Interview with Larry

Yesterday marked my first venture into the world of feature journalism. After all the brainstorming sessions, pitching ideas to my editor and research planning for my feature article on economics, I was ready to start packing my stuff, leave my room and start playing journalist. Of all the people and places to start gathering information for my first article, I decided to pay a visit to my former economics professor in my former school.

To give you some background on what I am interviewing him for, I should state what my (yet-to-be-released) article is about. I want to bring attention to the two modern thoughts on macroeconomics, Keynesianism, based on the works of economist John Maynard Keynes, and Classical Monetarism, also known as the Chicago school of economics (this economic school of thought originated from the University of Chicago), and how being taught one or both can affect business decisions and effectiveness as a business leader.

The important thing to keep in mind is that Keynesianism and Monetarism approach to macroeconomics do not see eye-to-eye on almost all issues. Simply put, Keynesianism believes capitalism is inherently unstable and the government, central banks, and other institutions should help to stop the unstable boom/bust cycles by manipulating the money supply, government policy, interventionism, and other measures. In contrast, Monetarism believes in the power of laissiez-faire capitalism, believes that government should have little to no role in affecting the market place, that the market place would sort itself out, and that government interference will do more harm than good, and in the end, everyone will be better off. Regarding monetary policy, the money supply must only match that of the demand for money in the economy; in other words, adjust the amount of money in an economy based on how much an economy produce.

My hypothesis is that if a student is taught one approach exclusively in business school, and it turns out to be wrong, then it will affect their business decision. But I have no clue if it is good or not to have been taught both sides; if it's good for students to be given both sides and told to decide for self.

As I was drinking coffee in Kitchener, waiting anxiously for the interview, I was worried that Larry, although a Keynesian economist, would actually have a balanced perspective on this issue; that he would speak respectfully of Monetarist economists, but respectfully disagree with them, and end up giving me very little things to write about. Thankfully, once the interview got started, that fear was quashed pretty quickly. He was as unrelentingly opinionated as I remembered, and he pulled no punches. I have a fighter, as well as a potentially sensationalist article, in my hands.

My first question to him was whether or not having a proper understanding of the macroeconomy is necessary for making good business decisions. "Vital", he said. "There have been countless examples companies that have failed because they got macroeconomics wrong."

Dome Petroleum, Olympia and York, and Nortel were failures cited by Larry that were caused by bad business decisions based on faulty economic analysis and/or ignorance of Keynesian macroeconomic policies. Unfortunately, my notes were not extensive enough during this section for me to reconstruct all his examples perfectly, but the Olympia and York case was memorable enough for me to put together from my memories as well as my notes.

Olympia and York was a Canadian real estate company and was one of the largest property developers on Earth. They owned some of world's most ambitious and well-known properties, such as the World Financial Center in Manhattan (headquarters to the former Lehman Brothers) and First Canadian Place (headquarters to Bank of Montreal) and Scotia Plaza (headquarters to Scotiabank) at Bay Street and King Street West in downtown Toronto. They had a huge portfolio of properties in the US and around the world, especially in Manhattan. O&Y was, at one point, the landlord to most of the properties on Manhattan.

Olympia and York's Waterloo came in the form of the Canary Wharf project in London, England. The Canary Wharf was to be O&Y's grandest and most ambitious project, and upon completion, would be Britain's tallest skyscraper. However, during that time (late 1980s to the early 1990s) there was high inflation in Canada (and presumably the rest of the capitalist, developed world). The Bank of Canada saw the inflation, one indication of an overheated economy, and took the appropriate counter-cyclical (i.e. actively stopping the boom/bust cycles, the definition of Keynesian) monetary actions, actions that Monetarists feverishly opposed, by raising interest rates (with the intention to contract the money supply and lower the rate of inflation). Now, it is worth mentioning that O&Y acquired the rights to develop the Canary Wharf during a time when the central bank of Canada (and I would imagine much of the capitalist developed world) wanted the economy to slow down. That edict extended to developers, telling them to halt developments of large, ambitious projects. The leadership of O&Y, the Reichmann brothers, did not understand the macroeconomic environment and the intentions of the central bank. The interest rates were rapidly accelerating during that time, but O&Y didn't care. They wanted to build the Canary Wharf, even as the Bank of Canada screamed for them to stop by raising interest rate. Since the interest rate was so high, commercial banks were not willing to lend them money (I believe they were served by Scotiabank?). Now, instead of not engaging in large, ambitious projects like the were suppose to for the good of the nation's economic welfare, they decided to remortgage their existing properties (which were highly leveraged to begin with) to secure lending for the construction of the Canary Wharf. As interest rate went up, it became harder and harder for them to pay interest, eventually culminating to a point where they could not pay the interest. They were subsequently bankrupt, Scotiabank took their property away (Scotia Plaza didn’t start out as 'Scotia Plaza'). They lost everything, their empire was cut to pieces like confetti and divided up as the Reichmann brothers filed for bankruptcy.

O&Y thought they could reap a huge profit with a very ambitious development. If they read macroeconomy right, they would have realized that the central bank were engaging in counter-cyclical policies, desperately trying to slow down the economy. If they understood macroeconomics, chances are good that they would have made a huge profit with the Canary Wharf and still exist today. But the Reichmann brothers weren't co-operative with the macroeconomy, thought they could fight it, trying to bike uphill against the wind, and lost.

The point Larry was making was that the Central Banks of the world want sustained and even growth, and will look to and act in accordance to Keynesian policies (a slight oxymoron?). If you do not understand the direction of the macroeconomy, and he emphatically stated that the macroeconomy will move in Keynesian manners, then your judgment will be impaired, and you will make business mistakes. You will make mistakes about the marketplace and you will make mistakes about public policy, and any success you may have encountered were based on luck. If you understand the Keynesian policies and its effect on the marketplace, you gain an important competitive advantage, the advantage of not "killing yourself". "When competitors smoke themselves, you can pick up their market." I'd say that's a pretty good competitive advantage, if you are a business student.

We started to discuss the "other side", i.e. classical-monetarism. It turns out that Larry has some very strong opinions (surprise!). Basically, and I stress that this is my observation of what he thinks in my own words but I think Larry would agree, he thinks the Chicago school of economics is full of crap, the foundation shaky, and the case for their continued existence is thinner than a one-ply toilet paper and you can’t even wipe your ass with it. Like O&Y, the Chicago school of economics is bankrupt, except instead of financially, intellectually.

I began by asking him, “K v. M, in what ways to they agree on?” “Nothing”, he replied.

“Well, there are some things that they do agree on”. “Aggregate demand is important; it drives growth”, he told me.

“Both sides don’t want boom/bust”, he said, referring to the unstable cycles of rapid economic growth and recessions. But what happens when it does happen? Larry said that for the classical monetarists, they just let it happen, the government should stay out, the central bank should accommodate booms, and when it busts, people should trust that the market place will correct itself, and we should all wait it out; they may not like it, but in the long run, it will be fixed. The benefit to the economy when the market is correcting itself will be disrupted by government intervention or when central bank try to conduct counter-cyclical policies. I noted the irony that even though they don’t like boom/bust cycles, their inaction is an implicit approval of the boom/bust cycles. "Alan Greenspan (former chairman of the Federal Reserve and a monetarist) said 'we don't burst bubbles'."

The problem, Larry stated, is that the classical monetarists never specify how long it takes for the adjustment to occur, so it can be from 2 months to 5 years or decades to generations. “The loss of productivity during that time cannot be recaptured”, he said. “If you lose five years of productivity, you can’t ever get that (five years of your life) back”.

Next, I asked him the Impossible Dream. “Is there any Classical Monetarist observations that you do agree with?” I did not expect an answer except perhaps a scoff and a “hell no”, but surprisingly (for real this time), I did!

“Monetarism is still useful in describing the role of money in the economy. They’ve done some good work there. Good job." "Also, they contributed some useful insight on the marketplace.” However, he emphasized that the classical monetarism school of thought does not address the role of psychology, social, and demographic changes. “That is their biggest flaw.”

Focusing on the current economic situation. “There seems to be a resurgence in Keynesian policy in most of the world in response to the current economic situation. Why do you think that is? Why didn’t classical monetarists have an answer to the current economic situation but Keynesians do?”

He noted that Keynesianism was developed in response to the one of the most devastating economic and social disaster in history, the Great Depression. Monetarists, he suggested, are composed of academics with right-wing ideologies. Monetarists tend to say to the government “when the economy is good and I'm making money, leave me alone. But, help me out when times are bad.”

Referring to the today’s economic condition and the monetarists, “The marketplace has systemically failed. They had nothing to say. They had no solutions except to tell people to wait.” Larry said flatly.

He also noted that no government involvement in the economy means there will be no such things as tax-supported public universities, which are accountable to taxpayers and have the implicit mandate to contribute and better society. Obviously, you need government involvement if you want to create a public university, by definition. In contrast, University of Chicago is a private university; it is funded by private money, not public money, so it's not accountable to the public, and don't need to develop scholarship that benefits the public, only its donors. Its success comes from its ability to elicit vast amounts of donations from corporate interest groups and wealthy private donors. In return, the university use their academic credentials and rhetoric skills to advocate the government for tax deduction for private universities (which happened to include the University of Chicago), tax-reduction and government non-interventionism. Coincidentally, he noted, these policies tend to disproportionally favor wealthy donors.

Larry actually does think that classical monetarists can get jobs. He said that because classical monetarists’ models are faulty, assumptions flawed, and their thinking are so far-out and disconnected from the reality of society and the marketplace, monetarists will be perfect for jobs in the public sector, universities, and advocacy groups (which include media), where their jobs include yapping and coming up with even more ridiculous theories of an imaginary world that does not exist and pester the government on policy made from conclusions derived from unreasonable set of theoretical circumstances that will never hope to be matched with reality. However, he emphasized that Keynesianism has been tested by the private sector of the marketplace, what economists are suppose to be focusing on.

Lastly, I asked him if students should learning about both sides of the debate, and then decide for themselves which path they wish to follow. He answered no; he said that universities should just flat-out not teach monetarism; it would do more harm than good.

“The only place for classical monetarism in university is maybe a course on the history of economic thoughts.” His suggestion that a still modern, influential school of economics should be condemned to the pages of historical folly, should never be taken seriously again and only to be seen and laughed at as an example of old time stupidity is pretty radical stuff. I was not surprised by his response but was surprised at this audacious declaration (which I agree with, but still, pretty audacious). It takes some balls to say that a good percentage of economists and academics should just take their PhD degrees and light it on fire, because a good portion of their life's work is proving to be useless and a big joke.

"What happens when a person goes to university and aligns himself with 'the wrong side'?"

“Because of increasing competitive pressure the global economy places on every individual, mistakes are going to hurt a lot more”. He equated investing and declaring yourself a monetarist economist to “pouring gas over your head and lighting yourself on fire.”

One thing that Larry told me that was really compelling to me was this. The Chicago school tries to make conclusions about society and the marketplace with idealistic but false assumptions that was often created to fit into a math model or equation nicely. Math is a set of deductive statements, so while math can arrive at a conclusion because you can logically follow a series of deductive statements, your conclusion can still be wrong because the assumptions were wrong. In other words, does it make sense to say, “my sociological conclusion is correct because on an equation, one side is equal to another”?

When you make a statement affecting society, you don’t say that you are right and pull out a piece of paper with an equation or a graph. Larry stated that all monetarists have are assertions, statements without supporting evidence, with a bunch of math thrown in. Keynesianism has evidence from the real world, from the private sector; monetarists only has rhetoric and math equations developed from the public sector.

It was a very interesting interview, and I can’t help but to be compelled by his arguments. I am now even more interested and excited to interview some monetarists to rebut Larry’s arguments. Well, as soon as they come out of hiding.