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Monday, July 28, 2008

Economics "is at Last a Science"

The subtitle on this article says:

The dismal science is at last a science—and the world is the beneficiary.

Here are a few parts of the article, though much is omitted, which is mostly an argument about the virtues of the market system:

Economics Does Not Lie, by Guy Sorman, City Journal: Though economics as a discipline arose in Great Britain and France at the end of the eighteenth century, it has taken two centuries to reach the threshold of scientific rationality. Previously, intuition, opinion, and conviction enjoyed equal status in economic thought; theories were vague, often unverifiable. Not so long ago, one could teach economics at prestigious universities without using equations and certainly without the complex algorithms, precise (though not infallible) mathematical models, and computers integral to the field today.

No wonder bad economic policies ravaged entire nations during the twentieth century, producing more victims than any epidemic did. ...

[Today] only one economic system exists: market capitalism. Virtually everywhere, the public sector has given ground to privatization; currency has escaped state control, to be governed by independent central banks; competition has taken wing, thanks to the deregulation of markets and the opening of borders; taxation has become less progressive, so as to encourage entrepreneurs and create jobs.

The results have been breathtaking. Opening economies and promoting trade have helped reconstruct Eastern Europe after 1990 and lifted 800 million people, many of them in China, Brazil, and a now-license-free India, out of poverty. Even in Africa and the Arab Middle East, nations that have embraced capitalism have begun to escape from the terrible underdevelopment that has long plagued them.

Behind all this unprecedented growth is ... a scientific revolution in economics, as yet dimly understood by the public but increasingly embraced by policymakers around the globe. The revolution began during the sixties and has finally brought economists to a broad, well-founded consensus about what constitutes good policy. ...

If economics is finally a science, what, exactly, does it teach? With the help of Columbia University economist Pierre-André Chiappori, I have synthesized its findings into ten propositions. Almost all top economists—those who are recognized as such by their peers and who publish in the leading scientific journals—would endorse them (the exceptions are those like Joseph Stiglitz and Jeffrey Sachs, whose public pronouncements are more political than scientific). The more the public understands and embraces these propositions, the more prosperous the world will become.

1. The market economy is the most efficient of all economic systems. ...

2. Free trade helps economic development. ...

3. Good institutions help development. ...

4. The best measure of a good economy is its growth. ...

5. Creative destruction is the engine of economic growth. ...

6. Monetary stability, too, is necessary for growth; inflation is always harmful. ...

7. Unemployment among unskilled workers is largely determined by how much labor costs. ....

8. While the welfare state is necessary in some form, it isn’t always effective. ...

9. The creation of complex financial markets has brought about economic progress. ...

10. Competition is usually desirable. ...

These ten propositions should guide all economic policymaking, and to an increasing degree they do, worldwide. ...

Some critics charge that economics is not a science in the way that, say, physics is—after all, economists can’t make precise predictions, as an exact science can. But this isn’t quite true: economists can predict that certain bad policies will lead necessarily to catastrophe. If economics, a human science, lacks the precision of physics, a natural one, it advances the same way—evolving from one theory to the next, each approximating a reality that eludes our complete grasp. ...

[T]he complete realization, in practice, of the findings of economic science ... has not arrived. The free market still has enemies and critics, ranging from those who dream of a world more just, more spiritual, or transformed in some other utopian way to those who simply seek to defend their own narrow material interests to those legitimate researchers who try to look beyond the market. And we must not overlook ignorance: economic principles aren’t widely understood among the public or even among lawmakers. The indisputable fact that the world has experienced a long period of growth as global trade has expanded remains strangely unknown. Doubtless the news is too good.

In the future, the threat to the beneficent influence of economic science will come less from tired socialist revolutionary rhetoric than from new dangers, such as terrorism and epidemics. ... Terror and epidemics could both unleash political upheavals that would undermine the market order itself.

Then there’s the fear of ecological disturbances, which could result in incoherent policies that wouldn’t necessarily diminish risks to the environment but might prevent development and thus harm the interests of the poorest peoples. ...

Another danger is inseparable from the very nature of economic systems: growth is cyclical. Despite the present anxiety about a recession, the time of major global economic crises seems to have passed, in large part because the progress of economic science allows governments and economic actors to understand crises and manage them better. The Great Depression probably couldn’t happen again...: the Federal Reserve, the European Central Bank, and the Bank of England have demonstrated as much in the current mortgage crisis by supporting the banking system. But smaller crises are inevitable, bound up as they are with innovation—and as the new drives out the old in creative destruction and forces sometimes painful adaptations, we find these upheavals harder to bear as we grow more accustomed to perpetual growth.

Similarly, free trade means that some people will lose their jobs, as we all know; foreign competition can wipe out entire companies or even entire industries. We all know it because, as Friedman argued, layoffs and closings get disproportionate media coverage. Meanwhile, nobody talks about the ongoing reduction in prices for consumers and investors, scattered among a huge number of beneficiaries. That helps explain why politicians are prone to deride free trade and voters are too often ready to agree.

To help the losers in the free market, government shouldn’t back away from either free trade or creative destruction and start subsidizing doomed and obsolete activities, a protectionist course that guarantees only economic decline. Instead, it should help the losers change jobs more easily by improving educational opportunities and by facilitating new investment, which creates more employment. An essential task of democratic governments and opinion makers when confronting economic cycles and political pressure is to secure and protect the system that has served humanity so well, and not to change it for the worse on the pretext of its imperfection.

Still, this lesson is doubtless one of the hardest to translate into language that public opinion will accept. The best of all possible economic systems is indeed imperfect. Whatever the truths uncovered by economic science, the free market is finally only the reflection of human nature, itself hardly perfectible.

The place where this article appears, City Journal, is published by The Manhattan Institute:

The Mission of the Manhattan Institute is to develop and disseminate new ideas that foster greater economic choice and individual responsibility.

Since the Institute supports free market solutions to policy problems, you might think this article - which promotes the wonders of capitalism - would find a receptive audience among Libertarians. But Jeffery Tucker of the Ludwig von Mises Institute is unimpressed by this effort:

You call this capitalism?, by Jeffrey Tucker: Here is a huge piece in City Journal by Guy Sorman, the ostensible purpose of which is to herald the triumph of markets over socialism. He tells us that economics teaches this. Fair enough. But once you get into the article, you will find support for pollution trading permits, US imperial patrol of seas, central banking, bailouts of failing banks, patents, limited welfare, restrictions on insider trading, forced transparency rules, and a host of other interventions slyly mentioned in passing as somehow essential to markets. If this person were writing in say 1900, he would be considered a more socialist than capitalist in his thought, since his tendency is support every institution that was born of a market failure argument. Hey, I'm glad he is against wholesale nationalization but that's about all that can be said for this disguised treatise on behalf of the interventionist social-democratic state. If this writer ever confronted a real supporter of the market, he would probably recoil in horror and start talking like a post-Marxist: dog eat dog, the jungle, survivalist of the fittest, and all that.

I'd think there's something in this article for just about everyone to object to. For example, I disagree that "Milton Friedman’s ... 'monetarism,' considered revolutionary when first proposed in the sixties, is now common wisdom." Not exactly, unless you push pretty hard on the definition of monetarism so that it includes interest rate targeting. further than Friedman would have been comfortable with.

As another example, the article also comments on stabilization policy (in a section of the article that is not quoted above):

Governments also have the capacity to intervene and create seemingly positive outcomes when it comes to short-term growth, which is subject to incessant fluctuation. Yet the eventual effects of such interventions, which are more likely to have political than economic motivations, are always costly...

If I thought the costs of intervention to stabilize the economy exceeded the benefits, I wouldn't support these policies, nor would anyone else. If things would be much worse without the polices - suppose we had managed to bring about a Great Depression type financial collapse by refusing to respond to the current financial crisis or by responding in ways that reinforced the crisis -  then the policies haven't cost us, they have saved us from something even worse.

Your turn. Comments?

    Posted by on Monday, July 28, 2008 at 12:15 AM in Economics, Science | Permalink  TrackBack (1)  Comments (116)

          

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