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Posner's 'A Failure of Capitalism'

by Robert Teitelman  |  Published July 31, 2010 at 11:52 AM
A Failure of Capitalism
by Richard Posner
The indefatigable Richard Posner's compact guide to the apocalypse -- "A Failure of Capitalism" -- has gotten attention lately, which he's kept alive with steady blogging. Much of the conversation  around the book centers on how Posner, a federal judge and long a proponent of the free-market Chicago School, "changed" his mind about deregulation and whether that makes him feel remorseful. Well, it doesn't seem to. Posner's dry lack of repentance belies a busy mind that recognizes that things change, people (sometimes) learn and life is uncertain -- all of which is commendable empiricism in a highly ideological age.

The other striking aspect of the book is Posner's insistence that what we are going through is a depression, perhaps not as bad, but clearly in the same category as the Great Depression. He tackles that notion, which is implied by the title, in his short preface: "The word itself is taboo in respectable circles, reflecting a kind of magical thinking: if we don't call the economic crisis a 'depression,' it can't be one." Posner recognizes how woolly the word is and offers his own definition. "I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and, among the political and economic elites, a sense of crisis that evokes extremely costly efforts at remediation."

Is this just throat clearing or logic chopping? Actually not. The argument about what we're going through -- recession, depression, bad karma, a Ponzi scheme -- has tended to align itself with specific policies and politics. The argument that this is a depression, for instance, has been a key component of the case against the banks: That they're insolvent, need to be seized and recapitalized. It's also grounding for vast stimulus packages and growing government activism and deficits. In short, the more extreme the economic diagnosis, the more fundamental, even transformative, the required steps to cure it. In this sense, Posner is unusual. He recognizes the seriousness of the problem -- he's clearly writing in the depths of the post-Lehman Brothers Holdings Inc. breakdown, which colors his analysis -- but he worries about long-term effects, from inflation to destructive re-regulation. His analysis might be liberal; his policy impulses remain conservative. On this, he's actually not that far from his fellow Chicagoan, Barack Obama.

The trouble with Posner's definition of depression, not to say those who toss it around much more indiscriminately, is how subjective it is. How steep is his "reduction of output"? Is "threatens to cause deflation" the same as deflation itself? How would you measure "public anxiety" in order to compare it to other public anxieties? Ditto for "the sense of crisis." And how will we know if it "evokes costly efforts at remediation" until after the remediation is complete? Posner even argues that evidence of a depression lies not in the slump itself but in the costs -- another dip into subjectivity -- of the cure, both economically and politically. In short, Posner's "depression" is a little like a bubble: You only knows it's a bubble after you've got a mess to clean up.

Posner argues that not every depression has to be as deep and protracted as the Great Depression. If that's the case, why aren't the '70s categorized as a depression? After all, the slump lasted years, unemployment approached current levels, there were deep public anxieties about everything from the oil crisis to stagflation, and extraordinary policies were promulgated, from price controls to (the real end of the '70s malaise) the Federal Reserve jacking up interest rates to kill inflation. True, the banking system did not nearly collapse (that happened in the '80s with the S&Ls) but Posner does not specifically pinpoint financial failure as a defining aspect. But the '70s did produce the conservative and free-market ascendancy, which was a long-term fundamental change.

Posner's definition, in fact, creates a kind of tautology. An economic situation is a depression if policymakers believe it represents a fundamental breakdown in which the usual self-healing powers of the market no longer function: a failure of capitalism. That recognition, which may or may not be accurate in the face of tremendous uncertainty (and which can't be tested after the fact), set into train deeper economic and political changes with longer-term effects. In short, it's a depression if we think it's a depression, which returns us back to the judge's own charge of "magical thinking" and separates the definition of depression from other technical descriptives like recession.

This is not meant to be necessarily critical. Rather, it shows how difficult it is to figure out where we are exactly in the midst of a storm. And Posner's attempt is helpful, if only in forcing us to look longer-term and to think beyond immediately expedient policies to what we're really perpetrating fundamentally and for the long-term. The truth is, the nature of this crisis will be determined by the consensus of economists and historians somewhere in the future -- a group that will have lost the fear and disequilibrium that took chilly hold last fall and winter. I'd rather assume the conservative approach and wait for them to decide.

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