Something I ponder every once in a while is the strange ideological positioning of “real business cycle” or “recalculation” or “structural” or “Austrian” analyses of the current recession, or recessions more generally. These notions are usually put forward by people on the right, very strict libertarians most typically. And the idea of how the proposition fits together with the larger ideology is that the structural analysis serves as a bullwark against government intervention to stabilize the economy.
This all seems to me to suffer from a paucity of ideological imagination. The problem, as Jim Henley points out, is that the “Recalculation Story,” if true, implies radical underlying flaws in the capitalist economic model that call not for small-bore government intervention but for wholesale rethinking of the way the economy functions. I others would look at this differently if they, like me, had been raised in a family that contained various Marxists. From inside a “left” point of view, real business cycle theory is a radical theory that rears its head in any downturn as evidence of the systemic crises of capitalism and perhaps the need for revolutionary change. New Keynesian insistence that timely public policy can, if implemented correctly, stabilize the situation is a very status quo pro-market point of view. The point of the New Keynesian analysis is that mass unemployment, where it exists, reflects a failure of the political system—exactly the kind of thing a libertarian should expect will happen now and again—rather than a failure of market exchange.
John Maynard Keynes understood himself to be a liberal trying to preserve a free enterprise system threatened by communists and fascists. Milton Friedman, I think, also understood that the grinding misery of the Great Depression only led to unhealthy politics and was an advocate of bank bailouts, helicopter drops, and all the rest to prevent disaster.
In 2010, of course, we’re not going to go communist. Which is nice. But if you tell people that high unemployment is going to exist for a long long time, and there’s nothing the government can or will do about it, then of course people are going to support policies that make the economy less flexible and less open to imports and foreigners. If laid-off workers can’t find new jobs, then protecting incumbent sites of employment from competition becomes priority number one.
It’s true that if you adopt this view you do need to give up some libertarian purism. If periodic state intervention is required for the purposes of macroeconomic stabilization then you legitimize state intervention to, for example, help poor people. But the battle for that kind of purism is lost anyway. What you gain by embracing stabilization policy and treating the political problems of how to do it effectively as a problem to be solved rather than a reason not to try is an account of why it is that 9.5 percent unemployment doesn’t discredit the underlying principles of a market economy.