Abstract
Innovative theories and policy proposals originating in the economics profession have diffused globally over the past several decades, but these models and policy programs transform as they spread. Existing models of change based on the concept of “paradigm shifts” capture the transformation of the economics profession at a high level of abstraction, but analysis of more concrete policy changes and associated ideas requires developing theory at a lower level of abstraction. I propose a field theoretic model of change based on the concept of cycles of polarization and settlement. According to this model, settlements are characterized by multiple cross-cutting axes of competition and debate in a professional field. Moments of contention emerge when field entrepreneurs successfully build professional movements, resulting in polarization. However, contention is episodic and followed by the emergence of “centripetal forces” which lead a gradual return to the center. I develop this model by examining the case of monetary economics and policy in Latin America, a critical case for studies of the policy influence of economic ideas and experts.
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Notes
Even Prasad, who is skeptical about the impact of ideas, notes that the French trajectory towards neoliberalism was influenced by structures that “subordinated political conflict … to academic expertise” (2006, p. 23).
Blyth (2002) does not employ the language of paradigm shifts, but he explicitly argues that monetarism triumphed in the 1970s and remained dominant (see pp. 171–172, especially footnote 78).
Misrecognition refers to an act of social classification that either accidentally or deliberately imputes a position in social space to an actor that does not occur with the actor’s “objective” position in abstract idea space.
Professional movements share many characteristics with “intellectual movements” (Frickel and Gross 2005), but a key difference is that professional movements seek influence in the policy arena as well as the academy.
This is not to deny that the work of Keynes or Friedman represented major changes within economics: they clearly did, but the concept of “revolution” may be misleading.
While Fligstein and McAdam argue that contention generally emerges in response to exogenous shocks, I am agnostic on this point. As discussed below, exogenous shocks did play a key role in creating an opportunity for the monetarist professional movement, but the movement itself preceded them.
Since the topic of this article is the transformation of the economics profession, I consider published literature as primary data in this context.
In total, I conducted 100 interviews with policymakers from Mexico, Argentina, and the International Monetary Fund between 2006 and 2010 as a part of a broader study of macroeconomic policy-making in Latin America. Interviews were open-ended and focused on particular policy-making decisions. In the case of Argentina, I also draw on recorded interviews housed at the Oral History Archive at the Instituto Gino Germani of the University of Buenos Aires. The conclusions of this article grew in large part inductively out of surprising moments in these interviews. However, it is not the goal of this article to exploit these interviews for the purposes of testing theory; for this reason, the article draws sparingly on the interviews for the purpose of illustrating key points.
The quantity theory of money states, to simplify greatly, that the rate of inflation is a function of the size of the money supply.
As the IMF’s chief economist, Jacques Polak, put it, “it might be asked whether, in the assumptions made about money [in his approach], the Quantity Theory of Money does not rear its barely disguised head? Suffice it to say … first, that the monster was never really slain; and second, that once it has been properly tied to [Keynesian] income analysis it appears not only to be harmless, but really quite useful” (1957, p. 8).
Marcus Fleming, who arrived independently at many of the same conclusions as Mundell, strongly identified as Keynesian (Mundell 2001).
As one alumnus puts it, “Mundell and Friedman ran very different schools. For Friedman open economy was a very short topic: flexible exchange rates—fully flexible—and free trade. What else was there to talk about? For Mundell it was, rightly, hard to understand how Friedman could talk about monetary policy in a closed economy as if there were such a thing” (Dornbusch in Mundell and Friedman 2001, pp. 22–23).
This policy program was so called because of the tables of exchange rate values that accompanied them.
For example, Argentine Central Bank President Adolfo Diz was a Chicago graduate of an earlier generation, while economist Ricardo Arriazu was closely involved in the design and evaluation of the stabilization plan.
Anonymous interview.
Roque Fernandez oral history interview.
Silva Herzog interview.
See Silva Herzog Flores (2009).
This group included finance minister Juan Sourouille, Central Bank President José Luis Machinea, and other economists associated with the Institute for the Development of State and Society (IDES).
This was also a direct rejection of rational expectations, because it implied that inflation expectations were backward-looking (adaptive) rather than forward-looking (rational).
Juan Sourouille interview, Oral History Archives, Instituto Gino Germani.
The text in brackets refers to the “intertemporal approach” in the original; in the jargon, this is a reference to the new classical economics.
For example, Jacob Frenkel and Michael Mussa (Chicago open economy alumni who successively served as IMF Research Director during the 1980s and 1990s) conceded, “[the] theoretical models applied to balance of payments analysis in the late 1960’s and early 1970’s [in Chicago] incorporate the same basic elements as earlier such models and, correspondingly, share many of the same properties and implications” (Frenkel and Mussa 1984, p. 3).
Interview, Juan Sourrouille.
For example, influential central bank official Francisco Gil Díaz; interviews with former Mexican officials.
Macroeconomists see the creation of a monetary union (such as the Euro) or the adoption of the dollar by another country as simply the extreme form of a permanently fixed exchange rate.
Author’s calculations from data compiled by Reinhart and Rogoff (2004).
Interview, Roque Fernández.
These competitors included Orlando Ferreres and Javier Gonzalez Fraga, senior officials in the finance ministry and central bank in 1989, when Cavallo’s proposal was first introduced (source: author’s interviews).
To simplify, there were two main interpretations of the hyperinflation crisis in Argentina: the neo-structuralists argued that the crisis was caused by a run on the currency, whereas the local Chicago group advanced a modified monetarist interpretation. In arguing that the hard peg ended the crisis by stopping the run on the currency (Cavallo and Cavallo 1996), Cavallo was closer to the former. Fernández dismissed this as a “heterodox” interpretation (source: author’s interview).
To simplify, the Taylor rule prescribes a monetary policy target (the interest rate) as a function of the output gap (the difference between actual and potential GDP), the rate of inflation, and the target rate of inflation.
According to documents obtained from the IMF archives, only after about 1999 did the IMF begin to actively encourage countries to adopt inflation targets, by which time many countries already had.
This is not the place for a full discussion, but whatever the Fed’s other failings—and the financial crisis indicates that there were many—during the Greenspan era (1987–2006), the Fed delivered both low unemployment and low inflation. The Fed did not raise interest rates as substantially as advocated by many inflation “hawks” during the late 1990s, and it kept interest rates low after the recession of the early 2000s. In this sense, there is substantial evidence that “the Federal Reserve has taken its dual mandate [to purse both full employment and price stability] very seriously during the Greenspan years” (Blinder and Reis 2005, p. 29).
These claims are institutionalized in the sense that they have become standard boilerplate in the Bank’s reports and the speeches of officials.
For example, the concept of fine tuning that prevailed at the peak of the Keynesian settlement also suggests complacency about the ability of policymakers to control macroeconomic forces.
Like Bernanke, Krugman is tied to the open economy network; his adviser was Rudiger Dornbusch.
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Van Gunten, T.S. Cycles of polarization and settlement: diffusion and transformation in the macroeconomic policy field. Theor Soc 44, 321–354 (2015). https://doi.org/10.1007/s11186-015-9253-8
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DOI: https://doi.org/10.1007/s11186-015-9253-8