Even economists don't fully understand the complicated global economy.
Why is it that economists don't understand – at a deep and scientific level – how the economy works?
Two centuries after Adam Smith's "Wealth of Nations," and more than seven decades after the Great Depression, they're still fighting over what works and what doesn't. The debate is far from theoretical. The fate of nations, politicians, and millions of working people depends on policymakers getting it right.
Right now, the big debate in Washington is on how to speed up the recovery so as to shrink unemployment and boost revenues. To help, policymakers are poised to extend Bush tax cuts for a year or two – an echo of the theories of John Maynard Keynes, who argued that in recessions governments should spend money to keep the economy moving, even if it piles up debt.
Using a different theory, the Federal Reserve is embarked on a new round of "quantitative easing" – the purchase of $600 billion in Treasury securities over the next eight months. The idea, built on the money supply theories of Milton Friedman, is that by pumping lots of money into the economy during times of recession, central banks can keep things from getting worse. Who's right?
In 1970, I wrote a Monitor column asserting that Dr. Friedman's "monetarist" school of economic thought was "winning more and more converts" because its advocates' forecasts for the American economy had been more accurate than predictions of Keynesian economists. It was seen then as a "revolution" in economist thinking.
Lately, though, some monetarists are having second thoughts.