For inflation hawks on Wall Street, he may be the most dangerous man in America.
Ever since Paul Volcker replaced the now forgotten G. William Miller as Federal Reserve chairman in 1979, it has been conventional wisdom on Wall Street that the Fed's main job is to enforce price stability, and that doing anything else is dangerous.
The failure of Keynesian economists to explain the stagflation of the 1970s caused their theories to be overthrown by a new classical economics, marked by such concepts as a "natural rate of unemployment" and the idea of "rational expectations." The economics of Milton Friedman overthrew those of Keynes.Upon accepting his Nobel, for a paper opposed to rational expectations, Akerlof delivered a lecture that directly challenged the natural rate theory. Drawing on sources as diverse as children's book author Richard Scarry and Britain's Oliver Cromwell, he practically begged the new classicial economists to "think it possible you may be mistaken." He even called Fed governors obsessed with inflation "dangerous drivers." Inflation hawks may be thinking hard about this today, when new Fed Chairwoman Janet Yellen takes her first press conference, with economists and investors alike sifting through each remark for signs of future Federal Reserve policy. That's because Akerlof and Yellen have been man and wife since 1978. They actually met at the Fed, at an overflow table during a lunch for visiting speakers. Although former Chairman Ben Bernanke used Friedman's monetarist theories in fighting the Great Recession, Akerlof and the New Keynesians believe that competition is imperfect, that government can use both fiscal and monetary policy to stabilize markets. Austrian economists deride all this as a "pink dream." Thomas Sowell has called Yellen a "return to Keynes." Those predicting imminent disaster for the economy, such as Paul Craig Roberts and Peter Schiff, base their belief on an assumption that the economics of Akerlof and, thus Yellen, must be wrong.