Simple Answers Do Not Always Mean Simple Minded

Tyler Cowen has a list 15 points summarizing his position on the crisis.  To me economic is a more blunt instrument than to Tyler, who views economics as a more subtle tool of reasoning.  As a result, on many issues Tyler will see complexity and multiple causes, and I see more straightforward answers.  This is especially true when it comes to issues of public policy.

I wanted to address one of his points:

11. If someone is pushing conclusions and not identifying the potential weak points in his or her arguments, be suspicious.  Also beware of anyone pretending to offer you simple answers.

But I think Tyler is underestimating that serious thinking can in fact lead to simple answers.  Richard Epstein's Simple Rules for a Complex World is such an example.  Milton and Rose Friedman's Free to Choose is another example.  How about The Road to Serfdom?  It is often portrayed as a very simplistic book, but actually it contains a very subtle and sophisticated argument that results in a rather straightforward answer.

We need something similar when it comes to the current history, I would contend.  Is the regulatory history that is relevant for the current crisis complex?  Of course it is.  Are the issues with financial instruments that have evolved recently difficult and complex?  Of course they are.  But can we tell a coherent story about a decade long intervention into the financial services market that has distorted incentives and information?  Of course we can.  We had easy credit, government policy initiatives, and government sponsored enterprises that operated outside the normal forces of market discipline.

In the meta-debate --- market versus governemnt --- the answer must be two fold: (a) free market economy is NOT the reason we are in this mess, but we are in this mess due to government policies; and (b) that a return to market discipline is what is required to fix the current mess, including market correction to the distortions caused by government policies.  When you make that assessment of the situation, I would argue that the answer to the question of bailout plans is very simple --- VOTE NO.  Responding with even easier credit and more intervention will only make the matter worse down the road.  It looks like this will be the outcome of the policy debates --- some form of a bailout that will "save us" from market correction now, only to have to deal with more serious problems "down the road".  I would argue we would be better off if we rejected all forms of bailouts.  But that simple answer I would argue isn't due to simplicity in thought, but instead the logical conclusion of some very complicated arguments about the role of money in an economy, the problems of fiscal imbalance, and the difficulties of government intervention.

Now, do I believe there are problems with the "secondary depression" -- as an economist in the tradition of Hayek, of course I do.  But I also am someone very suspicious of public interest explanations of politics, so I am skeptical that policies to address the "secondary depression" will be designed and implemented in a way that will address them effectively.  So I think we might need to go back to "simple rules".

Hayek often complained about "wooden conceptions of laissez faire" and I think I understand what he was talking about.  It is what I call "first principle libertarianism."  But I also think there is a way to defend the laissez faire principle in public policy without being "wooden".  For good or bad, that is what I think I am trying to do and teach to my students when it comes to public policy.  To provide "good reasons" for the laissez faire principle.

In this context, those good reasons are found in intellectual traditions ranging from monetary equilibrium theory, the theory of the market process, public choice theory, property rights theory, etc.  There are strengths and weaknesses in each of these perspectives and the goal is to synthesize the best of these traditions to forge a framework for interpreting current events.

In addition to reading Tyler, I would also suggest looking at Roger Koppl's Big Players and the Economic Theory of Expectations (2002).  Koppl argues that deviations from the neoclassical world to one where economic actors possess significant market power (Big Players) can in fact result in situations where destabilizing forces can take root in the system.  I don't view Koppl's argument as making a "market failure" argument, but instead a case for changes in the structural rules governing the system.  In short, there are constitutional political economy implications of the "Big Player" perspective. 

Comments

[Ed Weick]

Pete,
It appears to me that mere mortal political economic leadership is quickly losing its ability to have anything but a headline impact on the course of events now unfolding.
Economic truth is not optional; either you accept it or you will suffer the consequences.

How is that for a simple (simplistic?) answer involving the logical conclusions of some very complicated arguments proffered by the Austrian giants?
ED

[Daniel J. D'Amico]

Pete,

I read your post before Tyler's (revealed preferences I suppose). I had gotten the impression after reading yours but before Tyler's that you were summarizing his analysis and yours as being fundamentally similar. His - self-defined as complex and fanciful; yours - self-defined as straight forward and simple - but fundamentally similar.

After reading Tyler's post I fail to see much similarity. I'd be most interested to hear your take on some of Tyler's other points.

Specifically:

"2. We should use regulation to move more of the currently unregulated derivatives markets to the clearinghouse model.

5. The modified Paulson plan was better than nothing -- especially after the market had been scared --

6...give the battle-tested FDIC a much greater role in the whole process.

7. In the meantime the Fed should not worry much about inflation."

Did I misunderstand that you were describing a fundamental similarity to Tyler's analysis. If so you were pretty clear about your takes on the former, so if they are similar then I'm misreading Tyler's post. Is he arguing for something more market based than meets the eye.

At some level I'm tempted to say "complex be damned" especially if the answer is wrong. I haven't heard anyone arguing that government induced minority lending wasn't in part to blame (assuming minority means high risk lender and not purely based on race). If not then why the crises at all? Obviously people aren't paying back their mortgages.

I understand that Tyler likes creative solutions like betting markets and revealing information in non-conventional ways, but where does the rubber hit the road? There's no real mechanism for improvement and correction in those exercises.

[Matěj Šuster]

"...free market economy is NOT the reason we are in this mess..."

Yep, since we don´t have a free market economy, it obviously cannot be the reason we are in this mess.

On the other hand, too many market players (small and big) did act with embarrassing lack of foresight. Is it really that only government policies (monetary policy, systematic moral hazard etc.) are at the root of the current crisis? What about bad corporate governance, risk management, perverse incentives and asymmetric informations within corporations (too much stress on short-term (largely illusionary) profit) etc.?

[Matěj Šuster]

Dr. Boettke:
What is your reply to this Edmund Phelps´ claim:
http://online.wsj.com/article/SB122282719885793047.html

"I believe that leaving the process of recovery entirely to the healing powers of the banking industry, as libertarians suggest, would be imprudent, even if the banks could manage it. Lacking much government intervention, Japan's recovery took a decade. Sweden's recovery, with state intervention, took hardly any time at all."

[Ian Dunois]

Matej,
A speedy recovery does not necessarily mean that the problem had been solved. Government intervention is more like Chunk in the Goonies putting the statue back together. It appears to have been fixed but in Chunk's case he glued the piece upside down. The government's intervention would have a side effect, a side effect that they can not predict therefore creating a problem in the future which the government will have to intervene again in order to fix. The process is then just in a cycle broke->temporary fix->broke.

In short, Hazlitt says it in the first chapter of Economics in One Lesson. "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
Think long term not short term. Putting the dirt under the rug only works temporarily until the fine day one step pushes all the dirt out.

[Sukrit Sabhlok]

Early American history is full of very clear thinkers who offered simple, but sophisticated, solutions to societal problems.

Only since fashionable, but wrong, European ideas began to make their way into America did the Tyler Cowens' of the world start criticizing others for naively neglecting complexities. This is the sort of mentality that makes the average person trust people like Ben Bernanke or Hank Paulson; they think they have some sort of special insight into how to centrally plan the economy because, after all, they must understand the complexities of stabilization policy.

It has taken a great deal of effort by libertarian academics to bring home the basic point that simplicity is best. There is a simple solution to most of our problems: "Freedom". The common sense of mankind has been confounded by the notion that we need thousands of pages of legislation, bureaucrats, etc. running our life because the modern world is supposedly just too complex.

Complexity is the lie that sustains the State.