A Stitch in Haste

A Princeton economist provides a roadmap:

With only minor injustice, one may take this as the overarching mantra to which the core of the economics profession marches. Government is accorded a beneficial role in this vision only to provide purely public goods, such as national defense; to remove private-market imperfections, such as monopoly power on either side of the market; or to deal with so-called spill-over effects from private decisions, which economists call “externalities.” These exceptions aside, unquestioned belief in the sagacity, efficiency and beneficence of private markets reigns supreme.
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This analytic structure, formally called “neoclassical economics,” depends crucially on certain unquestioned axioms and basic assumptions about the behavior of markets and the human decisions that drive them.

This alleged “crucial dependence” on “unquestioned axioms” explains, we are told, why

Fewer than a dozen prominent economists saw this economic train wreck coming — and the Federal Reserve chairman, Ben Bernanke, an economist famous for his academic research on the Great Depression, was notably not among them.

So, to review:

1. Neoclassical economics says government should not intervene in markets without a compelling reason such as public good provision, monopoly regulation or correction of externalities.
2. The government intervened in a market — housing and mortgage lending — without a compelling reason.
3. Bad things happened. Very bad things.

Conclusion: Neoclassical economics is worthless.

And we wonder why most college graduates, despite taking at least one economics course as undergraduates, are worse than illiterate when it comes to economic policy analysis.

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More:

An inference drawn from the profession’s credo is that private markets invariably are self-correcting and are driven by rational human beings whose careful decisions serve to allocate scarce resources efficiently — that is, these decisions maximize a nebulous thing economists call “social welfare.”

This is true — up to a point. Since interpersonal utility comparisons are impossible, the notion of “social welfare” is also impossible.

But who is guiltier of invoking the fiction of “social welfare” as the basis for economic policy prescriptions — neoclassical defenders of laissez faire or neo-Keynesian defenders of unbridled income redistribution and economic interventionism? Economist, heal thyself!

Finally, note that there is another, far more powerful defense of capitalism than the “unquestioned axioms and basic assumptions” of neoclassical economics and its “social welfare” predictions. And that is the moral defense of capitalism: the remarkably modest suggestion that an economy based to the greatest extent possible on voluntary exchange among competent consenting adults rather than on government coercion (i.e., majoritarian looting) might — just might — be “the greatest good for the greatest number” regardless of what the economic data (or the economists who parse them) might otherwise suggest.

Filed under: Capitalism, Libertarianism, Taxation & Fiscal Policy