The commenter Jason sent me a great Wittgenstein quotation, and I immediately knew I had to use it somewhere. It took me 10 seconds to decide where:
“Tell me,” the great twentieth-century philosopher Ludwig Wittgenstein once asked a friend, “why do people always say it was natural for man to assume that the sun went around the Earth rather than that the Earth was rotating?” His friend replied, “Well, obviously because it just looks as though the Sun is going around the Earth.” Wittgenstein responded, “Well, what would it have looked like if it had looked as though the Earth was rotating?”
It’s quotations like this that make life worth living. So I wondered what Wittgenstein would have thought of the current crisis:
Wittgenstein: Tell me, why do people always say it’s natural to assume the Great Recession was caused by the financial crisis of 2008?
Friend: Well, obviously because it looks as though the Great Recession was caused by the financial crisis of 2008.
Wittgenstein: Well, what would it have looked like if it had been caused by Fed policy errors, which allowed nominal GDP to fall at the sharpest rate since 1938, especially during a time when banks were already stressed by the subprime fiasco, and when the resources for repaying nominal debts come from nominal income?
OK, not nearly as elegant as Wittgenstein’s example. But you get the point.
Jason also wonders what future generations will think of the Keynesian/monetarist split. Which model will seem like the Ptolemaic system? I won’t answer that, but will take a stab at a related question. The Great Depression was originally thought to be due to the inherent instability of capitalism. Later Friedman and Schwartz blamed it on a big drop in M2. Their view is now more popular, because it has more appealing policy implications. It’s a lot easier to prevent M2 from falling, than to repair the inherent instability of capitalism. Where there are simple policy implications, a failure to do those policies eventually becomes seen as the “cause” of the problem, even if at a deeper philosophical level “cause” is one of those slippery terms that can never be pinned down.
In 50 years (when we are targeting NGDP futures contracts) the Great Recession will be seen as being caused by the Fed’s failure to prevent NGDP from falling. Not through futures contracts (which didn’t exist then) but through a failure to engage in the sort of “level targeting” that Bernanke recommended the Japanese try during their similar travails.
PS. W. Peden thinks the quotation is apocryphal, and notes that it’s used in Tom Stoppard’s play “Jumper.” For some reason I prefer it be Wittgenstein.