Truly a Dark Age for Economics in the Midwest...

When last we saw the University of Chicago's Eugene Fama, he was mistakenly claiming that the NIPA savings-investment identity had as its consequence that increases in government spending necessarily could not boost employment and production.

It is hard to characterize the level of this mistake. I would like to say freshman-level, but my freshmen don't make it.

Now comes Eugene Fama again to make the false assertions that: (a) developed-country growth sped up after 1980, and (b) China's boom since the Southern Expedition of Deng Xiaoping is due to modern finance.

Paul Krugman watches the train wreck:

The lost generation - Paul Krugman Blog - NYTimes.com: Matthew Yglesias catches Eugene Fama making a strange assertion:

Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth...

The assertion about developed countries is, of course, entirely wrong. From Angus Maddison’s dataset:

And as Matt points out, the giant success story in the developing world was China, where the driver was the end of Communism — not modern finance. Actually, it’s even more absurd to give finance the credit than Matt realizes: China has not been experiencing net inflows of capital, partly because it has maintained capital controls, effectively insulating itself from the whole finance thing.

So why does Fama believe that something wonderful happened around 1980? Part of it, I suspect, is that in his milieu the politically correct thing is to pretend that nothing good happened until Reagan came along...