Friday, January 8, 2010

From Economics to Ideology to Real World Disaster?

Two interesting articles I recently read tied nicely together as a story about how the search for intellectual sophistication and grand theory in economics generated a doctrinaire belief in the free markets marvels and ability to police itself, which became an intellectual alibi and ideological fuel for a "hands-off-the-economy" Conservative movement, that in turn removed all road-blocks to a Financial Crisis and completely bungled the reconstruction of Iraq.
Phew... that was a long sentence...
Anyway - this piece by Kenneth Davidson in the American Interest argues that George Stigler and Milton Friedman turned the Chicago School of Economics into the hotbed of laissez faire economics that it is still regarded as today. And how this in turn helped along a new policy of deregulation that created the recent Financial Crisis.
Once it abandoned its political concerns with economic power, Chicago theory, with its axioms of profit maximization, perfect information and self-correcting markets, had no advice to limit the downside risks of economic and financial disaster. The fruitful blending of social and economic concerns pioneered by Simons may not be suitable to a modern economy, but his concern about the dangers of centralizing economic power remains an issue that is ignored by the Chicago School. Doctrine supplanted healthy intellectual doubt, theoretical purity trumped common sense and historical memory, acolytes took over from masters, and a different kind of irrational exuberance was the result. We’re all now paying the price.
The other piece, by Naomi Klein, in the Atlantic from 2004, describes the reasoning behind the Iraq reconstruction effort - basically, the attempt to set up a totally free and rigorous free market paradise that would have every capitalist in the Milky Way clamoring to invest and generate jobs, wealth and prosperity for all. While clearly biased against this ideology, there are numerous interesting quotes and witty observations - though it seems weird to both argue that their attempt was foiled because it was illegal against international law and to argue that the chaos of Iraq that followed should be proof that a full and perfect implementation of free market laws and regulations does not work.
And - as always - both authors can be attacked by any economist worth his salt. Because academic economics, of course, has nuances and spends much of its time discussing and analyzing flaws and caveats to the simplified picture that these authors attack. Its just that no conclusion ever lives on except as it does in broad stroke form. Friedman's essay on positive economics becomes "unrealistic assumptions are fine and lead to true welfare conclusions because it is all as if theory". A "perfect competition" reference model and "rationality assumption" with selfish preferences becomes "the broad truth" and what policy makers with bachelors in Economics and even the intuitions of many sophisticated researchers reach for.

Or something like that - what's the point? - if you recall this in the future it may all be reduced to "he blames economics for Iraq and everything that goes wrong" anyway... ;-)

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