The former Fed chair will probably be the first woman to run the Treasury department. Zach Gibson / GETTY IMAGES
Yesterday, President-elect Joe Biden picked Janet Yellen to run the Department of the Treasury. The hope among progressives was that Biden would pick Elizabeth Warren, a politician Wall Street bankers see as nothing less than the embodiment of Satan. Nevertheless, Yellen, who served as Federal Reserve chair under Obama, is not on the right. Nor is she one of those Wall Street-to-Washington-and-back revolving door types, such as Obama’s Treasury Secretary, Timothy Geithner. Nor is she a charlatan like Steven Mnuchin. (Not one economic thought exists in the head of that “investor.”) Yellen is an academic economist and, more significantly, a neo-Keynesian.
The reason why Biden picked her is because the bankers saw her manage the Fed in an apolitical manner from 2010 to 2017, when Trump replaced her with a white man, Jerome Powell, for no good reason. Yellen was, to the market’s liking, predictable and very cautious. She ran the nation’s bank-of-last-resort with a steady hand: raised interest rates gradually during the recovery, and, in 2014, began chipping away at the $4 trillion debt dumped on the Fed’s books by quantitive easing. But why should the left not feel so bad about her appointment? Why did the DSA card-carrying heterodox economist Doug Henwood tweet that “Joe could have done a lot worse than Yellen”? Because she is a neo-Keynesian, which is not the best type of Keynesian, but it is far better than a neoclassical economist. Let me explain why this is so.
Here is what happened to capitalism between the crucial years of 1870 and 1945. This period saw the growing strength of unions and the expansion of democracy in advanced capitalist nations of the West. A world war and massive market crash put capitalism in the ICU. It really was about to die. The doctor who saved post-classical capitalism (also called monopoly capitalism) from communism and fascism was John Maynard Keynes. His prescriptions would transform post-classical capitalism into state-managed capitalism. This meant the expansion of social welfare, the normalization of union demands, and massive public investments. This was the order of things after the Second World War. There was the New Deal in the US, the Beveridge Report in the UK, and the social market in Germany.
All of this had the appearance of working until the 1970s. At this point, the “old gang” (austerity, small government, market orthodoxy) regained political power and began an assault on labor that continues to this day. The reorganization of the post-war economy was legitimized by a whole branch of economic thinking that at every opportunity claimed the government was the problem and the market the solution. To make such an assertion at all plausible, the revived economic orthodoxy replaced history and class-based common sense with models and mathematics. Markets and their distributive mechanisms became a matter of number and algebra. By the end of the 1980s, Keynes, and his form of historically informed social democracy, was no longer taught in economic programs in the US and UK.
The way his ideas survived in the academic world was as the neo-Keynesian school initiated by John Hicks’s formulization of Keynes’s non-mathematical General Theory (the IS-LM model) and Paul Samuelson’s massively influential introductory textbook Economics. This is how the mainstream left survived the coldest winter ever (1978 to 2008). They went along with the math and models of the neoclassical school (which is called economics in our day) and made their arguments in those exact terms. No more talking about Karl Marx or even David Ricardo, who in 1817 made the fatal error of attributing value creation solely to labor, to work, rather than capital.
This is where Yellen comes from, the neo-Keynesians, who are considered to be center-left on the political spectrum. But there are also post-Keynesians (I side with this group, by the way). But no one ever hears about them because for the most part they push Keynes’s ideas to a final conclusion: socialism. Post-Keynesians emerged from Cambridge University in the 1930s. Neo-Keynesians from MIT around the same time. The former eventually came to hate the later, and they accused them of bastardizing Keynes. These bitter feelings were expressed during the Cambridge capital controversy. Basically, the neo-Keynesians were accused of “faking the funk.”
There is truth in this assessment. And it’s also true that neo-Keynesian spent way too much intellectual energy forming complex mathematical models that showed that, for example, a person who sells a car knows more about the car than the person the car is sold to. This became known as asymmetrical information. Yellen’s husband, George Akerlof, another neo-Keynesian, made contributions to this theory (called the “Market of Lemons“). Also in this school are a number of famous leftists economists, Joseph Stiglitz and Paul Krugman:
Janet Yellen for Treasury! Fantastic news. Not just someone with vast experience and a terrific track record, but a deep thinker too. One of the people who kept realistic, useful macroeconomics alive through some intellectual dark times. 1/
— Paul Krugman (@paulkrugman) November 23, 2020
What separates neo-Keynesians from the “old gang” is they believe in market imperfections, and that these imperfections can only be corrected by direct government interventions. In this respect, Yellen was not educated to be a market cheerleader. She is more of a market mechanic, and one who knows that capitalism can break down of its own accord. Sure, one would want a post-Keynesian running the treasury (James K. Galbraith, for example), but if you like Paul Krugman it will be hard to hate Janet Yellen. They are cut from the same cloth.