How Bernie’s Economic Policies Fit into Economic Theory ( William K. Black )

* No matter what occurs in this election cycle, the efforts of good people
like Prof. Black will be representative of the future eventually..without these changes,
instability will only continue. More fraud, more stagnation is unsustainable.



By William K. Black
April 19, 2016 Bloomington, MN

The journalist Adam Davidson has written an interesting article about economics and Bernie Sanders. As an economic adviser to Bernie I found his take on Keynesian and institutional economics of considerable interest. Institutional economics, contrary to Davidson’s take on it, is thriving and the University of Missouri at Kansas City has long been a center of institutional economics. (I am one of the scholars at UMKC that works largely in this field.) Davidson treats institutional economics, which overwhelmingly studies microeconomics and the “micro foundations” of the economy as having been rendered obsolete by the transformation that Keynes’ insights sparked in the study of macroeconomics.

[Institutionalists] played significant roles in government and academia into the 1950s. John Kenneth Galbraith was one of the most (and last) prominent members of the school.

By then, economics had been entirely transformed by the work of John Maynard Keynes and his 1936 masterwork, “The General Theory of Employment, Interest and Money.” The book more or less invented the field of macroeconomics — the study of how an economy works in the aggregate. And in the decades since, most academic economics and nearly all of government economic policy has revolved around Keynes’s insights.

Davidson’s thesis is unsupportable as a matter of logic, history, and macroeconomic theory.

Logic

Logically, it is not possible that changes in macroeconomics introduced by Keynes made microeconomics irrelevant. Ecological studies are vital, but they do not make botany and zoology any less important.

History

Historically, Davidson’s claim is incorrect. Institutional thought by classical economists began centuries before Veblen. Some of Adam Smith’s most famous points are institutional. He warned against allowing corporations, emphasizing what he saw were severe “agency” problems inherent in the structure. He warned that the most innocent of institutions, by bringing the owners of competing firms together, were an aid to the creation of cartels – and warned that it was impossible and inappropriate to attempt to ban such meetings. Smith explained why a common institution of his day – small merchants making goods (bread and cuts of meat) whose quality the average consumer could determine – would create a strong incentive to build a reputation for good quality, particularly in a village or township.

snip*Conversely, the reregulation and the resupervision of the savings and loan industry – and the creation of an effective criminal justice response to the elite frauds driving the second (and vastly more expensive) phase of the S&L debacle was the product of institutional economic policies. I led that effort at the staff level and drew on my training in institutional economics at the University of Michigan. Those actions took place in the 1980s and early 1990s. Similarly, Elizabeth Warren’s promotion of the Consumer Finance Protection Agency was the product of her sophisticated understanding of institutional design.

in full: http://neweconomicperspectives.org/2016/04/bernies-economic-policies-fit-economic-theory.html