Reprinted from neweconomicperspectives.org
This article discusses a simmering feud among five of the most prominent economists in the world (two of them Nobel Laureates). It was prompted by the August 8, 2013 article by Raghuram Rajan, who has just been selected to run India's Central Bank, entitled: "The Paranoid Style in Economics." (Note: I have deliberately "buried the lead" in my last section.)
The personalities involved have a great deal to do with the feud, but as Paul Krugman wrote on May 23, 2013, "It's Not About You."
I will ignore the personalities and discuss what it is about -- economic policies that continue to cause devastating harm to the public all over the globe. Krugman and Joe Stiglitz are critics of the International Monetary Fund's (IMF) imposition of austerity as a cure for severe recessions. Ken Rogoff, Carmen Reinhart, and Rajan were the leading economists at the IMF who championed the imposition of austerity.
Round One: Rogoff v. Stiglitz
The original feud was most famously between Stiglitz and Rogoff. Stiglitz, who led the movement at the World Bank to throw off its support for austerity, memorably claimed that IMF was staffed with "third rate" economists. Rogoff famously blasted Stiglitz in a July 2, 2002, "open letter" (only months after Stiglitz was made a Laureate) that, inter alia, referred to him as a "loose cannon" who had "slandered" the IMF staff, slammed him for refusing to "admit to having been even slightly wrong about a major real world problem," suggested he was so arrogant that he doubted that Paul Volcker was "really smart," admitted that Stiglitz had a few ideas with which the IMF would "generally agree" because most of them were "old hat," described Stiglitz's most recent book as "long on innuendo and short on footnotes," derided him as pretending to see himself "as a heroic whistleblower" when he was actually peddling "snake oil," described Stiglitz views as being most analogous to Arthur Laffer's "voodoo economics" (cleverly and deeply insulting on multiple levels), accused Stiglitz of lacking faith in markets and having faith in increasingly democratic governments ("you betray an unrelenting belief in the pervasiveness of market failures, and a staunch conviction that governments can and will make things better"), and ended with a wonderfully nasty "compliment" that compared Stiglitz to a famous scholar who suffers from often disabling mental illness ("Like your fellow Nobel Prize winner, John Nash, you have a "beautiful mind.' As a policymaker, however, you were just a bit less impressive.") To top off this list, Rogoff told Stiglitz that he should pull his book from publication because it "slandered" a senior IMF official.
But those are only the gratuitous insults that Rogoff launched at Stiglitz. His real attack was that Stiglitz had done incalculable damage to the developing world by criticizing the IMF and by opposing austerity as "battlefield medicine" for nations thrown into severe recessions.
"In your role as chief economist at the World Bank, you decided to become what you see as a heroic whistleblower, speaking out against macroeconomic policies adopted during the 1990s Asian crisis that you believed to be misguided. You were 100% sure of yourself, 100% sure that your policies were absolutely the right ones. In the middle of a global wave of speculative attacks, that you yourself labeled a crisis of confidence, you fueled the panic by undermining confidence in the very institutions you were working for. Did it ever occur to you for a moment that your actions might have hurt the poor and indigent people in Asia that you care about so deeply? Do you ever lose a night's sleep thinking that just maybe, Alan Greenspan, Larry Summers, Bob Rubin, and Stan Fischer had it right--and that your impulsive actions might have deepened the downturn or delayed--even for a day--the recovery we now see in Asia?"
Recall that this was written in 2002, so the hilarity of summoning the support of Greenspan, Summers, Rubin, and Fisher for one's financial policies was not apparent to neoclassical economists. In any event, Rogoff's claim is that the "impulsive" Stiglitz's criticism of the IMF during the Asian crisis endangered the economic recovery essential to "indigent people in Asia" because it could have reduced "confidence" in the IMF's policy of imposing austerity as "battlefield medicine" for Nations that were in sharp recessions.
Not content with claiming that Stiglitz had "fueled the panic" that endangered the poor; Rogoff extends his "battlefield medicine" metaphor by accusing Stiglitz of "sniping at the paramedics as they tended the wounded." Having analogized Stiglitz to a murderous war criminal, Rogoff returns to his subthemes that Stiglitz is arrogant, a terrible economist, and personally responsible for the IMF's failed austerity programs because Stiglitz "ignominiously sabotaged" those programs by criticizing them. Rogoff asserts that the key to economic recovery from a recession is the appearance of what many economists now refer to as the "confidence fairy" and that austerity is the sole elixir that can summon the confidence fairy. The confidence fairy only appears if one believes, really believes, in fairies so Stiglitz's criticism of austerity was an act of sabotage that prevented the IMF from summoning the fairy. Rogoff then asks:
"Do you ever think that just maybe, Joe Stiglitz might have screwed up? That, just maybe, you were part of the problem and not part of the solution?"
Worse, the policies that Stiglitz urged the IMF to "prescri[be]" to reduce human distress and speed recovery from a severe recession rejected austerity. Stiglitz denies that the IMF was providing "battlefield medicine" to nations in severe recessions. Recessions represent sharply inadequate demand. Economists have known for at over 75 years that austerity reduces the already inadequate demand and exacerbates the recession, as we have seen in the eurozone. This gratuitously harms tens of millions of people. Real battlefield medicine consists of stopping the bleeding and giving the patient fluids and plasma. Forcing austerity on a nation in a recession is analogous to refusing to stop the bleeding (e.g., by opposing capital controls) and bleeding the patient (via austerity). The IMF does, of course, provide some liquidity, but only if the nation it lends to agrees to bleed its economy through austerity.
Attacking Stiglitz for having such a conventional view about economics that the IMF now generally concedes is correct (IMF publications are hopelessly contradictory on this subject) required Rogoff to rely on rhetorical flourishes that sought to mock Stiglitz for opposing austerity as "battlefield medicine" for a recession. Rogoff asserted that increasing demand through government spending led to inflation rising, "often uncontrollably." Rogoff's logic is that austerity aids the poor because it forces millions of them into unemployment and poverty. This reduces workers' wages by forcing them to compete with huge numbers of unemployed workers for jobs. This prevents inflation, which Rogoff asserts is the great threat to the poor.
The irony of the IMF deliberately creating the "reserve army of the unemployed" that Marx asserted was the defining dynamic of capitalism in order to suppress wages is lost on IMF economists. Whatever their other qualities (a matter hotly disputed by Rogoff and Stiglitz) IMF economists have not demonstrated introspection about the irony of the IMF's embrace of Marx's most famous critique of capitalism as a means to purportedly achieve a "capitalist" recovery from financial crisis. The IMF's deliberate adoption of austerity policies it knows produce severe unemployment while bailing out the financial sector leads to severe increases in inequality of income, wealth, and political power. This is one of the reasons that Stiglitz strongly criticizes austerity.
Round Two: Neoclassical Economics v. the World