The Atheist's Guide to Reality_ Enjoying Life Without Illusions - Alex Rosenberg [122]
The Keynesian model ceased to work because it fell victim to an arms race. Its equations stated relationships between several economic institutions and their traits. These “institutions”—the interest rate, the money supply, the government budget, the propensity to consume, to hold money balances—had all arisen in modern society either as adaptations or as the immediate consequence of adaptations. No one understood these relationships till Keynes, so no government could exploit them to secure full employment before 1937, when Keynes’s General Theory of Employment, Money and Interest was published. Once governments began exploiting the relationships between these adaptations, they began to change the environments that select for strategies in the behavior of businesses, labor unions—in fact, all economic agents. There was now a new filter selecting for new adaptive strategies. These were ones that had higher fitness in an environment that for the first time included governments using the tools that Keynesian macroeconomic theory provided. To the surprise of the Keynesian economists, after some years of Keynesian fine-tuning by the government, the tools their model provided ceased to work to provide full employment. All they got was higher inflation without growth: stagflation.
Why did this happen? Economists who rejected Keynes’s theory had the answer: arms race. For a while, Keynes’s theory got the macro-facts right about the economy and how it responds to governmental policy. Eventually, however, the businessmen and women, the labor union leaders, even the consumers on the street “got wise” to what government was doing in the economy to manipulate their behavior, and they started making different choices. The beautiful model of the capitalist economy that Keynes discovered ceased to work because the relationships it described broke down when they were exploited by the government. This had to happen once some of the institutions, groups, and individuals the model described began to change their behavior to exploit the other institutions and individuals it described. The result? About 10 or 15 years after it became widely known, the Keynesian model fell victim to an arms race.
But its replacement, new classical economics, didn’t fare any better. This theory told us that people cannot be fooled in the way Keynes thought because they are rational. Moreover, markets inevitably regulate themselves owing to the counterbalancing actions of rational people who can’t be fooled the way Keynes thought. But deregulated markets and the absence of Keynesian macroeconomic fine-tuning lasted just long enough to create its own arms races (between investment banks and their clients, for example). These new arms races unraveled new classical economics’ policy recommendations and undermined its descriptions of economic reality. The reaction has been a revival of Keynesian thinking, but with quite different models of the nature of the economy. If it becomes the orthodoxy, “New Keynesianism” will simply give new hostages to fortune.
All such models, laws, and theories sought by the social sciences must share the same fate. There will be patterns to discover and to model and to offer to governments or companies to exploit in predicting or controlling people’s behavior. But the patterns will hold for shorter and shorter periods of time, and they will always be unraveled by arms races. That makes the social sciences merely nearsighted, when history is almost completely blind.
THUCYDIDES (AND MILTON FRIEDMAN) TO THE RESCUE?
Nowadays, fewer and fewer historians hope to vindicate their discipline by its predictive uses. Pretensions to prediction are left to teachers of international relations, “grand strategy,” and neorealism about the behavior of nations on the world stage. Many of these social scientists and policy wonks insist