Only a few of the books I have read and reviewed for this series have been written by people that I suspect are not particularly intelligent. Many have been authored by men who possess very different economic worldviews than mine, and nearly all have drawn some conclusions in the process that are different from my own. But the folks who have written on the economic crisis of 2008 are, mostly, intelligent people (yes, the “mostly” does imply that there may be some exceptions in there). However, while the staple of authors I have come across so far within this genre are pretty intelligent, there also have been very few who I would describe as extremely intelligent. Thomas Sowell makes that list (as does John Taylor), and not just because I found their books ideologically compatible. Richard Posner also belongs on that list, as any reader of The Crisis of Capitalist Democracy will immediately discover. Unfortunately, they also might find out that extreme intelligence from the author does not necessarily make for a satisfying book.
This is Posner’s second book on the economic crisis (the first one, A Failure of Capitalism, contains a title so stupid that I am not yet convinced it warrants a review; it also was written right in the throes of the crisis, so I suspect it contains a premature summary of premises and a premature determination of conclusions). This 400-page follow-up to that earlier work is a different story. Posner is a brilliant man – and he does not seem to reason with any ideological commitment so dogmatic that it interferes with his analysis of the matter at hand. However, after reading all 400 pages of this treatise I can not help but wonder if perhaps Posner would benefit from firming up his ideological commitments. The book suffers immensely from a sort of schizophrenia. It reads like a collection of miscellaneous thoughts and ideas but lacks a clear form or pattern to the thoughts. It jumps all over the place, and worst of all, he must make reference to something he is going to tell the readers on a future page over 100 times. If he had spent more time telling us stuff and less time telling us what he was going to tell us in a few pages (or chapters), the book would likely have concluded 100-150 pages earlier. And that is not to say I did not enjoy the book – it was a heady read and one that challenged me in a lot of ways. But I can not say it was well-written. The lack of cohesivesness in writing style combined with a bizarre sort of ideological agnosticism made the book frustrating to read, even as many of the conclusions he draws were insightful and important.
There is a lengthy portion of the book that I would recommend for all people interested in better understanding the true nature of Keynesianism. Posner’s intellect enable him to explore and illuminate the tensions embedded in various economic schools of thought, and the manner in which he gets the reader to understand Keynes better is quite good. Mysteriously, Posner insists on holding on to a high regard for the failed economic philosophy, even acknowledging that Keynes advocated “the value of unproductive projects on the grounds that they provided employment, which increased consumption.” Posner is not endorsing this major flaw in Keynesian thinking, but he is far more willing to forgive it than he ought to be. His hyperbole in describing Keynes is unfortunate (“a breed of Malthus, Mill, and Schumpeter”, and “the greatest economist of the 20th century”). But the chapter is in a lot of ways the highlight of the book, particularly for the critic of Keynesianism who wants to hear straight from the Keynesian mouth the real principles of their economic philosophy. The downfall of Keynes is, to me, his conscious degradation of thrift in the name of reckless consumption. Posner, a Keynes apologist, lays it out clearly and cogently, but quite unpersuasively. The chapter is an important read for the student of economics.
It is probably not what Keynesian apologsts want to hear – that “the $787 billion stimulus enacted in February of 2009 is Keynes’ grandchild.” It is certainly not what Keynes himself wants to hear. Posner had to dedicate a chapter to Lord Keynes because of the reinforcement it provides one of Posner’s own thesis: that much of the crisis of 2008 was related to the downturn in spending it created. I am not yet persuaded that the specific credit implosion of late 2008 is what caused consumers to temper their spending habits (nor am I convinced that consumers have really curtailed their spending that much). I think the more plausible theory is that spending was reduced as part of the necessary funeral for mortgage equity withdrawals that 2008 represented. But Posner claims “we have seen the damaging effects of thrift in the current downturn, in which rich people’s forswearing of luxury purchases in the name of thrift has reduced emmployment and deepened the downturn.” I would suggest that we have seen very little “thrift” leading up to or throughout this downturn, and that is most unfortunate. Posner, though, accepts as orthodoxy the Keynesian notion that consumption is the be-all and end-all of economic life, whether that consumption is sensible or not. I hope to attend the funeral for that line of thinking.
When it comes to the causes of the financial crisis, he is one of the few astute writers to hammer the monetary policy of Alan Greenspan. Indeed, a highlight of the book is Posner’s merciless blaming of Greenspan and the Fed for their low interest rate policy of the early 2000’s. I am fine with Posner’s prima facie theory that the lack of bailout for Lehman caused the crisis, but I wish he would have been willing to take the time to explore whether or not a bailout of Lehman would have just delayed the inevitable (which is what I believe), or whether or not there was a way that the Fed and/or Treasury could have averted much of the crisis with better handling of Lehman Brothers (I should say here that the focus of my writing is never going to be on whether or not Lehman or any other firm should or should not have been given any support; I accept at face value that all government support of free market failure is a tragedy and should be avoided, and I intend to make the case that the surest way to keep financial firms from needing bailouts is to make sure they know they will never get bailouts). Essentially, Posner claims that the crisis was caused by poor monetary policy (true), inadequate financial regulation (modestly true), and the lack of a bailout for Lehman (which has a cursory truth to it but is not an adequate explanation). He is quite redundant in his blistering criticism of this so-called financial crisis commission, yet his suggested solution to almost everything is a different investigative commission (only this one would be serious). I am surprised at the lack of depth in the list of suggestions he makes to avoid the next crisis (and apparently he is too, since he says at the end of the list, “I am not entirely happy with the suggestions I have made in this chapter”). They are mostly a re-hash of other red herring ideas (restoration of Glass-Steagall being one), and there is very little fresh and innovative material in there from a scholar who possesses the freshness and innovation that Posner does. What he does, though, is point out the “structural” problems that exist in America’s political culture should we ever seek to seriously address this crisis. I do not think the meaning behind his last chapter is good, but he is sufficiently mysterious about it that one can not say for sure what he is saying. To say that “democracy does make it difficult to control the business cycle without doing long-term damage” is true enough, as long as the conclusion is then that maybe we ought not to try and control the business cycle. Posner is not saying that. And when he questions whether or not the “institutional structure of America is up to the economic challenges it faces”, one has to wonder if he is gazingly looking upon China as Thomas Friedman shamelessly does as the standard for modern efficiency and political economy, or rather, if he merely means that political demagoguery keeps us from implementing a better system of freedom. I suspect I know what he is getting at, and I agree that America’s capitalist democracy is in a crisis.
The crisis our system finds itself in is not one of mere institutional structural limitations. A capitalist democracy devoid of virtue is inherently doomed. A capitalist democracy that wants to hold on to the most convenient parts of socialism (primarily those redistributive elements that helps politicians buy votes) and yet simultaneously present laissez-faire as its modus operandi is going to stumble over itself. That is the crisis that we are in – and it is the crisis that the economic crisis revealed. Posner is a brilliant man who wrote an invigorating book, but after 400 pages about the crisis of capitalist democracy, I was hoping he would find it.