I spent Christmas reading John Quiggin’s new book titled “Zombie Economics: How Dead Ideas Still Walk Among Us.” It began with Keynes’ great belief that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” I believe that statement is true.
Since Quiggin is a Keynesian economist, I expected he would lambast the Austrian school of economics, the Supply school, the Monetarist school or some other school. Instead, he took pointed aim at certain investment beliefs. While such beliefs do reflect some views of “defunct economists,” investment strategy really in a separate discipline.
For example, he took aim at the notion of “The Great Moderation,” which was a popular belief before the Global Financial Crisis and was popularized by Fed Head Ben Bermanke. That notion suggests that the worst effects of business cycles have largely been curbed by the much more limited regulation of Wall Street, as well as the increased ingenuity of the Fed. It is clear that the de-regulation of Wall Street was excessive, which I wrote about years ago. However, it was not clear to me just how ingenuous the Fed had become. Bernanke was slow getting started but finally did a great job. Score one for Quiggin that The Great Moderation was a zombie idea that more de-regulation is always better!
Another example, he took aim at the notion of “Efficient Markets,” which suggests that the market price of an asset is correct since it reflects all available information and that investors react to new information is similar, predictable ways. I’ve never believed that, although there is a possibility it might work for large cap stocks but nowhere else. Score another one for Quiggin that Efficient Market was another zombie idea that the market always knows better and understands more quickly.
Quiggin refers to these ideas and many others as zombies, because they still walk around despite being quite dead, i.e., that they are still practiced despite being wrong, that they are like practical men who are slaves to some defunct econmist.
For me, the take-away was one remarkable sentence that said “From the inside, ideology usually looks like common sense.” Amen! That is why I believe in situational economics or selectively picking whatever makes sense from each school of economics, depending on the economic variables. If I am a slave to a defunct economist, then I am a slave to a very large number of them.
So, that’s what I did for Christmas. Sometimes, I miss having kids at home . . . oh, well.