Economist Robert Higgs writes that a number of economists who have called themselves “free market” endorsed one statist scheme after another that lead the U.S. economy into the tank. Although he won’t mention names, nonetheless, they are legion, including one of Ronald Reagan’s chief economic advisors who now believes falling home prices have caused the recession.
Higgs writes that while he understands why Wall Street executives might have no problem grabbing loot made available by Congress, the economists who have endorsed some of these schemes are another matter:
But why have free-market economists and other commentators expressed approval of this blatant piracy? It now appears…that these free-market experts were not so expert after all. Indeed, many of them seem to have failed to understand how markets work and how government actions can hobble or kill those workings. Many have talked as if they actually believe in vulgar Keynesianism or other crackpot ideas – about “systemic risk” where none exists or about “missing markets” for poor-quality assets that only a fool would try to sell privately when the alternative of a munificent government buyout shimmers on the horizon.
While many economists have declared some real howlers, I should point out that many economists simply do not have the theoretical and analytical tools by which to logically analyze the present situation. Yes, I know that is a shocking statement, for many of these people have doctorates from the most competitive and highly-ranked graduate programs in the world.
Furthermore, while I have a Ph.D. in economics, it was not earned in a program that garners the academic respect of a Harvard or Stanford doctorate. Supposedly, that means I cannot criticize anything that the “high-level” economists say.
Yet, for all the calculus and the hard-to-comprehend statistical techniques they learn in graduate school and use in their “A” journal papers, many economists do not know economics. They might know academic economics, but they cannot comprehend economic logic, and that makes all of the difference.
Although I realize that this sounds arrogant, nonetheless it is accurate. The problems are not limited to “macroeconomics,” the study of the overall economy; difficulties also abound in “microeconomics,” which analyzes individual markets, consumer behavior and business firms.
For example, according to standard microeconomic theory, unless an industry is dominated by tiny firms with small production capacity and all goods sold in that market are exactly the same, there exists a market failure. That is right; according to the economics canon, any product differentiation is “proof” that the market has failed, and only can be set right by outside (read that, government) action.
In the real world, competition is defined by heterogeneity; people seek to demonstrate that their products are better than others, that there is a quality difference. Academic economists, however, hold that such differences demonstrate that markets are less competitive than what is socially optimal. (Joan Robinson, a student of Alfred Marshall and a developer of “imperfect competition” theory, wrote that such differences provided a “spatial monopoly” to producers and should be regulated by government.) Nor do they have a workable theory of capital, and they ignore the role of time and time preference.
On the macro side, things are even worse. Most economists receive Keynesian training in graduate school, and it dominates academic textbooks. Money is said to be a state-created quantity variable, and texts declare market economies are prone to collapse unless government intervenes.
Thus, the present foolishness we see from policymakers – that the government literally will spend its way out of this recession – comes right from the academic texts. Ironically, even though these policies defy economic logic, nonetheless most economists claim that the criticisms of the Austrian School, which dismantle these crackpot theories, are “discredited.” (Henry Hazlitt never even went to college, yet he was a better economist than most Nobel Prize winners.)
Why? Because academic economists said so, and according to them, that is the “market test.” That present government policies will lead only to more unemployment and more economic misery is irrelevant. As long as the mathematical theories claim government can “fix” an economy, government always is successful, even when it isn’t.
