Among the once celebrated triumphs of Alan Greenspan’s eighteen and a half years as chairman of the Federal Reserve, three stand out. First, he responded nimbly and forcefully to a series of dangerous crashes (from Black Monday in October 1987 to the bursting of the dot-com bubble in 2000), injecting liquidity to calm the markets and arguably fending off recession. Second, along with the Clinton-era Treasury secretaries Robert Rubin and Larry Summers, he successfully lobbied for deregulation of the credit industry, including the repeal of the Glass-Steagall Act, which had separated investment banks from commercial banks. At the same time he blocked attempts to subject over the counter derivatives to government regulation – to require that their risks be made clear, for example. New financial instruments, including credit-default swaps, were making markets more stable than ever before, he argued, and any attempt at regulation would subject investors to potentially calamitous levels of uncertainty. Third, Greenspan kept interest rates at record lows, stimulating economic activity while miraculously avoiding any significant rise in the consumer price index, which would normally have been expected to balloon as a result of the inflationary pressures produced by cheap money.
Then came what Greenspan now acknowledges to be ‘the greatest financial crisis ever’, followed by the worst economic slump since the Great Depression. The bursting of the housing bubble led to an unprecedented worldwide banking crisis and ended Greenspan’s reputation as clairvoyant forecaster-in-chief of the US economy. What had once seemed his greatest triumphs were now seen as his worst failures. He had disregarded warnings that deregulation would open the way to massively risky lending and borrowing practices. Price stability in consumer goods was judged, in retrospect, to have been largely a result of technological advances and low-cost imports from China and elsewhere, with the inflationary pressures produced by his cheap-money policy channelled into asset-price bubbles in the housing and stock markets. And he stuck to a subsequently discredited theory that monetary loosening (lowering interest rates) will always be enough, in the aftermath of an unforeseen crash, to stave off a deflationary spiral. His once towering reputation now looked as unearned as those vertiginous profits on securitised subprime mortgages.
In the wake of the financial crisis, Greenspan issued a series of op-eds and papers in economics journals making excuses for his actions and swatting away his critics. The closest he came to a mea culpa was his testimony before a sceptical Congress in October 2008. His unexpected discovery that major lending institutions had been engaged in reckless gambling and had failed to protect shareholders’ equity had left him, he said, in a state of ‘shocked disbelief’.
The Map and the Territory recounts his convalescence and recovery from that shock. In his testimony he reported, lapsing into his usual mangled syntax, that he had found a ‘flaw in the model that I perceived is the critical functioning structure that defines how the world works’. He has written this book to repair that flaw or to redraw his map so that it describes more accurately the topography of the real economy. It’s an important document because of what it tells us about the challenge presented by the financial crisis to a still powerful and widely held free-market ideology.
The central tenets of that ideology are well known and easy to state. Social welfare can best be achieved if individual participants in the market, motivated by rational self-interest, are allowed to engage in economic activity unhampered by government, which should restrict itself to ‘setting the legal conditions of political freedom’. If markets are perfect, it follows that any interference by government will introduce imperfections, especially the ‘fog’ of uncertainty through which investors must haplessly peer.
That Greenspan remains in thrall to free-market ideology is demonstrated by his unrepentant insistence here that ‘we need to lift the burden of massive new financial regulation that is becoming increasingly counterproductive.’ His current proposals for reversing what he sees as the otherwise unavoidable eclipse of America’s global economic dominance show no departure from his pre-crisis views: cut state benefits, allow housing repossessions, repeal many of the Dodd-Frank reforms of the banking system, eliminate or reduce deficit spending, and ensure that labour markets remain open to wage-lowering competition from foreign workers.
Political pressures to reverse deregulation, it seems to Greenspan, can best be fended off by token concessions: it’s fine to raise the level of cash reserves that commercial banks have to hold – even though the banks’ profitability will be reduced – so long as other financial institutions, such as investment banks, are left to speculate more or less freely with borrowed funds. Greenspan’s ‘fondest hope for this book’ is therefore nothing new. He wants to encourage Congress and other policymakers to recognise the ‘recuperative powers of deregulating markets’, which ‘is in our long-term collective self-interest despite the unavoidable short-term pain it will bring’.
So, the take-home message of The Map and the Territory is that Greenspan’s pre-crisis model of how the world works was essentially correct. But his reasoning on the way to this reassuring conclusion is convoluted and sometimes difficult to follow. Above all, he has to give some plausible account of the ‘flaw’ he was so shocked to discover in 2008. Doing so allows him to answer the charge that the libertarian ideology to which he is devoted bears some responsibility for the crisis. Unfortunately, his attempt to refute this allegation draws him into an impenetrable mesh of contradictions.
Greenspan begins by saying that his crystal ball failed him so miserably only because of a glitch in his highly conventional assumptions about the micro-foundations of self-correcting markets. ‘A basic assumption of classical and neoclassical economics, that people behave in their rational long-term self-interest’, turns out to be ‘not wholly accurate’. Human beings aren’t consistently rational maximisers of their own net worth. He has reluctantly come to this conclusion partly by peering into what he weirdly calls the ‘impenetrable black box’ of his own mind. He has also benefited from behavioural economics, the purpose of which is to introduce greater realism into theories of human decision-making.
Behavioural economics is concerned with cognitive biases, especially the unintended and often unwelcome consequences of a reflexive and self-defeating reliance on various common short cuts for making decisions in uncertain conditions. Greenspan knows this, but his ruminations on the ‘vagaries of human nature’ seem more a matter of what used to be called mass psychology. He’s interested in the way non-rational compulsions trip otherwise rational people into making fatally irrational decisions, and focuses on three main culprits: ‘fear, euphoria and herd behaviour’. Contrary to the parsimonious economics textbooks of Greenspan’s youth, the rational self-interest of buyers and sellers in a free market is repeatedly derailed by panic, irrational exuberance and copycat behaviour, especially in stressful circumstances.
To exonerate his fellow regulators and forecasters, Greenspan initially blames the crisis on the tempestuous animal spirits of investors and financiers. He sees himself as guilty only of having accepted ‘the neoclassical approach to economics based on utility maximisation’, which meant he was left dazed and incredulous by the self-destructive behaviour of major lending institutions. In other words, he failed to foresee the crisis because people disappointed his expectations of the way rational economic agents are supposed to behave. He has adapted to reality by lowering his opinion of human nature, and has concluded that booms and busts are ‘psychology-driven’.
To say that this is Greenspan’s core thesis isn’t to say that it’s consistently held or coherently defended. He’s subliminally aware that the unchanging features of human nature provide an incomplete explanation for the occurrence of rare historical events. He had written extensively about euphoric bubbles and panic sell-offs before the crisis. In The Age of Turbulence (2007) he reported that the idea of irrational exuberance came to him in 1996 while he was soaking in the bath, happy as Archimedes. As a tight-lipped Fed chairman, he was aware that a casual remark by a central banker could unleash an avalanche and that a run on a bank could plunge an otherwise solvent institution into insolvency. And the idea that before the crisis he was unconscious of the pressures exerted by euphoria and fear stretches credulity given the Fed’s mandate of tightening credit to throttle euphoria and loosening credit to alleviate fear.
It’s obvious that he wants us to believe he has learned his lesson. But he can’t stick to the fiction that his failure to forecast the crisis was the result of a naive faith in rationality. From the start, he combines that flimsy storyline with several others that contradict it as well as one another. He tells us that he failed to give sufficient weight to the non-rational motivations percolating through the economic system not because he thought them too insignificant to affect market outcomes but because they defied the mathematical requirements of the science of forecasting: ‘The point isn’t that I and other economic forecasters didn’t understand that markets are prone to wild and even deranging mood swings that are uncoupled from any underlying rational basis. The point is rather that such “irrational” behaviour is hard to measure, and stubbornly resistant to any reliable systematic analysis.’ Before the crisis, he explains, he was unbothered by his inability to incorporate animal spirits into his forecasting models because he also believed that they were essentially random ‘noise’ which left virtually no traces on underlying economic trends. This, he writes, is where the simplifications of his map fatally obstructed his view of the jagged terrain, for ‘the breakdown in 2008 … could scarcely be characterised as economic noise.’ Luckily for ‘the future of forecasting’, however, Greenspan’s new/old realisation about euphoria, fear and herd behaviour has been accompanied by the revelation that they can after all be measured mathematically and incorporated into economic models. But the closest he comes to doing this is to tell us that ‘the probability of the onset of what was previously thought to be a “hundred-year flood” is higher than once in a century.’ No one would call this mathematically precise. That euphoria, fear and herd behaviour are perennial motivations tells us nothing about when and under what circumstances they will become dominant and decisive.
Greenspan repeatedly claims that markets would work much more efficiently if animal spirits could be purged from human nature. But he also says the opposite: that economic growth and high standards of living would never have been possible without irrational euphoria, instinctive competitiveness (inbred by evolutionary pressures), and an empirically unjustifiable bias towards optimism. So which is it? Do animal spirits make us richer or poorer than we would otherwise be? A similar confusion haunts his discussion of conspicuous consumption, keeping up with the Joneses, and the psychologically irresistible comparisons of oneself with one’s social peers, all of which supposedly drag people away from their own rational self-interest. These passages are lifted verbatim, he acknowledges, from The Age of Turbulence. So we know that in this case at least, his thinking was entirely unaltered by the crisis.
Greenspan’s account of rational self-interest is, however, hopelessly blurred. On the one hand, he asserts that rationally self-interested borrowers, lenders, savers and investors base their decisions on ‘the facts of markets’ rather than ‘the less relevant views of other people’. Rational consumption, on this account, excludes conspicuous consumption, especially purchases made by borrowing beyond one’s means simply to keep up with, or look superior to, the neighbours. This makes sense as far as it goes. But Greenspan contradicts himself by conflating rational well-being with comparative well-being: ‘In the realm of economics, the vast majority of our actions are driven by self-interest relative to the interests of others.’ But what exactly is ‘self-interest relative to the interests of others’? And how is it related to rational self-interest defined in isolation from ‘the less relevant views of other people’?
Similarly mystifying is his account of uncertainty. He partly crafts it to excuse his failure to forecast the crisis. Having first allowed that animal spirits often drive market participants to behave in ways that are so delusional as to be perfectly unpredictable, he quickly reverts to the libertarian conceit that government intervention alone is responsible for ‘the pall of uncertainty’ that hovers over the economy. As recently as last December he claimed in a television interview that ‘the extent of government intervention has been so horrendous that businesses cannot basically decide what to do about the future.’ It would be fair to see this disproportionate and empirically baseless emphasis on government action as the principal source of economic uncertainty as the driving force of The Map and the Territory.
As a free-market theorist, Greenspan believes that being pro-business also requires him to be dogmatically anti-government. As an observer of economic realities, on the other hand, he devotes lengthy passages to US infrastructure’s disgraceful ‘state of decline’ and the heavy burden this places on private businesses and individual consumers. The consequences of government inaction can’t but be on his mind when he documents, at equal length, the indispensable role played by the government in building transcontinental and transatlantic telegraph lines, the transcontinental railroad and the American highway system. He even admits to having modified his earlier thinking on the railroad. Acknowledging the enormous boost it gave to national productivity, he writes: ‘I am hard pressed to argue, as I did in the 1960s, that the post-Civil War subsidised rails from the Mississippi to the West Coast were a wholly bad idea.’ The same flirtation with activist-state liberalism is evident in his discussion of the ‘extensive technical training of our military during the war and the educational benefits of the GI Bill’, both of which contributed substantially to the dynamism of America’s economy in the 1950s. Such developments epitomise a complex and mutually reinforcing interdependence, not a simple opposition, between government action and private ownership. His focus on them suggests a surprisingly firm grasp of the all-important difference between the lack of obstacles and the presence of preconditions. Economic growth requires not merely government forbearance but also government performance.
So why , after all this, does he remain nostalgic for ‘rugged individualism’? Why does he hype ‘self-reliance’ while explaining that self-reliant individuals would have been unable to populate the American West and make a success of commercial farming there without sustained government help? Whatever the explanation, Greenspan follows his extensive account of the many ways the US government has facilitated the development of flexible markets by reverting to the claim that ‘the rise of the role of government in the United States has coincided with, and is doubtless a cause of, increasing market rigidity.’ As if unaware that government has ever helped create conditions favourable to competition, he lapses back into describing economic growth merely as ‘the result of removing impediments to competition’.
Finally we come to Greenspan’s partly conventional, partly eccentric treatment of inequality, fairness and the welfare state. He begins with what might seem a refreshing admission: ‘Inequality of both income and wealth in recent years has risen to a level that has opened up large crevices in America’s political system.’ But he opposes any attempt to close this gap by redistributive politics, and while he acknowledges ‘a markedly above-average rise in the salaries of those employed in finance since 1980’, he argues that any attempt to cap such salaries would be counterproductive.
To understand why he believes this, we need to turn to his criticism of the welfare state and the threat it poses to America’s economic future. The country’s large budget deficits and historically low savings rates are both caused, he argues, by over generous welfare programmes that transfer money from the rich who save to the poor who consume. The unfairly overtaxed rich are not necessarily the most productive members of society, he admits, but at least their savings, profitably loaned out by financial intermediaries, provide the cash that allows inventors and industrialists to develop new industrially applicable technologies.
After examining mountains of data from this angle, Greenspan concludes that the rising share of GDP eaten up by social benefits is the principal cause of ‘the fiscal chaos we are now experiencing’. These spendthrift programmes might even lead capitalist societies to collapse in the way communist command economies did. This ‘unconstrained deficit spending’, combined with political enthusiasm for the reregulation of the financial industry, is putting America’s global economic dominance in jeopardy. If the US stays on its current path, he writes, ‘our status as the world’s leading financial power will be profoundly shaken.’
But what about those still wealthy, no-regrets financiers whose reckless gambling left Greenspan briefly dumbfounded in 2008? He flatly opposes ‘regulatory punishment of bubble malfeasance’ on the grounds that while such punishment might be ‘soul satisfying’ it ‘is rarely economically productive’. He admits that outright fraud needs to be punished to the full extent of the law, but neglects to mention that the line between legal and illegal is not fixed but is periodically moved by Congress, often to accommodate the wishes of the banking lobby.
He’s less interested in defending financiers against charges of malfeasance than in defending them against accusations that there is something basically ‘unfair’ about their accumulation of vast fortunes when most of their fellow citizens are struggling. Again he fields and abandons arguments opportunistically with scant regard to conceptual coherence. He begins by associating criticisms of wealthy financiers with Marxism, a theory he describes as ‘widely rejected’ and which he obviously scorns. Next he defends a form of moral relativism according to which conflicting judgments of ‘fairness’ can’t be expected to agree. The owner of several news organisations can’t share a notion of what’s fair with the homeless person who sleeps under one of his newspapers.
He expresses doubt that any economic system can be ‘both productive and fair’, but doesn’t go so far as to say that inequality causes economic growth, perhaps because he rightly suspects that such an ideologically loaded proposition can’t be empirically proven. (Evidence from different free-market societies reveals no simple correlation, much less a demonstrable causal connection.) That this is nevertheless the impression he wants to leave is clear from the way he attacks those who favour a ‘vast safety net for those who fall through the cracks of a largely self-regulated market system’, claiming that their criticism of capitalism for its unequal allocation of benefits and burdens is unforgivably one-sided, since no other system has done so much to increase standards of living ‘even for our lowest income recipients’.
After arguing that the unfairness of economic inequality exists only in the eye of the beholder, then asserting that the unfairness of economic inequality has to be tolerated for the sake of growth, Greenspan performs another pirouette, claiming that economic inequality is in fact patently fair. The wealthy are wealthy, he writes, because of their extraordinary talents and efforts, not to mention their copious contributions to general social welfare. From the premise that voluntary transactions are by definition ‘fair’, he concludes that when markets are competitive the income of high-earners is always ‘justly theirs’.
Most commentators take it as self-evident that taxing the wealthy at a higher rate than lower income groups is ‘fairer’. But that implies that somehow upper income taxpayers have not ‘earned’ their income, a view that rests on the belief that in a division of labour society, all income is produced jointly. The alternative view is that even though output is produced collectively in a free, competitive market, each individual’s income reflects that person’s marginal contribution to total output.
He is quite emphatic that the ‘alternative view’ is the right one, stressing that ‘capitalism’s inequality of wealth, of course, reflects the variations of economic talent among our populations.’
After concluding confidently that capitalism today is essentially meritocratic, Greenspan swivels without warning to the view that meritocracy isn’t an apt description of any society where inherited wealth plays an important role. He acknowledges that ‘the prevalence of inherited wealth’ undermines his claim that our position in the economic hierarchy is a reflection of what he calls our ‘individuality’, but then changes the subject and says that large bequests from parent to child, while not merited by the recipient, are nonetheless natural, due to an ‘inbred propensity’ of parents to value their own children over those of others. But he doesn’t treat ‘income transfers crafted to elevate the least privileged members of society to equality of opportunity’ with such understanding, claiming rather that they flagrantly violate both the letter of the US constitution and the spirit of individual self-reliance at the heart of modern capitalism.
Though he derides every ‘non-market-determined use of a product or service’, even Greenspan recognises that public schooling is not distributed to children on market principles. However, anything that isn’t shared out according to market principles, like government money spent on the transport and communication infrastructure, makes the libertarian in Greenspan deeply uncomfortable, since this defies his ideological commitment to a society ‘where government has little role aside from setting the legal conditions of political freedom’. He has no qualms, for example, about arguing that medical care should be distributed according to ability and willingness to pay.
But how does he explain the origin and continuation of such perversely non-market distributions of what he considers justly acquired private wealth? On the one hand, he ascribes US welfare benefits to an irrational bout of compassion and fellow feeling: ‘It was not until the 1960s that we turned our national benevolence to the less well-off within our own borders and set in motion an inexorable rise in social benefits to persons.’ To anyone convinced of ‘the inbred self-centred nature of our species’, such eleemosynary policies seem almost inexplicable. To account for the apparent anomaly, Greenspan reaches into his grab-bag of inbred propensities and comes up with a proclivity to feel empathy for others which can occasionally develop into a wish to relieve undeserved suffering, even if this involves a calamitous degree of otherwise unnatural ‘self-sacrifice’.
When it comes to the behaviour of welfare recipients, on the other hand, Greenspan feels no need to invoke irrational propensities. The ‘political constituencies’ who support ‘every new entitlement’ have a perfectly calculating but deeply dishonourable interest in getting something for nothing. America’s ‘historic entitlement boom’ upsets Greenspan not only because he objects morally to the poor fleecing the rich, but also because he thinks such wealth transfers impose a terrible drag on economic growth: ‘We can choose to buffer the competition’s “losers” from the extremes of suffering and want,’ he writes, but there is always a ‘trade-off between productivity and such buffering’. ‘The cause of our diminished flow of gross domestic savings,’ he claims, ‘is demonstrably government social benefits to persons’ and this means that savings aren’t there to be invested in the development of new technology.
But are entrepreneurs seeking to use cutting-edge technology in industry really being starved of the credit they need because the rich are being taxed too much to pay for the welfare state? And would slashing benefits in order to reduce taxes on the richest guarantee that credit would flow into economically promising projects? Not so long ago, major financial institutions chose, for the sake of windfall profits, to channel credit, not towards new technology, but towards home buyers who didn’t have sufficient funds. How can we be sure that the savings of the rich, swollen by tax cuts, would flow towards their most economically productive use?
Although he fleetingly compares welfare benefits to the Marshall Plan, Greenspan doesn’t pursue the possibility that such massive non-market distributions might be explained by the calculated interests of donors. He denies, for instance, that consumption by needy welfare recipients can lead to an increase in investment to satisfy pumped-up demand: ‘Personal consumption expenditures, by definition, add nothing to our capital stock and hence nothing to our future standards of living.’ And that isn’t all. He reports that ‘only 22 per cent of married women were in the labour force in 1950 to bolster household income. Today, the figure is more than 60 per cent.’ But he doesn’t consider the extent to which social security has reduced the burden of caring for the elderly, a task carried out predominantly by women, allowing a significant increase in women’s contribution to national productivity, while also enhancing their autonomy and mitigating a perennial unfairness in the distribution of responsibility for the care of family members.
Ending his book on what only he would think an upbeat note, Greenspan imagines that America, if its luck holds, might soon suffer a spell of runaway inflation. Such an invigorating crisis, he explains, could ‘reset the political incentives towards restraint’, restore fiscal austerity by forcing a radical cutback in deficit spending, and therefore ‘solve the social benefits dilemma’. This politique du pire foreshadows an even more outlandish line of argument.
In his ode to ‘modern industrial capitalism’ as ‘the most effective form of economic organisation ever devised’, Greenspan writes that ‘at its core is creative destruction, a system of winners and losers. If we wish to achieve ever higher levels of productivity and standards of living, there is no alternative to displacing obsolescent low-productivity facilities with facilities embodying those technologies at the cutting edge.’ As beneficiaries of this churning process, we have to accept ‘the inevitable hardship imposed on significant segments of our workforce who lose their jobs and often their homes in that process of displacement’. Without such ‘market casualties of creative destruction’, there could be no winners, such as the ‘justly’ remunerated CEOs of the great investment banks.
Recent generations of cutting-edge technology have brought us to a tipping point, he goes on. Progress has taken us so far that the average American worker lacks the intellectual capacity needed to cope with recent technological innovations. Things were different in the 1950s when the ‘skills required to operate our capital facilities were readily taught in American high schools.’ In those days, a high school diploma qualified a worker ‘for a reasonably skilled job in a steel mill or auto-assembly plant’. Due to their military training, ‘veterans were fully capable of operating complex manufacturing assembly lines and our economic infrastructure in general.’
This is no longer true: ‘The skill structure of the workforce overall does not match the needs implied by the complexity of our capital infrastructure, most specially in areas of high-tech industry.’ You might think the mismatch was the fault of America’s poorly performing schools. But that is not Greenspan’s position. He thinks our upcoming staffing shortage derives from ‘an apparently inbred upper limit to human IQ’. The average person will not, he argues, be adequate to the new technology: ‘While there is an upside limit to the average intellectual capabilities of a population, there is no upper limit to the complexity of technology.’
Luckily for business, ‘the increasingly important use of robots’ can ‘sustain the level of production but significantly decrease the number of human hours required to produce the output’. Many low-skilled jobs have already been lost and the wages of semi-skilled workers reduced by automation, or what Greenspan calls ‘a shift in the composition of capital investment towards labour-saving equipment’. This ‘gradual displacement of repetitive jobs by … increasingly sophisticated robots’ is unstoppable. Automation has already contributed to the weakening of American unions, and Greenspan associates their decline with both the increase in inequality and the surge in economic productivity. We now come to the logical next step. The bright side of automation, to Greenspan’s eye, is the possibility it offers to beat back competition from China. A ‘rapidly growing robotics industry that substitutes low-“wage” robots for people’ will undercut the benefits China has gained from its exceptionally low labour costs.
America can hope to outcompete China not only by lowering its own wage costs but by getting rid of working-class jobs. American capitalists will benefit from automation, in other words, even as US workers see their jobs disappearing. ‘The capital costs of robots are falling to the point where their equivalent wage per hour is becoming competitive with low-wage developing countries,’ Greenspan writes. ‘The United States may continue to lose manufacturing jobs but not manufacturing business.’ In the past, a belief that ‘discharging people’ was ‘an unsavoury activity’ occasionally inhibited cost-saving investments in labour-saving technology; but ‘a major increase in profit margins’ is the ‘pay-off’ awaiting employers once their ‘reluctance to shed workers’ has ‘vanished’.
Middle-class jobs seem likely to go the same way: ‘The declining cost amortised over a two or three-year period of robot “labour” had become highly competitive in terms of hourly cost with what had heretofore (1950s, for example) been middle-income jobs.’ In numerous passages devoted to the impending robotisation of the economy, Greenspan is not simply providing a detached view of the evisceration of the middle classes whose demand for goods and services once powered the American economy. He isn’t merely forecasting. He is putting forward a utopian image of a market economy in which many of today’s workers will be classified as ‘scrappage’. His complacent glee at the thought of profitable investments that can simultaneously increase unemployment is hard to contain: ‘I am astounded at how close we are to being able to vocally direct our cars while sitting back and enjoying the ride.’
The inveterate forecaster anticipates a world where the master class escapes the burden of inequality only in the sense that employees have become largely expendable. Even though he pours scorn on crony capitalism for privileging ‘a favoured few’, he looks forward to a form of capitalism where ‘an ever smaller share of our workforce staff our ever more sophisticated high-tech equipment and software.’ He even imagines that Darwinian competition will bring market society to ‘the point when all we have left is a small handful of especially talented people who can create and operate the newer technologies’. The identity of the ‘we’ in this phrase is worth pondering. The deregulation campaign of which he was such a prominent cheerleader may have been only a precursor to something much more ambitious, a worldwide movement for the liberation of the rich. In Greenspan that movement has found the voice it deserves.