Greenspan's Olympian view of the economy over decades and even centuries is surely worth pondering. The Economics 1 I learned at Harvard in 1964 said that Keynesian economics had all the answers: The course of progress in history is to move from less to more government regulation and government manipulation of the private sector economy, and today (that is, 1964), we have figured out just how to manipulate it.
Ten years later it was apparent that all that was wrong; but it wasn't apparent how the economy or economic policy could be fixed so as to perform better. The answer, according to Greenspan, turned out to be: Let free markets work with less regulation, and in time they would produce better financial mechanisms and information technologies. Interestingly, a case could be made from his remarks that the political marketplace worked, if unknowingly, to help produce these results. Greenspan made the point that presidents and politicians of both parties have moved toward deregulation. True: Jimmy Carter and Edward Kennedy played major roles in airline deregulation, for example. Ralph Nader was a force for deregulation, as were market economists like Milton Friedman. Lower taxes were largely a Republican contribution but not entirely: Bill Bradley and Dan Rostenkowski played critical roles in the 1986 tax law lowering rates and eliminating preferences. The political marketplace was sending signals that the results of heavy regulation and high taxation weren't acceptable, and politicians, Democrats as well as Republicans, responded to the signals in the political marketplace, as they usually but not always do.
The danger that Greenspan implicitly warns against is that the politicians, or some of them, will forget the lessons of the past 30 years. He warned against protectionism, but Democrats in the House were now in lockstep opposition to the Central American Free Trade Agreement. Democrats in their all-out opposition to George W. Bush seem to have forgotten some of their own policy successes in the 1990s and before. I think one of the purposes of Greenspan's speech was to remind them.
Economics is the one academic discipline that has clearly moved to the political right over the past long generationand, perhaps not coincidentally, it is the one social science most closely disciplined by real-world data. It turns out that history doesn't always move left, away from markets and toward government regulation and control. In Greenspan's version, history moved left because of perceived market failure in the 1930s and perceived government success in World War II, but when the resulting arrangements stopped working well, history moved to the rightto markets, flexibility, resilience. We have learned a lot about the economy and economic policy since the 1970s, and no one has taught us more than Alan Greenspan. I wish him luck on developing metrics for resilience.