That doesn’t mean nothing happened.  Bill Gates wrote a check for $750 million to the Global Fund to Fight Aids, Tuberculosis and Malaria, nearly making up the shortfall in its recent $13 billion fund-drive. Bloomberg News bought a page in the Financial Times to advertise its Davos coverage, and the FT, long one of the forum’s biggest boosters, brought to a boil a month-long series (“Capitalism in Crisis”), produced a special section, and maintained a witty round-the-clock blog (subscription required).

But the most interesting thing about the Davos meeting this year has been the Larry Summers Redemption Tour, which was timed to coincide with it. At issue is the economist’s service as chief economic adviser to the Obama administration in its first two years. A failure, as presumed by some?  Or, despite the bumps along the way, more nearly e success?

The tour began ten days ago with a well-sourced report by Bloomberg that Summers was among those whom President Barack Obama would consider appointing president of the World Bank when Robert Zoellick’s five-year term expires later this year. “Educating girls” is the single most important investment opportunity in the developing world, Summers told Tom Keene on Bloomberg Television.  There were those op-ed pieces last Monday, too, in The Washington Post and the FT.   (“Economic Insecurity is No Excuse for Inaction.”)

An interview that Summers gave on behalf of the London School of Economics Growth Commission on his way to Davos turned out badly, especially in this YouTube version. The interviewer, Krishnan Guru-Murthy, sought to incorporate the documentary film “Inside Job” in his line of questioning. Unlike his handler, who can be heard objecting in the background, Summers kept his temper while on camera.  But he reportedly was plenty angry afterwards. (The full interview is here.)

And even then, Summers didn’t attract much press attention, compared to former years.

Far more intriguing was an 11,000-word report, “The Obama Memos” that appeared last week in The New Yorker about a thick sheaf of memoranda prepared for the president during his first to years by his economic team, which Summers led. Journalist Ryan Lizza describes reviewing “hundreds of pages of internal White House documents,” without saying where he got them. More than twenty memos are discussed, often with their presidential jottings; the sequence ends in the summer of 2010, about the time that Budget Director Peter Orszag and Council of Economic Advisers chair Christina Romer left office.

But the centerpiece of his article is Summer’s initial stimulus memo, dated December 15, 2008, fifty-seven pages long, marked “sensitive and confidential” and never [before] made public.” It is, Lizza writes, “the ur-text of economic policymaking for the Obama Administration.”

A veteran  reporter, Lizza has been The New Yorker’s Washington correspondent since 2007 –  he vigorously covered the primaries in 2008. In October 2009, he wrote Inside the Crisis:  Larry Summers and the White House Economics Team, featuring perhaps the last photograph of Orszag, Romer, Summers, Treasury Secretary Timothy Geithner and Jared Bernstein, economic adviser to Vice President Joe Biden, all together, all beaming on the White House lawn.

By then things were already beginning to fall apart among the president’s economics team, a process described in 2010, not without controversy, by former Wall Street Journal reporter Ron Suskind in Confidence Men: Wall Street, Washington, and the Education of a President, which drew heavily on Orszag’s witness and was profoundly antagonistic to Summers.  Chances are that Lizza is working on a book of his own.  His article seemed timed to coincide with the Davos forum.

Summers’ memo is deeply interesting for the choices it presented to the president-elect a month before his inauguration.  Remember, this was more or less the same task that Summers had been assigned as a youthful apprentice to Treasury Secretary-designate Lloyd Bentsen and NEC director Robert Rubin in 1992 in the interval before Bill Clinton’s inauguration — canvassing bond buyers, underwriters, economists and others about the likely effects of various fiscal and monetary policies in the coming years. The decisions that Clinton subsequently made about the mix of tax increases and budgetary stringency to pursue put the US on a path that, in combination with the good fortune of the Internet boom, led eight years later to a budget surplus.  Summers replaced Rubin (who had subsequently replaced Bentsen) as Secretary of the Treasury, in 1999.

Summers’ executive summary in December 2008 noted that the president would have to submit or sign several large pieces of legislation immediately upon taking office – a stimulus package, a continuing resolution, the Iraq/Afghanistan supplemental appropriation, and something related to the government’s Troubled Asset Relief Program.

He described the likely future this way:  the economy in 2009, Obama’s first year in office, was expected to lose 3 to 4 million jobs in the absence of any stimulus; already it had lost nearly 3 million.  Unemployment would rise to 9 percent and not begin to fall until 2011.

A $600 billion stimulus over two years would create 2.5 million jobs relative to what would happen with no special Federal government boost. The measure could be expected to hold the unemployment rate to 8 percent in 2010. The composition of the package was important.

No more than $225 billion over two years could sensibly be spent on the president’s core priorities – energy, infrastructure, health, education, protecting the most vulnerable. To achieve the full desired stimulus effect, therefore, would require some combination of state fiscal relief and tax cuts for individuals and businesses.

The memo described four alternative plans, ranging from $550 billion to$890 billion, depending entirely on the generosity of state aid and tax relief.

At one point Summers warned, “An excessive recovery package could spook markets or the public and be counterproductive…”  But that didn’t mean the figure couldn’t be substantially more than $600 billion, given the current climate of opinion – a view shared by Federal Reserve officials, he said.

Still, he wrote, “strong measures to reinforce medium-term fiscal credibility” were desirable. “It is easier to add down the road to insufficient stimulus than to subtract from excessive fiscal stimulus.”

There was a lively argument last week about this aspect of things. Paul Krugman, of The New York Times and Princeton University,  told Lizza that he thought Summers, in the memo, had misjudged the specter of bond market vigilantes who might be frightened and drive up interest rates. Jared Bernstein, who as the vice president’s representative sat in on the White House talks, defended Summers, saying the was “among those who recognized the urgency of the Keynesian imperative.” And Ezra Klein, of The Washington Post has scouted out much more backstory to the memo than I provide here. After a lot of log-rolling, the American Recovery and Reinvestment Act came it at $800 billion. 

Most interesting to me, however, was the passage beginning on page 10, where Summers writes of his advice, “This is standard macroeconomic analysis and it had led most leading economists to call for substantial stimulus packages.” He then reports the results his consultations, and his reading of “published accounts”:

Among progressive economists:

Robert Reich (1.2 trillion over two years)

Joe Stiglitz ($1 trillion over two)

Paul Krugman (at least $600 billion in one year)

Jaimie Galbraith ($900 billion in one year)

Institute for America’s Future, a statement signed by Dean Baker and several senior labor leaders (at least $900 billion

Among others:

“Senior Federal Reserve officials” (well over $600 billion)

Adam Posen, of the Peterson Institute for International Economics ($500 billion to $700 billion in one year)

Goldman Sachs ($600 billion in one year)

An Open Letter signed by 387 economists led by Nobel laureeates Robert Solow, George Akerlof and Joseph Stiglitz ($300 billion to $400 billion in November, presumably significantly higher now)

Among Republican economists:

Marty Feldstein, ($400 billion in the first year)

Larry Lindsey ($800 billion to $1 trillion)

Ken Rogoff ($1 trillionj over two years)

Mark Zandi, (at least $600 billion in one year)

Summers wrote, “Greg Mankiw is the only economist we have consulted who refused to name a number and was generally skeptical about stimulus.”  Mankiw. a former chief economic adviser to George W. Bush, noted last week on his blog that his lonely dissent at the time “reflects the range of economists that Team Obama chose to consult.”

Indeed. Summers apparently didn’t talk to former Bush Council of Economic Advisers member Randall Kroszner, for example, who recently had been rejected by Democrats as a nominee to be a governor of the Fed, or to anyone else in at the University of Chicago. Nor did he solicit the opinion of John Taylor, of Stanford University, a former Bush Treasury official and monetary policy expert who had been a candidate for the job to which that Ben Bernanke had been appointed.

Among the economists whose opinions were presented to Obama, nearly all were, like Summers, trained at Harvard or MIT. Yale (Galbraith) and the University of Pennsylvania (Zandi) were the exceptions; Robert Reich went to law school.  But Summers didn’t mention his Harvard colleague Robert Barro, who subsequently proved to be the most trenchant critic of the form the stimulus took.

Within a week of Summers’ memo, Nobel laureate Robert Lucas, of the University of Chicago, would write, in Bernanke is the Best Stimulus Right Now, an op-ed in The Wall Street Journal, “There are many ways to stimulate spending, and many of these methods are now under serious consideration.  How could it be otherwise?  But monetary policy, as Mr. Bernanke implements it, has been the most helpful counter-recession action taken to date, in my opinion, and it will continue to have many advantages in coming months.”  And a week after that, at the meetings of the American Economic Association, Taylor began a crusade against the stimulus that has since been generalized into the broad consensus among Republican politicians.

(For what it’s worth, I think the administration got it about right, though the President might well have high-lighted Summers point’ about the $225 billion limit on sensible Federal spending on his core priorities, and emphasized that the rest was going to the states and to tax cuts.)

The omission of the doubters’ point of view are interesting mainly because of the way Summers’ memo undercuts the argument of Lizza’s article in The New Yorker – that Obama’s goal of post-partisanship turned out to have been “not just naive but delusional” in the face of Republican intransigence.  Lizza says that the experience of the 2010 midterm elections shows that only partisan dominance can succeed. He may be right.  It is, however, certainly too soon to be certain.

Summers probably would argue that a major memo on foreign policy, say, wouldn’t have sought the opinions of people at the Heritage Foundation or the American Enterprise Institute; that a major memo on education policy wouldn’t have included the views of voucher advocates. Seeking support and input from elected officials of the other party is bipartisan, he might say, but seeking expert opinions at wide variance from your own is a waste of time.

Unless, of course, your boss is seeking to appear – or even to be – post-partisan.  Lizza makes much at the beginning of his article of a dinner George Will gave in January, 2009 to welcome the president-elect.  A regular Who’s Who of conservative pundits were in attendance: Michael Barone, David Brooks, Charles Krauthammer, William Kristol, Lawrence Kudlow, Rich Lowry and Peggy Noonan.  Four years later, he notes, all routinely disparage the president, often in the strongest possible terms.

So did Obama waste his time listening to their views? The answer, it seems to me, is no.  Four years later, they are the ones who seem shallow and foolish, not him.

The main effect of Summers’ memo is to show that there was no similar attempt to take account of the a wide dispersion of conservative macroeconomic opinions (though Feldstein, Lindsey and Rogoff are certainly part of the conservative spectrum). Obama began his presidency on a thoroughly partisan note, probably without knowing it – an odd fate for a man who for a dozen years had taught at the University of Chicago Law School.   It is going to be a long while before the history of those years is well understood.

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As a result (that is, taking advantage of it), there is no Economic Principals this week

.                              dw

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So to celebrate the 2010 award to Peter Diamond, Dale Mortensen and Christopher Pissarides, for what is known as the DMP model of labor markets and unemployment levels, there were many sessions on joblessness and a grand plenary luncheon talk by Robert Hall, ofStanfordUniversity.

Hall sought to show how the DMP model– the most realistic account available, he said, based on a complete statement of underlying principles of turnover, job-filling and -finding rates and wage determination – explains current high rates and the lingering of joblessness.

A dramatic increase in unemployment benefits couldn’t explain the problem, he said – because no such increase had taken place.  Neither could the trend in productivity – it fell, as usual, in the recession, then rebounded sharply, while unemployment remained at 10 percent. Perhaps diminished inflation was responsible, he said, thanks to a certain form of wage stickiness as described recently in a modification of the standard model, in which employers are mindful of the amount of inflation that has occurred since the last time wages were set; more inflation plus stale wages mean more hiring.

With lower inflation as the result of slack conditions that have prevailed since 2007, real wages paid to new hires are elevated.  The payoff from hiring new workers is correspondingly lower.  It takes a higher job-filling rate to justify new hires [but]… the job-finding rate is lower and unemployment is higher. Sticky wages are not just something Keynes thought up: it makes economic sense.

To many in an audience of several hundred, composed mainly of those who were not members of the macro-labor research community, the intensely technical nature of the talk, complete with diagrams, was a sign of a profession still deeply at odds with itself. For many economists, the well-known empirical finding by Carmen Reinhart and Kenneth Rogoff, that recovery from a banking crisis ordinarily requires five or six years, carries more weight.

Diamond, of the Massachusetts Institute of Technology, who laid the groundwork in the 1970s and ’80s with models of search processes in markets with various frictions, noted that, until the news of his award, he hadn’t looked at the search literature for nearly twenty years, and was therefore reacquainting himself with what had gone on in the interim.  Pissarides, of the London School of Economics, stayed home to attend the birth of a new baby. His friend Yannis Ioannides, ofTuftsUniversity, gazed down from the platform in his stead.

So it was left to Mortensen, of Northwestern University, to savor triumph in his home town, and to bask in the glow of a series of panels over three days devoted mainly to one of the most vigorous empirical programs in all of economics, the result of a patient research program he devised forty years ago that has finally paid off.  Economists may not yet understand very well why the most dangerous crisis in 75 years happened, but they know a great deal more than they used to know about what happened as a result.

The big news of the meetings, therefore, was surely Bengt Holmstrom’s presidential address to the Econometric Society. The profession has been struggling to understand how a relatively small shock in housing markets could bring international trade to a grinding halt for two months and push the world economy to the edge of a global depression. Holmstrom, of MIT, contributed a vital piece of the puzzle.

Sometimes, Holmstrom said, ignorance is bliss.

The common view of the crisis, he noted, is that it had been caused by Wall Street greed and bad incentives.  Banks, through the newly-invented process of securitization, had created financial instruments of baroque complexity that nobody really understood.  The originate-and-distribute banking model had caused reckless lending.  Credit-rating agencies had depended on the mechanical application of inappropriate formulae to evaluate risk.  This was pretty much the problem, he said, as described by author Michael Lewis in The Big Short.

But what if a certain kind of desirable opacity, suddenly lost, was the heart of the matter?   What if liquidity ultimately depends on a regime of “no questions asked”?

After all, Holmstrom said, there were plenty of examples of purposeful opacity in the everyday world. The South African De Beers syndicate sells uncut diamonds only in bags containing hundreds of gems, graded to certain standards. The well-functioning market for diamonds depends on continuing trust in De Beers

Fractional banking depends on the assumption that all banks are equally safe.  When one bank or another came under attack in the nineteenth century as liable to fail, bank clearinghouses “circled the wagons,” ceased publishing audited data for individual banks, offered only aggregate data, insisting instead on the solvency of the whole.

Cash money is the most opaque asset of all, Holmstrom noted.  It is backed by nothing more than faith in stability of the government.  Yet when questions arise about, say, counterfeiting, many establishments refuse to accept $100 bills.

Something of the sort happened to money markets in the crisis, Holmstrom said. Not in  familiar retail markets for bank deposits, but in the enormous and for the most part unregulated lending among investment banks, money market funds, corporations and other institutions (collectively known as the shadow banking system), in which $1 trillion in “repurchase agreements,” meaning overnight demand deposits among giant institutions, were regularly rolled over  every morning – until mutual fears among counterparties began to spread, especially after September 2008, when two government-sponsored entities that made the market in mortgage-backed securities, Fannie Mae and Freddie Mac, were placed in receivership.

It is these markets, which depend on debt-like instruments about which no questions are (ordinarily) asked – in which guarantees take the place of transparency (as a rule) – that began to shut down rapidly in the autumn of 2008, precisely because questions were being asked  about their backing.  Suddenly private information had value. When the collapse of Lehman Brothers eroded the overall systemic guarantee, Holmstrom said, the result was a classic banking panic – but out of sight of all but those most intimately involved.

A largely opaque system is favored by private vendors, Holmstrom noted, because it effortlessly expands liquidity before the fact and facilitates economic growth. In another session,  as if to buttress the point, Gary Gorton, Stefan Lewellen and Andrew Metrick, all of Yale University, showed that the “safe asset share” of information insensitive debt – government bonds, demand deposits, money market funds and collateralized repurchased agreements – had remained remarkably stable at around 33 percent of GNP since 1952. When government provision of debt declined, private production took up the slack, and vice versa.  This surprising fact had been previously unnoticed, presumably because theory often determines what is observed.

Opacity has two kinds of problems, Holmstrom told his audience of perhaps five hundred persons.  One it is vulnerable to a discontinuous transition from the state of no-questions-asked to another, in which it pays to create private information. If that happens, panic can easily be the result.  The other problem is that opacity hides systemic risk.

The former problem can be addressed by two kinds of regulation:  more transparency in the normal state, when a little more information won’t hurt (publishing net asset value for money market funds daily, for instance, instead of with the current two-month delay); less transparency in the crisis state (putting toxic assets in bigger, recapitalized bags, for instance, as banking authorities quickly did during the Scandinavian banking crisis in 1991-92, or, somewhat more slowly, as US authorities did in 2008-09).

The latter problem – the accumulation of systemic risk – means that outside monitoring will be required.  (As if on cue, the newly established US Office of Financial Research last week released its first official working paper – A Survey of Financial Risk Analytics, by Mark Flood, of the OFR; and Dimitrios Bisias, Andrew Lo and Stavros Valavanis, all of MIT.)

Holmstrom’s presidential address isn’t written yet.  For his Chicago presentation, he again relied on slides (he has given the same talk before many different audiences.)  In due course the talk will appear as an essay in Econometrica, the journal of the Econometric Society.

But the new view it represents is slowly making its way through the profession.  A formal model, with co-authors Gorton, of Yale, and Tri Vi Dang, of the University of Mannheim, will appear eventually as well.  The nature of the rude surprise that overtook banking authorities around the world in the summer of 2007 is slowly being explicated.

Meanwhile, Laurence Kotlikoff, of BostonUniversity, announced plans to run for president of the United States, at least on the third party movement headquartered at AmericansElect.com.  Kotlikoff, a specialist in public finance, is a natural comedian, with good timing. But that may not be enough to justify his entry into an already crowded field.

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The single most interesting development was the adoption by the AEA’s Executive Committee of stringent new disclosure requirements for authors seeking to publish in the association’s seven journals, including the flagship American Economic Review.

Three stages are involved.

First, to journal editors, authors must identify interested parties from whom they have received sums totaling $10,000 or more over the previous three years, including consulting fees, retainers, grants, as well as in-kind support, such as access to data.

Unpaid positions must be noted, whether with nonprofit advocacy organizations or firms.

The same information must be supplied for authors’ partners and close relatives.

Parties with the right to prior review must also be named.

In most cases, this much will be closely held. Only in articles they choose to publish will editors will make public such potential conflicts as exist.

The executive committee exhorted economists to adopt the principles when writing for other academic journals, in print columns, broadcast commentaries and giving legislative testimony.

Hence the third stage:  will other economics journals, notably the Journal of Finance,  adopt a similar stance?

The new policy was drafted by a committee consisting of Robert Solow, of the Massachusetts Institute of Technology, chair; Derek Bok, of Harvard University; William Nordhaus, of Yale University; David Card, of the University of California at Berkeley; and Nancy Stokey, of the University of Chicago.

Although dissatisfaction has been growing in recent years about the incidence and extent of divided and unacknowledged loyalties among researchers, the new rule-making is widely viewed as having been precipitated by the success of Charles Ferguson’s documentary about the 2007-08 crisis, “Inside Job.”

Much reporting remains to be done on the nature of various temptations that have arison over the last several decades, from expert testimony to corporate directorships to political consultancies.  Mark Whitehouse, of Bloomberg News, has made a start.

More next week on the meetings themselves.

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…In Silicon Valley, all the Sturm und Drang of 2011 seemed as relevant as the Cricket World Cup. High unemployment? Crippling debt? Not in Silicon Valley, where the fog burns off by noon and it’s an article of faith that talented, hard-working techies can change the world and reap unimaginable wealth in the process. “We live in a bubble, and I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world,” says Google Chairman Eric Schmidt. “And what a world it is: Companies can’t hire people fast enough. Young people can work hard and make a fortune. Homes hold their value. Occupy Wall Street isn’t really something that comes up in daily discussion, because their issues are not our daily reality.”  It was never clearer than in 2011 that Silicon Valley exists in an alternate reality—a bubble of prosperity….

Brad Stone, Bloomberg BusinessWeek, December 22, 2011

The Federal Reserve Bank of Boston’s 2010 Annual Report, when it appeared last year, was decorated by a series of falling autumn leaves and featured a nifty restrospective essay, “New England Transformed,” by retiring research director Lynn E. Brown. She — and the falling leaves — emphasize the region’s aging population.

The future of the six-state region hadn’t looked bright when she joined the bank, in 1975, Brown recalled. Textile and shoe manufacturing were continuing their century-long decline. With the end of the moon race and the Vietnam War, military spending was cutting back. The energy crisis had hit the region hard. The sobriquet Taxachusetts was just beginning to bite. Per capita income was falling, from 109 percent of national average in 1970 to 103 percent in 1975.

Though it was not obvious at the time, Brown wrote, 1975 was a turning point. The phrase “high technology” was gaining currency: computers in the ’70s, software in the ’80s, Internet technologies and life sciences in the ’90s, and financial services throughout, in Greater Boston and southwestern Connecticut. Per capita income rose to 120 percent of the national average (though, naturally, living costs rose as well).

Education was a large part of the story, according to Brown. By 2008, 35 percent of adult New Englanders possessed college degrees, as opposed to around 28 percent nationally.  So was the cooperation between business and political leaders that ended the underlying reality of Taxachusetts, if not necessarily the reputation itself:  today, wrote Brown, the tax burden compares favorably with most other states.

Three severe recessions in the past twenty years, however, two of them worse than the national average, have put an end to “the Massachusetts Miracle,” and its various regional spillover effects.  Foreign competition has cut New England’s manufacturing jobs nearly in half since the mid-’80s. Net outmigration has been the result.  High vacancy rates in key occupations indicate a shortage of specialized skills. Slow population growth; advancing age, low birth rates: Maine and Vermont are the oldest and second-oldest states in the nation, and New Hampshire is fourth.  You can’t call it a declining region, wrote Brown.  But significant challenges lie ahead.

Concealed beneath the aggregates of the professional economists are successive waves of collapse.  The mini-computer giant Digital Equipment Corp. disappeared into Hewlett-Packard. Proud old banks, including the First National Bank of Boston and New England Merchants, were merged out of existence; insurance companies, including John Hancock and New England Life, were absorbed by other companies.  Thomas H. Lee Partners and Bain Capital entered the private-equity business; but, thanks to schisms in Boston’s venture capital industry, no first-tier buy-out firm emerged.

Proud old publishers, Houghton Mifflin and Little Brown, were acquired. The Atlantic Monthly moved to Washington, D.C. The New York Times bought The Boston Globe it in 1993, thinking it would be a money machine and, for a decade, it was. But after the Times installed a team of its own, starting in1999, readership declined disproportionately. Once the fifteenth-largest newspaper in the nation, the Globe last year dropped to thirty-first in weekday circulation. All big newspapers’ circulations are shrinking, but none more rapidly than the Globe.

Meanwhile, the San Jose (Calif.) Mercury News has vaulted to sixth-best-selling daily paper on the country, behind The Wall Street Journal, USA Today, the Times, the New York Daily News and the Los Angeles Times. And on that opposition hangs a story – perhaps the story of Boston and northern California’s economic development of the last sixty years.

The present-day fate of New England goes back to an argument at the Massachusetts Institute of Technology in the ’50s about that material from which semiconductors, well understood locally from wartime work on radar, were to be manufactured in the years ahead. Dogma held that it would be germanium; silicon crystals would be too difficult to purify to the required degree.  Robert Noyce, an MIT-trained physicist, thought otherwise.

When MIT declined to tenure him, Noyce decamped, first to Philadelphia, then to the Shockley Semiconductor Laboratory, in Mountain View, California.  Silicon leadership went with him – to Fairchild Semiconductor and Intel, each of which he co-founded, And eventually to Silicon Valley, centered around San Jose, which the two firms spawned. New England never developed a vigorous industry in silicon chips. By the end of the ’70s, savvy venture capitalists had begun migrating to Palo Alto’s Sand Hill Road.

Similarly, when Bill Gates dropped out of Harvard College, in 1975, to found a little software company called Microsoft, he repaired first to Albuquerque, N.M., , then to his native Seattle. Plenty of entrepreneurial software development was going on in Cambridge, including the first spreadsheets, but proximity to microprocessor developers in California, Intel in particular, gave Microsoft a decisive edge.  Microsoft networking software eventually swallowed whole Massachusetts’ minicomputer industry.

The Internet, on the other hand, remained a powerful economic engine in New England well into the ‘’90s, thanks largely to the influence of MIT’s J.C.R. (Jack) Licklider, of Bolt Beranek and Newman and the Pentagon’s Advanced Research Project Agency.   But the advantages that came with having been present at the creation largely evanesced with the rise of Google in Palo Alto.  Harvard Students started Facebook, but had to move to Silicon Valley to find developers. Marc Andreessen, the browser inventor-turned-venture capitalist told The Economist last autumn that recently “there has been a massive brain drain from Boston to the Valley, which has all but gutted Boston as a place for high-tech entrepreneurship.”

It may be so.  But IBM has bought some twenty Massachusetts companies recently and built one of the world’s largest software facilities in Littleton. And Boston still has its great universities, not just Harvard and MIT, but Boston University, Boston College, Tufts, Northeastern and Brandeis universities and a host of smaller institutions. It’s no surprise that Microsoft, Google and, most recently, Amazon, have set up or plan to set up laboratories in Cambridge as listening posts.

What remains commercially strongest in Boston today is health care. (Defense giant Raytheon Corp. has survived, too, along with a little nebula of smaller firms, thanks to a breakneck spree of acquisitions led by CEO Dennis Picard.) The biotech and pharmaceutical presence here, too, can be traced to a couple of key decisions:  first, MIT’s willingness in 1982 to accept Edwin (Jack) Whitehead’s gift of an affiliated but self-governing research institute (Harvard and Duke earlier had turned him down); then, MIT professor David Baltimore’s decision, as Whitehead Institute director, to hire cryptographer Eric Lander away from the Harvard Business School, where he was teaching entrepreneurial finance (days) and learning molecular biology (nights)

Lander’s collaboration with MIT geneticist David Botstein produced an explosion of powerful insights in what we now call bioinformatics – and assured, at least for a time, the continuing leadership of Boston’s universities and hospitals in medicine. Where once Raytheon’s headquarters dominated the region’s celebrated Rte. 128, today a biopharmaceutical giant (the UK’s Shire plc) is completing a research campus for human genetic therapies business.

Now this is not exactly a new story.  in The Americans: The National Experience, historian Daniel Boorstin described New Englanders as “the Versatiles,” and traced the region’s adaptability to its nearly total early dependence on the sea.  “The sea leads everywhere,” Boorstin wrote, but it demands quick decisions and a willingness to jettison unprofitable cargo. Yankee traders were famous for their willingness to take advantage of unexpected bargains wherever they were to be found, to sell the ship itself if it could not go on with profit. “Captain and supercargo had unfettered discretion to shift investment, to convert the voyage from one purpose to another, to give up and return home, whatever promised most.”

Or, as the Boston Fed’s Lynn Brown put it at the end of her essay, “As I look back over the past thirty-five years, I am struck, first, by New England’s ability to adapt to changing circumstances and,  second, by how quickly and unexpectedly circumstances can change.”

.                                xxx

EconomicPrincipals has made its maiden appearance in Bulgarian. Albert Ward translated The GPT That Dares Not Speak Its Name, a weekly from early 2009 that connected economic historian Nathan Rosenberg’s seminal notion of general-purpose technologies with the cluster of financial innovations that had called attention to themselves so memorably the year before.  Strength to his arm, as he spreads the good news around the globe.

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He asked some undergraduates how they valued the gifts they had been given and concluded that between a tenth and a third of holiday spending is deadweight loss – that is, loss not offset by someone else’s gain.

Better to give cash, or donate to charity, he concluded, especially if you don’t know the person very well.

Of course it’s always possible that the recipient of your gift is not perfectly informed about the world – that you know something that he or she doesn’t.  In that case, your gift may create value above its price.

It’s in that hope that EP sends along an inexpensive gift – no more costly than the time it takes to hit a link.

Take a look at Flightaware – a live flight tracking site that collects data from the plane itself.  It’s free. You’ll love it.  You’ll never have to ask an airline about departure and arrival times again.

Happy holidays from EconomicPrincipals.com.

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It may not show up on best books lists – not even the one I wrote for Strategy + Business – but Roots, Rituals and Rhetorics (for which I have adopted the useful mental shorthand of the “three Rs” of change), was the most unexpectedly illuminating book I read this year.  Not everybody is as interested as I am in how our ideas about business and economics originate, and how they are absorbed, elaborated and changed. But for fans of such things, this book is nearly impossible to beat.

Few readers at the beginning of the second decade of the twenty-first century will be surprised by Augier and March’s broad conclusions about how the social organization of business has changed since 1945.

*  A managerial class came into being in those fifty years. What had been a relatively open occupational category before the war, drawing from the ranks of workers, owners and college grads, gradually became the province of the MBA.

* A new language emerged.  Spreadsheets became the standard form by which MBAs exchanged opinions; “properly aligned incentives,” their desiderata.  Managers spoke the new lingo to one another, confident that they would be understood.  There was less technical language for the general public.

* Business schools’ faculties became the gatekeepers and custodians of managerial rhetoric, first through the students whom they admitted, then through the curricula they devised; finally through the support they provided to executives, through consulting, mentoring, research, and their links to the press.

* Business schools assumed the task of producing fundamental knowledge relevant to management, a responsibility they shared with departments of economics.   As repositories of a store of know-how indispensable to practice, management schools came to be seen as having joined the worlds of engineering, medicine, law, science, architecture, and theology.

What’s riveting about the book is the historical narrative by which its authors reach those conclusions. They turn it into a story, which they tell in graceful, often witty, prose.  March, 83, lived through much of it: a Stanford University professor since 1970, a political scientist, he is a veteran of the Nobel nomination league for his writings on decision-making and organizations. Augier, of the Naval Post Graduate School, nearly fifty years March’s junior, is an especially original historian of economic ideas.  As essentially the account of a participant-observer, the book is a welcome complement to Philip Mirowski’s  Machine Dreams: Economics Becomes a Cyborg Science, another version of more or less the same story.

Augier and March begin their account with a chapter on Abraham Flexner.  It was Flexner’s 1910 report on medical education in the United States and Canada, Bulletin Number Four, from the Carnegie Foundation, that guided foundations’ investment in medical schools for a crucial twenty years after it appeared. The US was suffering from “a century of overproduction of cheap doctors,” Flexner wrote.  Universities, not commercial establishments, should train physicians. Fundamental knowledge of science and medicine, not apprenticeships, should be the basis for their education. Professionalism, meaning peer review, should be the rule.

It worked. Within a decade of Flexner’s prescription, the number of medical schools declined dramatically; the quality of students, faculty and instruction in the remaining schools substantially improved; and science, biochemistry in particular, became pervasive in the curriculum. Not surprisingly, in the 1950s and ’60s, the Flexner Report became a model for foundations wishing to reshape the business schools.

The authors move on to a chapter about the University of Chicago, where they say Robert Hutchins, president from 1929 until 1951, played a key role in galvanizing the spirit of change.  Hutchins supported the highly interdisciplinary Cowles Commission, hired Friedrich von Hayek, Milton Friedman and Aaron Director.  And even though Hutchins considered business schools second-rate intellectual enterprises, the Chicago Graduate School of Business under Allen Wallis, George Shultz, James Lorie and George Stigler came to represent – though only after Hutchins left – precisely the sort of research-oriented curriculum and interdisciplinary faculty that he had championed in other corners of the university.

It was RAND Corp. that provided the most stimulating incubator of change in the years after World War Two. An acronym for Research And Development, RAND was a private facility originally chartered by the US Air Force to explore ways of organizing scientific and technological knowledge for military purposes.  Its first Pentagon boss was Gen. Curtis LeMay.  But RAND’s Southern California headquarters, across the street from the Santa Monica pier, quickly grew into a kind of universal think-tank, spinning out important work on strategic thinking, decision making, organization theory and economics of all sorts, much of which found its way into business school curricula.   “Cleverness led inexorably to excess,” the authors write. RAND’s cocksure enthusiasm for intelligence eventually was implicated in both the misadventure of Vietnam and the financial collapses of the first decade of the twenty-first century, they say. But its influence also led to the creation of successful and durable  programs, such as the Advanced Research  Projects Agency (ARPA) and the Office of Net Assessment in the Defense Department.

None of it would have happened the way it did without the Ford Foundation.  Chartered in 1936, the philanthropy in the 1950s supported a number of liberal causes, among them public broadcasting in the United States, nation-building in Asia and support for the social and behavioral sciences.  California attorney H. Rowan Gaither, who eventually would become the foundation’s head, left RAND Corp. to set up a wildly ambitious web of programs, especially in view of Sen. Joseph McCarthy’s enthusiasm for attacking social science in general and foundations in particular.  Business education turned out to be “a safe haven,” a “philanthropoid’s  dream,” in the words of one Ford functionary.

And so it was that the Graduate School of Industrial Administration at the Carnegie Institute of Technology in Pittsburgh – a small, unranked, and unaccredited school at a second-tier engineering institute, as the authors put it – became a poster- child of the new management education.  That story is too interesting to tell here in any detail, but what went on in the old factory building that Andrew Carnegie had built on the side of a hill, so that it could be used as a gravity-powered assembly line in case the education business didn’t work out, was an explosive success, assembling a collection of faculty members (including March) whose influence on both economics and management education was far flung.  After that, everybody got into the act, led by the Wharton School of the University of Pennsylvania, the University of Chicago, Northwestern University, and Stanford University.

And of course there was Harvard, which, as the citadel of teaching by case methods, routinely hedged its bets. Its business school had long maintained a foot in the business of knowledge production.  Historian Alfred Chandler might well have shared a Nobel Prize, had he lived a year or two longer. Instead, the prize for research on governance, a deft one, went to Elinor Ostrom, of Indiana University, and Oliver Williamson, of the University of California at Berkeley. Starting in the late ’70s,  however,  Harvard Business School dean John McArthur made a decisive break, promoting from within Michael Porter, in strategy; and hiring a trio of key outsiders: Michael Jensen, from the University of Rochester, in organization; Robert C. Merton, from the Massachusetts Institute of Technology, in finance; and Robert Kaplan, from Carnegie Mellon University, in accounting;. These were serious researchers at the very tops of their fields, producers of public knowledge, as opposed to a stereotypical old guard at Harvard, for whom teaching was paramount.

Roots, Rituals and Rhetorics doesn’t concern itself with the content of the doctrines that were propagated by these and other thinkers. There is nothing about income distribution, the global financial system, nation-building and the like. So much heavy lifting lies ahead for other historians of thought.  There is, after all, a distinct possibility that the attempt to improve the intellectual environment of the business schools overshot and produced something else instead. In any event, the book ends on a note of disappointment:

 As the scholars and policy makers who grew up during the Great Depression and the Second World War and launched their careers in the 1950s and 1960s were gradually removed from the scene, they were replaced by individuals who grew up in different times and were imbued with different, less academic, and more self-interest-oriented perspectives. The “golden age” was transformed to a significant extent  into an era of the glorification of huge fortunes and  of those who accumulated them, the anointing of greed as a social virtue, and the substitution of the lessons of experience for the lessons of analysis and research.

But, briefly, there was a Camelot.

For would-be agents of change, however, having embarked on the reform of management education,  this is no time to stop. Business schools were part – only a part – of a well-intentioned effort to take apart and examine the workings of North American society in the ’50s and ’60s.  Those same economic architects and engineers should now assist in the  job of  putting it back together again — or so it is to be hoped. What’s the Carnegie Foundation, or whatever may be its nearest equivalent today, doing about that now? Significantly, it seems to me, Augier and March prominently acknowledge the John and Cynthia Reed Foundation, a creation of the former Citicorp CEO and present chairman of the MIT Corporation.

There is plenty of juice in this orange. I don’t see how you can know much of anything about, say, the rise of management consulting, without Augier and March.  The Roots, Rituals, and Rhetorics of Change is an indispensable point of entry to one of the most important stories of our time.

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An hour is time enough to do a distinguished job. Thomas Schelling, of the University of Maryland, gave a brilliant lecture in 45 minutes a few years ago.  But when two laureates are required to condense their message into half an hour apiece, the results can be disappointing – the talks, not the messages.

That’s what happened last week to Thomas Sargent, of New York University, and Christopher Sims, of Princeton University. Both are researchers who introduced new kinds of mathematical methods to formulate old questions about cause and effect in economics. But both are committed to proposition that, since their formal methods evolved from natural language, the conclusions they generate can be translated back into relatively straightforward terms. Both are preparing lucid papers. But the talks they gave about them were cut short.

Sargent compared the creation of the fiscal system of the United States in the years between 1780 and 1840 – “time zero” in the language of economic modeling, he joked – with the beginnings of the European Monetary Union after 1990. He then contrasted the US government’s assumption of the original thirteen states’ debts after the War for Independence with its refusal to assume – to “bail out” — the states’ obligations after the collapse of canal and railroad spending sprees in the 1830s, and very lightly drew some parallels to the crisis of 2008.

Sims talked about the evolution over the years of Jan Tinbergen’s original 1938 attempt to build “a mathematical testing ground for theories of the business cycle” with Trygvie Haavelmo’s 1942 criticism of that attempt as insufficiently probablistic (Tinbergen was the co-recipient of the first Nobel prize, in 1969, Haavelmo the twenty-first) with a view to showing that, especially with respect to modeling the behavior of policy makers, scientific progress in economics “is not as  pretty as natural science; it’s a little messy.”

Neither lecture worked quite the way the laureates intended.  Not wanting to be bad guests, both speakers hurried the pace of their presentation rather than disregard their prompter. (As noted. their presentations are online, you can judge for yourself. Both papers will be published in the American Economic Review next June. Sargent’s, in particular, would make a good little book, along the lines of his two earlier essays, The Big Problem of Small Change and The Conquest of American Inflation.

Given the spirit in which the prize in economic sciences was established – the need not just to fathom the mysteries of political economy, but to convey that understanding to the lay public – the authorities might allocate a little more time to the lectures and a little less to the intense socializing that determines the calendar of the busy Stockholm week.

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A good thing, then, that we have Economic Principals’ Translate Thomas Sargent Contest.  When he accepted the CME-MSRI Prize in Innovative Quantitative Applications last fall, Sargent summed up the vision of the world on which he worked this way:

The assumption that people share common beliefs about underlying sources of uncertainty [that is, that expectations are rational] underpins influential doctrines in modern economics, including (1) how the distinction between expected and unexpected government actions affect inflation-unemployment dynamics; (2) how to cast optimal fiscal and monetary policy as a dynamic mechanism designed to cope with enforcement and information limits; (3) how timing protocols that capture a government’s ability to commit give rise to optimal fiscal and monetary policies that are time inconsistent; and (4) how reputation can substitute for commitment.

Because central banks and treasuries want to implement solutions of optimal policy problems like (2) in contexts like (1), in which the distinction between foreseen and unforeseen policy actions is important, a time consistency problem like( 3) arises, prompting them to focus on ways like (4) to sustain good expectations. By showing how to modify the common beliefs assumption [the presumption that everyone’s expectations are the same] in ways that take account of both adaptive learning and of economic agents’ response to statistical model uncertainty, economic research has also set down foundations for better models in the future.

EP challenged readers to come up with translations and/or illustrations of Sargent’s description of the human predicament.  And several tried. Ken Voytek wrote: “Fool me once, shame on you; fool me twice, shame on me.” David du Plessis wrote: “Economics, because it is wrapped around people, is not an exact science. Our hopes (and consequent actions) are more often not about interest rates but about how we want to see ourselves. Governments should nurture our hopes.” And John Albin wrote: “1. Pay no attention to the man behind the curtain. 2. Pay attention to the man behind the curtain.”

But the realm of strategic interaction routinely overpowers aphorism. The winner therefore is this entry by David Kreps, of Stanford University.  His subject is tax amnesties. But notice that his reasoning could apply equally to forgiveness, assumptions, and bailouts of all sorts — including the kinds of the kinds of decisions taken in the formative years of the United States that were the subject of Sargent’s Nobel lecture.

Tax Amnesties and Modern Macroeconomics

Governments, in an attempt to raise funds, impose taxes.   Some individuals and firms, in an attempt to avoid being the source of those funds, cheat.  They cheat by failing to report income, conducting transactions in cash, and so forth.   Governments, to deal with tax cheats, engage in costly endeavors such as auditing.   And, sometimes, governments try to recoup taxes they never collected by proclaiming a tax-evasion amnesty.

The idea is simple:   The government proclaims to all and sundry:  “If you have evaded taxes, come forward now.   We won’t punish you, at least not too much.” Certainly, the confessed evader must pay the taxes he or she evaded.   And, in addition, interest charges may be imposed, and perhaps a small fine.  But criminal prosecution is taken off the table; coming forward and confessing is made relatively acceptable option, attracting a lot of otherwise lost revenue.

Given their frequency and popularity, governments believe that these amnesties are a good thing, flushing out tax cheats and swelling government coffers with tax revenues that would otherwise never be collected.   But, in a Wall Street Journal column dated August 7, 1986, Robert Barro and Alan Stockman raised an objection:   When individuals realize that tax amnesties will be offered periodically, they can reason that cheating on their taxes might not be such a bad thing:  Cheat today, and confess at the next amnesty, or confess at the next amnesty if you feel the hot breath of the tax authorities on the back of your neck.   So, Barro and Stockman reason, tax amnesties may actually lower tax compliance, by convincing folks—perhaps in particular folks who are momentarily short of funds but anticipate better days ahead—that another amnesty is always just around the corner.

Moreover, tax cheats, seeing an amnesty in progress, may reason that the government will flush out some tax cheats with this amnesty, but others will remain unflushed. So, once this amnesty is finished, it will be in the government’s interests to offer another amnesty, on even more favorable terms, to flush out those who didn’t come forward in amnesty mark 1. This sort of inference—the government will do tomorrow what is in its best interests tomorrow—may mean less coming-forward in this amnesty.  (In the microeconomic context of a monopolist selling a durable good, Ronald Coase’s famous conjecture is that the monopolist will be unable to get anyone to buy at the monopoly price, since, because everyone anticipates that, having made all possible sales at the highest price, the monopolists will then lower his price, to capture those who didn’t come forward – so no one buys at the higher price.)

Of course the government doesn’t want individuals to draw these conclusions.   So tax amnesties are frequently accompanied with loud proclamations. “This is it.  Last chance.  We’re never doing this again.”   But while tax cheats may be vile, that doesn’t mean they are stupid.  They can do the math.   They realize that after the amnesty is over the government will have every incentive to offer another amnesty.   The very success of an amnesty, if it is successful, leads to the assessment that it will be offered again.   In other words, talk about “last chances” is cheap; incentives after the fact speak louder, and lead individuals to conclude that the government proclamations have no credibility.

Barro and Stockman suggest an ingenious twist on this.   Have the government proclaim a tax amnesty.   See who comes forward.  And then tell those who came forward “Hah!, we didn’t mean it.  You are going to prison (or suffer whatever criminal consequences the courts will impose).”   (A possible flaw in this scheme is that it depends on a judge to go along with the scam.) This has a wonderful side effect: no individual would ever trust a government-run amnesty again, and everyone knows this.  So everyone will recognize that there is no point for the government to try an amnesty in the future.  So everyone concludes that there will be no amnesty, and if they evade the tax authorities today, they will never be given a “get out of jail free” card.   On the margin, at least, this should increase compliance.

This story (and, by the way, if you can’t find the original and quite wonderful WSJ column, it is reprinted in Eric Rasmussen’s Readings in Game Theory, Wiley, 2001) captures, in a very specific context, what Sargent was describing.   To the extent that certain government (and central bank) actions can be anticipated, smart people in the economy will anticipate them and act accordingly. And, it is a matter of doctrine that the proportion of people in the economy who are smart in this sense is larger than you might think, especially when you weight more heavily those individuals whose economic activities have larger impact.

In particular, people anticipate that the government will do next year what is in the best interests of the government, next year.   Disclaimers issued today that “We promise not to do X” are not credible, when everyone knows that X will be really beneficial next year.   The government, then, has to operate under the constraints this imposes; it must craft its policies with this sort of thing in mind.   In some (limited set of) cases, reputation can serve to improve credibility; “we won’t do X next year” is credible if (a) doing X means the government won’t be trusted in other matters and (b) the trust of its citizens in these other matters is more important, going forward, then the short-run benefits (next year) of doing X.  But (a) and (b) are real stipulations, not always easy to meet; reputation is not a cure-all by any means.

This scheme is at work in inflation/unemployment dynamics, just as it is in the more specific context of tax amnesties.   And this is what Sargent and Sims and their colleagues (prominent among whom, of course, are Barro and Stockman) have brought to the study of the macroeconomy, and for which they are highly deserving laureates.

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Ruizimus among the Austrians, EP’s weekly on the misleading parallelism between the careers of Friedrich von Hayek and John Maynard Keynes, occasioned a certain amount of controversy.  Readers who took an interest may wish to sample the 43 comments that it elicited, many of them of very high quality.

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Something of the sort has been going on recently with the shade of Friedrich von Hayek.  The Austrian economist, who died in 1992 just short of what would have been his ninety-third birthday, never made false claims for himself – far from it: he knew all too well the loneliness of the long distance runner. And scrupulous work as editor by the late W.W. Bartley, interpreter Bruce Caldwell, and biographer Alan Ebenstein, have made it possible to see the man clear.

But the claims conservatives are making about the role he played as an economist are beginning to smack of Ruizismus.  That is, they have jumped a caricature out of the bushes late in the day and claim that their guy ran a great race.

By now the story of the short-lived contest between Hayek and John Maynard Keynes in the early 1930s is fairly well known, thanks to highly readable books like Grand Pursuit: The Story of Economic Genius, by Sylvia Nasar, and Keynes Hayek: The Clash that Defined Modern Economics, by Nicholas Wapshott. There is always that very funny rap video, too, if you prefer to watch.

It is certainly true that Lionel Robbins had invited Hayek to London in 1930, specifically to battle Keynes. As Nasar writes, British economics at the beginning of the ’30s was in the process of dividing into two broad camps.  There was Cambridge University, the seat of high theory since Newton, home to Malthus and Darwin,  citadel of English economics since Alfred Marshall arrived in 1885, and, withal, of decidedly interventionist temperament.  The Cambridge camp was led by “the Prof” (there could be only one), Arthur Cecil Pigou, though he was about to be upstaged in unexpected ways by Keynes.

And there was the London School of Economics, where the 30-year-old Robbins had set out to assemble a cosmopolitan group of market-oriented liberals, which included John Hicks, from Warwick (not South Africa, as this page maintained for a time); Abba Lerner, from Bessarabia; and Hayek, from Austria. “Robbins’ ambition was to turn the LSE, founded and patronized by Fabian [socialists], into the liberal counterweight to Cambridge collectivism,” writes Nasar.

Hayek arrived in London in January 1931, just as the world slump was deepening. He gave four lectures, arguing, as he had before, that an increase in the money supply would further distort the structure of production and prolong the slump. He was hired by the LSE and got into a fierce exchange with Keynes.

Keynes’ Treatise on Money had just appeared – an attempt to get back to academic economics after a decade of speculation and influential journalism. Hayek panned the book for the “almost unbelievable” degree of obscurity of its equations.  Keynes replied by calling Hayek’s 1931 tome, Prices and Production, “One of the most frightful muddles I have ever read.”  Pigou attempted to referee:  “Body-line bowling [cricket’s equivalent of baseball’s beanball]! The method of the duello! That kind of thing was surely a mistake.”

It turned out that Treatise on Money wasn’t a very important book after all. Keynes hurried on to his General Theory of Employment, Interest, and Money, with its bold claims that a collapse of effective demand had caused the Depression, that a program of government stimulus could end it. And when The General Theory appeared in 1936, Hayek didn’t review it. He may not have been asked.

Keynes’ book was anything but “collectivist” in, say, the manner of Pigou, who in The Economics of Welfare, had argued for the possibility at least of extensive government planning. Instead, the new book argued only for governmental management of the business cycle, through the use of monetary and fiscal policy (macroeconomics, as it quickly became known); the conduct of microeconomics was left to the capitalists.

Thus, in the autumn of 1936, Hayek slowly began to switch to a new and much more philosophical project: an investigation of various spontaneous orders that arise without central direction, and the significance of knowledge in economics.

Thereafter he labored under five distinct handicaps.

The Pure Theory of Capital, his response to Keynes’ success, turned out to be an abject failure.  Hayek had begun the book in 1934, hoping to expand decisively on the earlier arguments of Prices and Production.  He didn’t finish it until 1940; and when it appeared, in 1941, it seemed completely beside the point – “a pebble thrown in the pool of economic science that  seemingly left nary a ripple” was the way Paul Samuelson later described it.

The Road to Serfdom, which appeared in 1944, was an embarrassment. Instead of adopting anti-utopian fiction, as George Orwell did four years later, in Nineteen Eight-Four, Hayek actually argued in the middle of World War II that “it is Germany whose fate we are in some danger of repeating.”  Lumping together the more ambitious vision of post-war Labor governments with altogether more modest efforts at reform that soon would be dubbed “the mixed economy,” Hayek wrote, “[D]emocratic socialism, the great utopia of the last few generations, is not only unachievable but to strive for it produces something so utterly different that few of those who now wish it would be prepared to accept the consequences.” Reader’s Digest excerpted it in the United States, and many of those who voted for Thomas Dewey in 1948 may have read it there.  But it did Hayek’s reputation as a scholar a great deal of harm.

His divorce in 1950 from his wife of twenty years was a scandal; Robbins, godfather to his son, didn’t speak to Hayek for fifteen years. An early courtship had been jinxed by a year that Hayek spent in 1923-24 studying in New York. Through “some misunderstanding of intentions,” the object of his affections married someone else. He then he married, as he put it, “on the rebound.” Returning to Vienna in 1946, he discovered his earlier sweetheart was now free to marry, whereupon he left his wife (who, under English law, wouldn’t grant him a divorce), their seventeen-year-old daughter and twelve-year-old son, in especially churlish fashion. In Keynes Hayek, Wapshott tells the story:

Hayek celebrated Christmas Day with Hella and the children in their snug family home in Hampstead.  Two days later he left them for good, travelling to New York to attend the American Economic Association convention.  Hayek’s finances were more on his mind than economics. To avoid the expense of a contested divorce, he slipped a note under the hotel room door of Harold Dulan, chairman of the economics and business department of the University of Arkansas, Fayetteville, asking for a teaching post.  Hayek’s plan was to establish residency in Arkansas, a state whose permissive marriage laws would allow him to wrest a cheap divorce from Hella. Dulan duly obliged, as did the chancery division of the Arkansas high court.  Hayek’s divorce became absolute in July 1950. “Finally I enforced it,” Hayek recalled. “I’m sure that was wrong and yet I have done it,” he said.  “It was just an inner need to do it.”

Hayek needed a way out of England, too. He had acquired an American backer, the libertarian Volker Fund, of Kansas City, Mo., a foundation willing to pay him $10,000 a year, two or three times an ordinary academic salary. The Institute for Advanced Study wouldn’t hire him, but the University of Chicago, under president Robert Hutchins, would – just not in the economics department, where young professor Milton Friedman objected to Hayek’s economics. So Hutchins persuaded the university’s Committee on Social Thought to appoint him, a second-rate appointment, professionally speaking. Starting in 1950, this permitted Hayek mostly to write and travel; he didn’t participate in the workshop that was remaking monetary economics. These were “wilderness years,” as Wapshott describes them.  In 1969 Hayek moved back to Austria for financial reasons, and began suffering from acute depression, probably arising from the first of two heart attacks whose scars were not detected until much later.

Even when he was awarded the Nobel Prize, in 1974, the occasion was bittersweet. He shared the award with another old rival, Swedish economist Gunnar Myrdal.  Both men had been highly influential in the economics of the early ’30s (Myrdal, writing in Swedish and German, had pretty thoroughly anticipated Keynes); both had stopped working in the field after Keynes’ triumph in 1936.  Myrdal had become a planner, writing two influential books:  An American Dilemma: The Negro Problem and American Democracy and Asian Drama: An Inquiry into the Poverty of Nations.  Hayek had written The Sensory Order, The Constitution of Liberty, and  Law, Legislation, and Liberty. The two thoroughly disliked each other. And both were overshadowed by the presence at the ceremonies that year of Alexander Solzhenitsyn.  The novelist, who had been awarded the prize for literature in 1970, had finally been expelled from the Soviet Union.

The great irony is that it was Milton Friedman, honored with a Nobel two years later, who had demonstrated the series of mistakes in monetary policy, tightening when they should have eased, by which the US Federal Reserve Board turned what likely would have been an ordinary recession into the Great Depression.  Hayek had been clearly wrong, at least about the monetary policy that was appropriate at the time.  (It was the policy that had been advocated by Friedman – supplying liquidity in a financial crisis –that in 2008 enabled the Fed to carry the day.) And as for the period-of-production arguments of Austrian capital theory, they remain unsupported by later empirical work.

The recognition of the Nobel added years to Hayek’s life, at least in the view of those who knew him. (He adamantly denied that the award had anything to do with his longevity.) But it was Margaret Thatcher who plucked him from scientific obscurity and put him at the head of her parade. She had read Road to Serfdom while studying chemistry at Oxford, Wapshott says.  He describes the scene when, soon after assuming leadership of the Conservative Party, in 1974, “meeting with the party’s left-leaning research department, she reached into her bag and slammed a copy of Hayek’s Constitution of Liberty on the table. ‘This is what we believe!’” Photo ops with with Ronald Reagan followed, and Presidential Medal of Freedom in 1991.

Since then, there has been a modest flowering of academic interest in his work, particularly at George Mason University – and an explosion of political interest.  “The core Hayekian belief that the size of government should be kept to a minimum manifested itself in the early ’90s in the ambitions of Newt Gingrich, a university professor turned Congressman from Georgia,” writes Wapshott. Flat income taxes, as opposed to progressive rates, a long-time Hayek favorite, have begun to appear on some political agendas. And The Road to Serfdom once again topped the best-seller lists for a time last year, when Glenn Beck touted it on his Fox news show.

But the fact remains that Hayek just didn’t contribute very much to the development of technical economics. With the publication of “The Use of Knowledge in Society” in the American Economic Review in 1945, he essentially won on the “calculation debate,” conducted with Ludwig von Mises and Oscar Lange, concerning the possibility of central planning. But it was Leo Hurwicz who carried the lessons to the next stage, where they began to have practical effect.

Paul Samuelson later said, “I can bear witness that, for twentieth century professional economists, Milton Friedman was infinitely more important for turning economists toward conservatism than was Hayek.” His implication was that the Swedes had made the right choices in the mid-1970s. On another occasion he slyly suggested that the award might have been better still if the prize-givers had cited Cambridge economist Joan Robinson, a partisan of Chinese and North Korean communism, as well.

That combination, Hayek, Myrdal and Robinson, might have cast the contributions of each into sharper relief:  three pioneers who, after important early contributions, gave up economics for political activism.

Was Hayek more important for the lay public?  Whether his thinking played much of a role in “the German miracle,”  the restoration of Germany’s devastated economy after World War II, as Nasar implies in her chapter “The Road from Serfdom: Hayek and the German Miracle,” I have my doubts. The thinking that underlay the Marshall Plan had more to do with The Economic Consequences of the Peace, Keynes’ 1919 polemic against the reparations imposed on Germany after World War I, than with Hayek’s  jeremiad of 1944.

Certainly Hayek made a big impression on me and my friends, when, as young men,  we read him in the 1970s.  We felt the same way about the Harvard philosopher Robert Nozick. With the passage of time, though, nineteenth century liberalism has seemed, by itself, a less and less adequate framework with which to deal with the problems of the twenty-first century. What was fresh the, because it had been forgotten, seems today to be nostalgia — or, worse, nonsense, when incorporated in the platform of Republicn presidential candidate Ron Paul.

Both as a contributor to economic theory, then, and a designer of economic policy, the vigorous figure depicted as Hayek in George Mason economics professor George Mason Economics professor Russ Roberts and filmmaker John Papola’s  two widely-viewed videos, “Fear the Boom and Bust”  and “The Fight of the Century,” and, to a lesser extent, the accounts in Keynes Hayek and Grand Pursuit, seems to have more in common with Rosie Ruiz than with Hayek himself– or at least so it seems to me.

That said, it is pleasing to think that Hayek himself may yet turn out to have been a very great economist after all, far more significant than Myrdal or Robinson, when seen against the background of a broader canvas.  The proposition that markets are fundamentally evolutionary mechanisms runs through Hayek’s work. Caldwell, of Duke University, notes that, starting with the Constitution of Liberty, “the twin ideas of evolution and spontaneous order” become prominent, especially the idea of cultural evolution, with its emphasis on rules, norms, and decentralization.

These are today lively concepts in laboratories and universities around the world. “It could have been that Hayek was running a different race, and the fact that he didn’t do well in the Walrasian race was that he wasn’t running in it—he was running in the complexity race,” says David Colander, of Middlebury College. Hayek may yet enter history as a prophet of evolutionary economics, a discipline dreamt of since the days of Thorstein Veblen and Alfred Marshall in the late nineteenth century but not yet forged, whose great days lie ahead.

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Thus writing last month in Bloomberg Businessweek, reporter Drake Bennett described in the journalistic form known as a “tick-tock” how anthropologist David Graeber, of the University of London,  last August joined a meeting in Bowling Green, a park in lower Manhattan. It had been called by Adbusters, a Vancouver magazine, but  Graeber discovered that the agenda had been planned mainly by local labor activists, “verticals,” in his parlance. It would consist of a rally with speeches, followed by a march, to present various demands. Graeber thereupon moved to the other end of the park, a core group formed around him, to be schooled in the methods of the “‘general assembly’ … the central concept of contemporary anarchist activism.”

At the end of the day, the march was cancelled and Occupy Wall Street began to assume its eventual shape. It was these “horizontals” who then planned the protest in Zuccotti Park in a series of general assemblies over the next month, Bennett wrote.  Once the encampment was successfully established, on September 17, Graeber went off to rejoin his girlfriend, returning a month later to take his bow in Businessweek and push his book, Debt: The First 5,000 Years.

Last week, in The New Yorker, journalist Mattathais Schwartz sets the story in a more general frame. This time Adbusters has its day. The bi-monthly magazine, founded in 1989 by a veteran activist named Kalle Lasn, “is not the only radical magazine calling for the end of life as we know it,” writes Schwartz (himself the founder of the Philadelphia Independent, published from 2002 to 2005), “but it is by far the best looking.”

It was Lasn and his senior editor Micah White who had come up with the idea of an encampment, Schwartz explains, set the date the occupation would start, and registered its catchy name at www.OccupyWallStreet.org.  “If anybody could claim responsibility for the Zuccotti situation,” he continued, “it was Lasn.” And in 5,700 words Schwartz spells out in considerable detail  more of the behind-the-scenes history of what happened in September in lower Manhattan.

These rival claims being fought out on clay-paper magazines make fascinating reading.  It’s always possible that Zuccotti Park itself may be no more enduring than the Port Huron Statement.  That, too, seemed important at the time, but instead it turned out to have been a skirmish in a much larger drama, to which it contributed to a very different outcome.  To me, though, it seems that in its overall critique of the dominance of the commercial ethic, Adbusters is onto something likely eventually to succeed.

We owe to Philip Mirowski, of the University of Notre Dame, and Dieter Plehwe, of Berlin’s Social Science Research Center, the outlines of the most capacious frame so far of the story in which we’re been  living the last seventy five years – the rediscovery of market processes.  In The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective,  they associate it with the doings of  a small group of economist- intellectuals led (sometimes in different directions) by Friedrich Hayek and Milton Friedman. From this small beginning, they say, emerged eventually the political platforms of Margaret Thatcher and Ronald Reagan and, ten years later, the “Washington Consensus.”

They don’t tell us anything about the road to Mont Pelerin (that’s the little Swiss village near Montreux where in 1947 the Mont Pelerin Society organized itself):  the centralizing, collectivist, authoritarian trend that had been building in Europe since German and Italian unifications of the 1870s. For that, consult Ninteen Eight-Four, by George Orwell, or To the Finland Station, by Edmund Wilson. But antagonistic as it is, The Road from Mont Pelerin is still a good start on organizing our understanding of the last 75 years.

With a view to keeping my bearings, I’ve been reading An Overgoverned Society, a collection of speeches by the late W. Allen Wallis, to see if it had any resonance today. Published in 1976, it was considered to have been prescient in its time.  Wallis had been among the founders of the Mont Pelerin Society (he had attended graduate school at the University of Chicago with Milton Friedman and George Stigler); in1962 he became president of the University of Rochester, a position from which he exerted considerable influence (the end of the military draft and the creation of an all-volunteer army were among his enthusiasms).

Sure enough, the book begins (as Mirowski and Plehwe believe the Mont Pelerin Society itself began)  with a long quotation from The Good Society, by Walter Lippmann, written between 1933 and 1937 (“The predominant teachings of this age are that there are no limits to man’s capacity to govern others, and  that, therefore, no limitations ought to be imposed on governments….”)

Two things struck me about An Overgoverned Society. The first is how close Wallis and his fellow insurgents were to achieving their aims, and how little he seems to be aware of it  The battle over the draft already has been won. Friedman’s argument about the significance of monetary expectations is about to be put to the test (and, thirty years later, his argument about the failures of the Federal Reserve Board at the beginning of the Great Depression). The election of President Reagan is just four years away.

The second is how completely Wallis omitted from his case exculpatory evidence.  There was nothing about the resumption of rapid growth after World War II, thanks in large part to the Marshall Plan; the civil rights revolution, beginning with the integration of the armed forces in 1948; government’s  contributions of infrastructure, from the GI Bill to the Interstate Highway System to the creation of the computer industry.  And of course Wallis had no inkling of the problems of the present day soaring health care costs, the likelihood of climate change, the problem of currency zones.  Whereas Milton Friedman’s 1962 book, Capitalism and Freedom, still seems fairly taut, the Wallis speeches sound to my ear like Tea Party rhetoric, little more.

Believing that societal norms alter and evolve in long pulses, that a gradual turning has begun, I have to say I am still heartened by the excitement with which Occupy Wall Street has been received.  Its inner story is something of a disappointment:  the tenets of “contemporary anarchy” are a weak foundation on which to build a “thought collective;” Adbusters’ emphasis on voluntary simplicity is more promising. The movement expresses a powerful longing for a time in which the power of money will be reduced. Maybe it’s a spiral instead of a zigzag; but the direction is slowly changing.  The road from Mont Pelerin is in the rear-view mirror. The next part of the journey has begun.

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