John Maynard Keynes, the most influential economist of the 20th century, put it best: “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
Examples of madmen in authority, hearing voices in the air, spring to mind readily these days. But it’s not only the mad who are guided, often unwittingly, by the ideas of intellectuals in the past. Every leader is, even Angela Merkel, the German chancellor, who is on the sane end of the spectrum. So when Ms. Merkel makes policy — as during the crash of 2008 and the subsequent euro crisis — which defunct economists was she a slave of?
One of them was named Walter Eucken. He was the founder of Ordoliberalism, a German tradition in economics that I explained in our long read this week. Ordoliberalism, and German economics in general, tends to drive non-German economists crazy.
I don’t think Ordoliberalism was ever right.
One such economist is Paul Krugman, whom I interviewed on Twitter this week. (And what a novel format that was!) “I don’t think Ordoliberalism was ever right,” Mr. Krugman told me. “German economic philosophy — “ordoliberalism” — basically never took on board the notion that overall demand can be insufficient, and that sometimes you need active policy to boost it. Anglo-American economics differs on that, I think rightly.”
That brings us back to John Maynard Keynes, the academic scribbler from whom Mr. Krugman distills his frenzy. It was Keynes who made the case that in economic emergencies such as the Great Depression or the Great Recession of 2008-09, the state should spend money when others won’t. Keynes thus posthumously got us out of the last financial crisis, when every country from America to Germany followed his advice. Mr. Krugman would have liked even more Keynesianism during the euro crisis, especially in Greece, and takes Germany to task for blocking that.
Plus ça change, plus c’est la même chose. Economists have been arguing these points since the 1930s. The Ordoliberals never explicitly reacted to Keynes, but are considered anti-Keynesians. So are their close relatives, the “Austrian School” of Ludwig von Mises and Friedrich von Hayek. Hayek later settled at the University of Chicago, which then birthed the “Chicago School” and the “Freshwater School” of economics. Based at universities in the interior of America (and thus near lakes), its conservatives rejected Keynes and argued that markets were by definition “efficient”, because people in it were rational.
Which in turn drove “saltwater economists” like Mr. Krugman up the wall. They are based in America’s coastal universities (i.e., near the sea) and are neo-Keynesian. Mr. Krugman is sure that recent economic history proves his side right. And he will tell me so on February 19th, when I interview him again, in person here in Berlin, during our Handelsblatt Global Business Strategy Day. Stay tuned.
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