortgage mess was the federal government. Mentions John Cochrane. Gary Becker, who won the Nobel in 1992, says that Posner and others raised fair critiques of Chicago economics. Mentions Robert Lucas and James Heckman. If the economic equivalent of a big-bang theory is to emerge, it will almost certainly come from scholars much less invested in the old doctrines than Fama and Lucas. Mentions Richard Thaler. Raghuram Rajan, an Indian-born Chicago professor, is one of the few economists who warned about the dangers of the financial crisis. . . .
The impact of the financial crisis shouldn’t be underestimated, especially for Chicago-style economics. “Keynes is back,” Posner said, “and behavioral finance is on the march.”
As a follow-up, Cassidy has posted interview transcripts with the Chicago economists that are the subject of the piece. Says Justin Wolfers:
All the interviews are with truly great economists. The very best come across as trying to build insight that is both rigorous and empirically relevant. But some come across as obtuse; others as arrogant; and some oblivious, or uninterested in evidence. Time and again I was surprised at how readily the interviews slipped from careful insight into personal ideology and dogmas. In each case, the interviews are revealing. (The charitable interpretation is that perhaps what they reveal is how seriously each took Cassidy’s interviews.)
Here are links to the transcripts: