Freshwater versus saltwater circa 1988

As a follow-up to my post on debt and it’s exclusion as a subject of merit amongst several schools of economic thought, I wanted to bring a New York Times article from 1988 to your attention. This article by Peter Kilborn, a Washington, D.C. based and long-time former correspondent for the New York Times, is timeless.

It reads like an article right out of 2008 or 2009 and highlights how little has been decided in the debate about the economic effect, size and role of government. Many of the key players – Paul Krugman, Larry Summers, and Robert Lucas to name a few – are the same. At issue is the divide between freshwater and saltwater economists that has been raging for at least a generation now. Kilborn says:

To tinker or not to tinker? For decades most politicians and professors of economics have taken it for granted that the Government must adjust the engines of the economy to avoid recessions and create jobs. But lately, a long-belittled school of skeptics who think the Government usually just gums things up is gaining attention and influence.

The skeptics are known as ”fresh water” economists, less for the purity of their thought than for their origins at universities along the shores of the Great Lakes.

The school’s views are filtering into such lofty citadels of mainstream ”salt water” economics as Harvard, the Massachusetts Institute of Technology, Princeton and Stanford. Its theories also appeal to economists who are advising the Presidential election campaign of George Bush, and, to a lesser extent, those working for Michael S. Dukakis.

The fresh-water people build their case for minimal intervention on the view that workers, consumers, business executives and investors anticipate changes in the economy faster than the Government and can adjust to them better on their own.

On some level, one could say this divide is manifest in how the political fault lines in the U.S. are forming. Larry Summers, President Obama’s chief economic advisor, is a saltwater type with definite freshwater sympathies. 

On the other side of the political spectrum are those who want small government, a view championed by Ronald Reagan in the 1980s. Republicans are drawn to this positioning because it invokes the Reagan presidency, which was a high point for the post-Nixonian Republican Party. 

You will have noticed my post earlier today on Sarah Palin walking in the small government, Libertarian mantle as she crafts a strategy to take control of the party.

In the article, Krugman sums up the crux of the divide nicely, with Robert Lucas taking the other side:

”The basic distinction,” he said, ”is do you think recessions present a problem? And do you think the Government can do something to avert them? The fresh-water people say that recessions either are nothing to worry about or that in any case, the Government can’t do anything about them.”

Robert E. Lucas, the undisputed dean of the fresh-water school and chairman of the economics department at the University of Chicago, said, ”What we’re turning against is the idea that you can fine-tune the economy with any policy at all.” The university has long been the home of monetarist economics, which maintains that steady, noninflationary growth results from steady growth of the money supply and of which the newer theory is an offshoot.

So, if you are wondering where all of the back and forth is coming from on economic theory and why it has failed us, take a step back in time to the late 1980s. The debate is pretty much the same today.

Source

‘Fresh Water’ Economists Gain – NY Times

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.