What We Are Up Against?

Check out this NYT article on the free market ideology.

The problem is that various statements in the piece are so misinformed theoretically, empirically, and policy application wise that it is hard to know where to start to set the matter straight.  But the article is extremely useful as a means to remind us as economic educators that our work is cut out for us and that it does take varied reiterations to force alien concepts upon reluctant minds.

Comments

[John V]

wow.

This quote jumped out at me:

"But in Washington, and under the roofs of many homes now worth less than a year ago, there appears to be a shift in the nation’s often-ambivalent attitude about regulation."

Even considering the context about subprimes, statements like this just baffle me and show how some can tie events together in ways that don't make sense.

When I see statements like this I think of: "Hey diddle diddle, the cat and the fiddle......and the cow jumped over the moon"

Just a jumble of ideas that make little real sense when you put them together.

[Mario Rizzo]

This is not quite as bad as I feared. But then I expect a very low level of economic literacy. The NYT author is right in saying that a lot of people, including economists, are finding new reasons for regulation. I would draw this bolg's readers especially to those promoting the idea of cognitive and behavioral biases. This is not market failure in the traditional sense of, say, externalities. It has to do with the persistent and systematic mistakes market participants are alleged to make in important contexts. This is the new frontier of criticisms of the market. A whole new ballgame. (So far Vernon Smith's approach has not gained much traction outside of GMU and environs.)

[Adam Martin]

If you want to be really scared: http://www.governmentisgood.com

[matthew mueller]

This is a difficult article to respond to, simply because it is arguing in so many directions. If I had a 30 second response, I would say that market imperfections should not lead to greater government oversight and regulation. The same things that cause market imperfections are typically even more pervasive in the political sphere. The trick is finding an appropriate balance or trade-off between unstable and imperfect markets and rapacious and uninformed government bureaucrats. Frank Knight writes about this in "The Ethics of Competition" and also Elinor Ostrom in "Governing the Commons". Remarkably, both works arrive at the same conclusion: a preference for "decentralized institutions." This is the direction I think we should be moving in. It is imprudent to base one's defense of cooperation and opposition to government regulation on arguments premised on the notion that markets function automatically in the absence of external disturbances. Instead, I think it is important that economists recognize the limitations of the laissez-faire ideology while still emphasizing the reality of government failure. I think the work of Frank Knight in this respect needs desperately greater elaboration.

[Jon]

Holy crap Adam Martin ... what an absurdly frightening website.

[Dain]

Jeffrey Friedman has been on this track for some time, choosing to emphasize the failures of politics rather than the glories of the market. For any fan of the free market hoping to avoid being tagged as an "ideologist" (even if they are!), Friedman offers sound utilitarian reasons for de facto support.

[Bogdan Enache]

Professor Rizzo is right ! The normative/political recommendations that stem from behavioural economics lately are extremely worrying and they argue on a very different level compare to traditional anti-free market economic theories.

I know professor Rizzo wrote about soft paternalism, but there are behavioural social scientists whose conclusions seem to advocate what I think can be labelled without much error as hard paternalism.

For example, here's an essay by Barry Schwartz developing the very uncommon and paradoxical idea that freedom of choice and self-determination are actually a tyranny of some sort :

http://www.swarthmore.edu/SocSci/bschwar1/self-determination.pdf

He makes a lot of interesting arguments with which one or the other might agree in his every day life, but the political implications of his ideas, basically that the government might actually "free" us by reducing and directing our choices are very suspect to say the least.

In the end it seems that this critique of free markets and a liberal order in general is based on the old Marxist theme of alienation, restated in a very clever and sophisticated way.

[Peter Boettke]

Knight was no doubt a brilliant economist, but he is also responsible for many of confusion. He is responsible for the wide scale adoption of both perfect competition as a benchmark, and the circular flow model of the capitalist process. The irony of the first problem is that he actually was a classic 'argument in contrast' model in Risk, Uncertainly and Profit, but in Ethics of Competition he uses the model as a normative benchmark.

Ross Emmett is probably the leading scholar of Knight studies at the moment.

However, I also think Laissez Faire is being used in the sense the critics of the system used it rather than its advocates. Laissez faire in the language of Adam Smith is not asocial, atomistic, statis and 'perfect'. It is a comparative institutional analysis that was in classical economists and up thru to the Austrian economists of Mises and Hayek.

So I find it somewhat strange when words get twisted so that Austrian economists are being chided for promoting a perfect market model, and theoretical agnosticism is being held up as theoretical sophistication.

Can someone point me to the most egregious examples in Mises and Hayek where their words could be interpreted as them claiming that markets are perfect?

As a counterpoint, I suggest Hayek's "Individualism: True and False" in Indvidualism and Economic Order, p. 11ff where he discusses what Adam Smith and his contemporaries were actually arguing.

Perhaps we could compare notes.

[ralph r. emmers]

An old roommate of mine in Amsterdam, whom I otherwise have no contact with anymore, sent me the link to this article, knowing that I left for the United States to study free-market economics.

People like him, smart young pro-American-Liberal Europeans, who download and watch shows like Stephen Colbert, are an important category of people we can win over to our side. They are anti-Bush, anti-Republican, anti-Religious, but if we come up with good arguments they might become pro-market.
In Europe almost no one is consistently arguing the libertarian viewpoint. The young elite now get their information from the Naomi Klein's and the NY Times op-eds, the old elite is solidly socialist, and the right is corporatist or racist instead of individualist.

If we are serious about influencing the world towards a more pro-market perspective we *need* to take on these articles, however poorly written they are.

[matthew mueller]

"Indivdiualism: True and False" is an excellent essay, and shows clearly that Hayek was not an advocate of perfect competition in the [R]ationalist, constructivist sense. However, I do believe that Hayek overstated the "self-correcting" tendencies of the spontaneous market order, a view that is shared by J. M. Buchanan in "What Should Economists Do?" where he puts Hayek in the "Panglossian Category" which states that invisible-hand processes give rise to beneficial institutions through a series of competitive (group) selection and evolutionary adaptation.

And with Mises, I think these errors are even more conspicuous because a close reading of his work will quickly reveal many inconsistencies. Without going into too much detail, I will just direct you to Vaughn's book "Austrian Ecnonomics in America", where she writes "He (Mises) never really considered possible sources of disorder internal to the market; disorder was an exogenous phenomenon brought about by government regulation. In this attitude, we should recall, Mises is really not very different from many neoclassical economic theorists" p. 90. Mises speaks of speculative human action, of constant change, individual reevaluation, profit AND loss, uncertainty of the future, disequilibrium prices etc. and yet tried to impress on his readers the idea that markets are fundamentally orderly.

Now, orderly markets are different from perfect markets, and in this respect I have a lot of admiration for the attention Austrians pay to economic processes. But it should be stressed that the policy conclusions Austrians espouse are identical to those making a case for laissez-faire predicated on the perfect competition model. And this is where Frank Knight and the Chicago School would probably come in.

[John V]

Matthew,

one observation:

"But it should be stressed that the policy conclusions Austrians espouse are identical to those making a case for laissez-faire predicated on the perfect competition model."

Now I'm not an economist. Heck, I wouldn't even call myself "Austrian" since I haven't studied enough. I'm like that laymen student of economics (as described in a previous post) who has read several economics books...some of them "Austrian"....BUT...who has never had formal education in it. Nevertheless, from what I understand, neo-classical economics and Austrian school may agree on many policy prescriptions but for different reasons.

And if you've ever followed any Mises Media files where the likes of Klein, Salerno, Murphy and others explain the difference between Austrian and Neo-Classical foundations, you'd never know that the two economic perspectives actually arrive at mostly the same conclusions...if you didn't already know. The Austrian Economists I mention above are very clear that they disagree with the soundness of Neo-Classical Theory and prefer the Austrian approach to explaining economics phenomenon.

I guess what I'm trying to say is that Neo-Classical policy predications on perfect markets are irrelevant to identical Austrian policy predications since they often arrive at the conclusion but for different reasons and from differing methodologies.

I also wonder if your reading (and perhaps Vahn's) of Mises isn't a little uncharitable or slightly misleading. But again, I'm not really in much of a position to elaborate so I won't.

If I'm on to something with any of what I've said, perhaps Peter or Steve could comment...and if I'm not, perhaps they could explain where I'm erring.

[G]

"...it does take varied reiterations to force alien concepts upon reluctant minds."

I keep wondering how the socialists and interventionists do it so well? Sigh.

Mathew,

Those things such as speculation, profit and re-evaluation apply to all human action, not just markets. Governments include speculation without the direct feedback of the price mechanism.

[Peter Boettke]

Matthew,

I think you are reading Buchanan's essay wrong. His criticism of Hayek is NOT on his depiction of the market, but on his depiction of the application of spontaneous order to the legal and political framework. This is where it is claimed that Hayek is Panglosean.

Now there is a debate on Hayek's Pangloseanism in the journal CPE with a wonderful counter-argument by Glen Whitman that you can probably access on line at Glen's site. Also Leland Yeager has stressed this in response to people that claimed that Hayek was an irrationalist.

The question of policy similarities and yet different methods to achieve them is a very interesting one and actually one that I would think with your interests in institutions you would clue into. Think of it this way --- a 2 by 2 matrix --- rows representing social order or social disorder, columns representing simple problems situation, or complex problem situation. Neoclassical theory represents order/simple cell; Marxist represent disorder/simple cell; Post-Keynesian and Market Failure theory represents disorder/complex cell; and the Austrians/NIE represent the order/complex cell.

The basic idea is that order is not produced by behavioral assumptions, but institutional conditions/contexts.

Pete

[Josh]

Adam, what did you expect from a professor who got his degree at UMass and teaches in Massachusetts?

My apologies to everyone for the spillover effects from my home state.

[Jon]

Quibbles over Austrian vs. Neo-Classical theory aside ... the problem is that this NYT article pretty accurately depicts the average American layman's view of what students and proffessors of free-market economics think.

I can't count the number of times that I've had to correct people on what I beleive when I tell them I'm a free-market fan.

Oftentimes they leave with a "huh, well I never thought about it that way" sort of response. The problem is that enemies of free-markets can just pull out anecdotes as evidence of market failure and demand intervention. It's attractive, I'll give them that.

So I guess my question is how do we (whether you consider yourself Austrian, Neo-Classical, or simply a layman) respond?

[Jack McHugh]

Related to "soft paternalism" and the psychological aspects is this:

The People’s Romance: Why People Love Government (as Much as They Do)
By Daniel B. Klein
The Independent Review, Volume 10 Number 1, Summer 2005

'Why do some people never support a free-market proposal, even when they think it would work better than government intervention? For many, the reason is that collective political action offers the romantic notion that “we’re all working together,” while market mechanisms seem to them less lofty because they rely on the self-interest of individuals acting privately.'

[Steve Horwitz]

Matthew,

I'm not clear why the fact (and I'm not sure it's even a fact, but I'll grant it for the sake of argument) that some folks get to laissez-faire from perfect competition counts against Austrian arguments for laissez-faire. As others have noted, it simply isn't necessarily the case that those who adopt PC approaches even get to the same policy conclusions as Austrians in a few cases.

However, perhaps the error is more general. Perhaps the PC model is really more appropriate to centralized economies. There's a *reason* Lange made the arguments he did in his 1936 article, which essentially claimed that the standard model could work just fine (I'd say "better") for an economy with state-owned means of production and centrally-set prices.

Perhaps those who get l-f conclusions from the PC model are get to the "right" results for all the wrong reasons. As social scientists, don't we want to understand the world first and then get to policy conclusions next? How is the Austrians' superior understanding of how markets worked somehow minimized because people with a weaker understanding reach the same policy conclusions?

[Bill aka NO DooDahs!]

My major successes in converting people to the notion of free markets come from negative attacks.

(1) Point out that "government" doesn't work. Expose every failure of "government." If you do this successfully, they will start looking for something that DOES work.

(2) Point out that many things which are pointed to as "market failures" are, in actuality, no such thing. For practically ANY thing they want to label as a "market failure," I can find that (a) the market was not free, but was in fact regulated by "government," and (2) an aspect of causality for the alleged failure was actually an unintended consequence of prior "government" regulation.

I learned this via deconstructing my own slow and torturous conversion to free market anarchism, and realized that the best way to convert people might just be the way I converted myself …

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