Are You Not Entertained?!

The stock market fell again today. Are you not entertained?

But why should anyone be surprised by the current financial carnage?

Government generated perverse incentives and distorted information led to imprudent private decisions followed up with massive government interventions that produced additional perversities in the incentive structure and distortions in the economic signals. 

Regime uncertainty has set in as government policies have taken one wrong turn after another and destroyed the investment environment and the opportunities for entrepreneurial action to produce the necessary market adjustments.  Thwarting market corrections is not the way to fix this, but the adjustments now required to clear out the myriad of malinvestments will not be accomplished overnight even if government got completely out of the business of screwing up the economy.

But this persistent meddling by government into the economic system isn't really new. The wrong turns have been taking place for decades.  Look at our fiscal situation.  Look at our monetary policies.  Look at the regulatory regime.  Adam Smith argued that the power of self-interest is so strong that it often is able to overcome numerous obstacles that human folly puts in the way.  Sometimes market-oriented economist have confused this power of self-interest to overcome obstacles with an actual ideological shift in government policy.  But in more sober moments of reflection, the best of the market-oriented economists from Friedman to Buchanan, let alone even more fundamental market advocates like Sennholz and Rothbard, recognized that even the Reagan revolution was little more than rhetoric.  These thinkers remembered that Smith also argued that what was folly for an individual in terms of financial irresponsibility and imprudent decision making was surely folly for a nation and could lead to its ruin.

This proposition was overturned by the new fiscal religion of Keynesian economics, and was embodied in policy practice throughout the Western democracies after WWII.  Keynesianism supposedly was intellectually defeated in the 1970s.  That claim was, and has continually, been challenged by thinkers from James Tobin and Robert Solow to Joseph Stiglitz and Paul Krugman.  But what cannot be denied, is that the tools of economic policy remained fundamentally Keynesian throughout the years.  Sometimes we had conservative Keynesianism, other times we had liberal Keynesianism, but we always had Keynesian policies in practice.  Throughout the years the levers of fiscal and monetary policy were employed in the attempt balance the economy.  Macroeconomic demand management in concert with microeconomic regulation has been the governing norm throughout the world --- starting with the Western Democracies of the US and Europe, spreading throughout the globe via the IMF and World Bank.

James Buchanan and Richard Wagner published Democracy in Deficit: The Political Legacy of Lord Keynes in 1977, but its analysis is as relevant today as then.

The bottom line: political capitalism is not laissez faire capitalism; the hampered market economy is not the unhampered market economy.  We are currently seeing the consequences of political capitalism and the hampered market economy.  Economic science has been perverted, economic teachings has been perverted, economic policy has been perverted --- all by politics.  To continue down our current path is to reinforce the perverse folly of politics that has threatened the viability of the current economic system.

Addendum: Important quote to thinking about from Democracy in Deficit --

Intellectual error of monumental proportion has been made, and not exclusively by the ordinary politicians. Error also lies squarely with the economists.

The academic scribbler of the past who must bear substantial responsibility is Lord Keynes himself, whose ideas were uncritically accepted by American establishment economists. The mounting historical evidence of the effects of these ideas cannot continue to be ignored. Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians' ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax. "Democracy in deficit" is descriptive, both of our economic plight and of the subject matter for this book.

Comments

[Rafe Champion]

At a time of active and ad hoc intervention it might helps to underline the important difference between public administration by rules and orders.

http://clubtroppo.com.au/2008/10/23/rules-and-orders-the-dangers-of-ad-hoc-interventionism/

[matthew mueller]

This is a good post by Dr. Boettke. The most important thing students of economics should learn (after the fundamental principles) is the history of the evolution of recent economic thought. Boettke does a nice job briefly outlining the development of Keynesian economic policies (which are not isomporphic to Keynes's economics!).

The BEST book on this topic that everyone should read can be found here: http://www.amazon.com/Economic-Thought-Since-Keynes-Dictionary/dp/0415164540/ref=cm_cr-mr-title with a review by your truly. If I recall correctly (damn my poor memory!), the authors argue that on fundamental principles the Keynesians and monetarists (and other liberal variants) are in agreement. The real debate between people like Friedman and Tobin, for example, has occured in the political context. It is hard to identify any differences between Keynesians and monetarists today over the shape of the Phillips curve, for example. This is all the more remarkable considering, according to the authors, that the monetarist counter-revolutiion, directed against Keynesian economics, has really emerged from a complete misreading (or lack of reading) of Keynes's great 1936 book. After all, what was it that led Friedman's charge against Keynesian economics --- Money matters! No real Keynesian would deny that; in fact, they never have (I refer you to Paul Davidson and the Post Keynesian literature).

[Ian Dunois]

Thought you'd like this Matt.
http://econlog.econlib.org/archives/2008/10/work-safe_readi.html

[Ian Dunois]

Also since you have greatly increased many things on my reading list, thought I'd give you one.
Say's Law and the Keynesian Revolution.
Thanks to Adam Martin for the pointer to the book. It greatly helped me when I first read it last year.

[matthew mueller]

Thanks Ian. I just had my school library order a copy of the book; it looks good. Keep the suggestions coming!

[Ian Dunois]

No problem Matt. So when can we look forward to you starting a blog. You could trackback to the posts here and it will show up as a link above the comments and it will allow you to dictate the topics a little bit more to allow some better discussion. It seems you have plenty of time to write some posts, why not run your ideas through it? This would also save you time from having to type in comments as could always link to a post you wrote before.

[Daniel J. D'Amico]

Ah another Pete Boettke gem. Pete has this rare talent of force fitting Austrian economics into metaphors with popular films. Let's review:

1) Splash - the scientist finally shows them all wrong when he actually delivers a mermaid. How does the establishment react? "Go find us unicorn," they say.

Just sub in the business cycle of the Great Depression and we see a parallel to the Austrian school. They said it all along only to be dismissed to find the next one.

2) Just change the channel to The Princess Bride when Inigo slices the face of the six fingered man. "Offer me money, offer me power," he demands.

The six fingered man: "all that and more, anything you want."

Inigo: "I want my father back you S.O.B."

Now picture Hayek wining the Nobel prize only he says, "I want my liberty back."

No matter how hard one tries, restitution is only a proxy for the true loss that a victim endures. Somethings can never be undone.

3) And now we're given this post. I presume the economics profession as a whole are the competing gladiators. Us free market types we're not supposed to win but just entertain the political elites. But now it is our day, and what "are you not entertained?"

An honorable mention go to Ice Pirates as an example of Mengerian imputation theory.

[Pedro P Romero]

"Economic science has been perverted, economic teachings has been perverted, economic policy has been perverted --- all by politics. To continue down our current path is to reinforce the perverse folly of politics that has threatened the viability of the current economic system."
This is the reason like others I came to GMU not to be perverted...or diverted...to focus on the BIG questions...freedom...economic crises...

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