Joel Jacobsen

John Cassidy's "Letter from Chicago" in the January 11 New Yorker makes a good case for the proposition that the harm done by the pseudo-Nobel for Economics has outweighed all the good done by the prizes actually established by Alfred Nobel's will.

It makes the case just by mentioning in passing all the various pseudo-Nobels rung up by University of Chicago economists.

The Chicago School economists are the ones who explained, with impressive mathematical formulae and even more impressive condescension, that the financial collapse of the past 18 months couldn't happen.  Cassidy reveals that many are still prepared to show us that our fears remain as ignorantly foolish today as ever.

Eugene Fama, the Robert R. McCormick Distinguished Service Professor Finance (why aren't professors in general embarrassed by Ruritanian titles like that? – and why isn't Fama, in particular, embarrassed to be associated with "the Colonel"?),  tells Cassidy: "I don't know what a credit bubble means.  I don't even know what a bubble means.  These words have become popular.  I don't think they have any meaning."

Cassidy finds it necessary to add: "Fama wasn't kidding."  Fama wasn't kidding because he "propounded the efficient-markets hypothesis, which underpinned the deregulation of the banking system championed by Alan Greenspan and others."  

Fama and his acolytes can explain that when a market rises precipitously, it's evidence of its efficiency.  More evidence of its efficiency is provided by the equally-precipitous collapse in which everyone suffers except those who caused the collapse, provided they had the larcenous sense to cash out in time.  

That's why Cassidy errs in referring to the "efficient-market hypothesis."  A hypothesis is falsifiable.  But efficient-market dogma can only be proved right and right again.  It's an improvement on actual knowledge.

In a blog entry accompanying his article, Cassidy refers to Richard Posner, the federal judge/professor/author/object of envy who even gets his own unflattering full-color caricature in The New Yorker.  Cassidy writes of "Posner, who recently converted to Keynesianism..."

"Converted" is the right word.  Posner went from absolute certainty in one faith to absolute certainty in another, like the post-Trotskyite-neocons or sad old David Horowitz, still Mau-Mauing university authorities 40 years on.  Some people just need an external structure of belief, and it almost doesn't matter what it is.

Before his conversion, though, Posner was, with Robert Bork, the great champion of the theory that antitrust laws harm competition and that everyone would be better off if we just let economic actors go at it.  Here it is from his days of being insufferably arrogant on the other side, squaring off against retired Justice Potter Stewart.

From a legal point of view, Stewart mops the floor with Posner, but Posner wins the day: he wasn't interested in law, but in correcting the ignorant, which, being a professor and appellate judge, he was especially well-situated to do: he'd never had any occasion to doubt his expertise.

I read Bork's The Antitrust Paradox: A Policy at War with Itself, but he lost me in the chapter that explained how predatory pricing could never happen.  You know, like a big airline reducing fares to undercut a low-price rival until the rival is forced to abandon the route or is driven out of business.  Bork explains how that could never happen.

Bork was a federal appellate judge, too, just like Posner.  Both were appointed by President Reagan.  And both consciously set about altering antitrust law, which is to say, altering the structure of the American economy and the relationship of ordinary Americans to the biggest corporations.

Amazon's "product information" describes Bork's book this way: "Shows how antitrust suits adversely affect the consumer by encouraging a costly form of protection for inefficient and uncompetitive small businesses."  That was the goal: efficiency, by rooting out the smaller competitors, actually improves things for consumers.

Bork's and Posner's ideas carried the day and, beginning with the administration of the president that appointed them both to the federal appellate bench, the federal judiciary stopped enforcing antitrust laws.  Inefficient and uncompetitive small businesses were driven from the market and, in the happy world they helped produce, consumers enjoyed....

...Microsoftness.  (See post 413.)   Efficiency serves the purpose of acquiring a commanding position in the market, but Microsoft-style mediocrity is the only rational strategy for any company that has achieved that position.

Consider, for example, K-Mart, which not so long ago towered over its puny rival Wal-Mart, and GM, which as recently as 1979 sold just about half of all cars bought in the U.S. 

K-Mart and GM engineered their own downfalls carefully, with no shortage of highly-paid of MBAing.  Rather than trying to produce a good shopping experience or good car, they tried to produce good-enough ones.  They followed Microsoft's 85% rule, trying to exert the least effort necessary to maintain market share.  (See post 413.)  

That was efficient, and Bork and Posner and their many judicial groupies assured us that efficiency would make life better for American consumers. In fact, they proved it, to their own satisfaction, with the words of their opinions.  And the only argument against their assurance was reality, which never counts for much inside the courtroom.

Outside the courtroom, however, the thriving little businesses shuttered by the arrival of K-Mart didn't spring back to life as K-Mart embraced its identity as National Lampoon's Swill-Mart.   The legendary Roger Smith's helmsmanship at GM didn't, as theory would have predicted, open the door for nimbler competitors to revive the American car industry.

I'm sure Bork and pre-conversion Posner could have explained why their theories were not to blame.  Reality plays dirty.  I'm confident they, and the teams of University of Chicago economists who supplied them with their theories, would have rejected any hint of responsibility for the creeping mediocrity that, since their accession to power, has spread across the country like a leaf blight.

It's hard to think of any aspect of American life that hasn't been made worse by the market concentration of the post-Bork, post-Posner years.  Chain restaurants have done for quirky little local restaurants.  Most cities have seen their second-largest newspapers shut down.  Radio?  Turned into a sonic billboard.  (See post 18.)  And what is "too big to fail" but another name for excessive market concentration?

Big-box retail stores, with their ruthless "inventory control," stock only products that predictably sell quickly.  That's why, as Calvin Trillin once said, the shelf life of an average book is somewhere between milk and yogurt.  And that's why you only miss your local hardware store when you want one of those out-of-the-ordinary things -- one of those doohickeys that fall into the slow-moving 15% of a hardware store's inventory.  It would be foolish for Home Depot to clutter up its shelves with an item like that.

That's what making a fetish of efficiency leads to.  Efficiency is not giving the consumer what she wants, but forcing her to accept what's offered.  That's how you keep costs under control.

I don't think Posner and Bork, and the legions of smitten federal judges who took up the fad they started for unfalsifiable theory, bear sole responsibility for the creeping mediocrization of American life.  They don't even bear primary responsibility.  They just bear only a great big fat share of it.