Wednesday, December 01, 2010

The Magic of the Marketplace and the Wisdom of the East

Tom Toles:

Why do we mistrust government, yet have complete faith in the market? "All have fallen short of the glory of God."  Two years ago Sandy Goodman wrote:

"Another big problem is the almost blind faith that Friedman's followers and most other present-day economists have in Adam Smith's "invisible hand." They believe that the free market, unimpeded by government, will almost inevitably produce good outcomes. This kind of thinking substitutes theology for economics. And many times, it just isn't true.

Smith, a Scottish philosopher and college professor, was, of course, the founder of modern capitalist economic theory. In context, it is clear that when he writes about "the invisible hand" in his first great work, The Theory of Moral Sentiments, and again in his more famous book, The Wealth of Nations, he is referring to the hand of God or some equally inexorable force of Nature. In "Moral Sentiments," published in 1759, he ties the invisible hand directly to God. In "Wealth," 17 years later, he is less specific. But here too, Smith portrays "the invisible hand" as a powerful, superhuman force that makes things turn out right, in spite of human selfishness and rapaciousness. Either way, Smith's premise is based on faith, rather than on observation.

If, however, one looks at human experience rather than invoking faith or religion, one must observe that all too often things do not turn out right. All kinds of economic calamities, not to mention genocides, natural disasters, disease pandemics, and other catastrophes have afflicted humankind since its beginnings, punishing good people as well as evil ones. In economic matters as in others, the invisible hand that makes things turn out right is often nowhere in evidence. The market often works, but sometimes it doesn't.

Actually, Smith himself acknowledges this when he writes that despite their purely selfish intentions men "frequently" end up promoting the common good. "Frequently" is a long way from "always." So even the founder of capitalist theory was not nearly as optimistic about "the invisible hand" inevitably creating "the magic of the marketplace" as are many of today's conservatives. Despite this, they continue to insist on citing him as the authority for their nonsensical claims about the infallibility of laissez faire capitalism.

Would that some of Smith's admirers also keep in mind other things he wrote. Earlier this month, former Fed Chairman Alan Greenspan, made the outlandish statement (especially given the proliferation of corporate scandals and the number of executives in jail) that "we bank on the self interest" of business people to be honest to "protect their reputations."

Adam Smith knew much better. He was quite properly suspicious of businessmen. "People of the same trade seldom meet together" Smith wrote, "but the conversation ends in a conspiracy against the public." Had he lived two and a half centuries later, he might have been referring to predatory lenders and dealers in credit default swaps.

Update: In his testimony on October 23 before a Congressional committee, Greenspan admitted that the current financial crisis had shaken his faith in free markets. He confessed:"I made a mistake in presuming that the self interest" of banks and other financial institutions would protect them from chaos. And when Congressman Henry Waxman suggested to the former Fed chairman that his ideology was not working, Greenspan agreed: "That's precisely the reason I was shocked," he replied,"because I have been going for 40 years or more with very considerable evidence that it was working very well." Apparently, Enron, the accounting scandal and many other gross defects in free markets over the decades made no impression on him."
"Enron's collapse...will remind everyone - some conservatives painfully - that a mature capitalist economy is a government project. A properly functioning free market system does not spring spontaneously from society's soil as dandelions spring from suburban lawns. Rather it is a complex creation of laws and mores..." --George Will, 2002
Why must our economic policy be an either/or? Why not a both-and? Kishore Mahabuani, dean of Singapore's Lee Kuan Yew School of Public Policy writes in Newsweek:

"Crucially, as they opened up their markets, neither China nor India threw the proberbial baby out with the bath water--instead, they balanced capitalism with judicious government direction. As the Indian economist Amartya Sen has wisely said, "the invisible hand of the market has often relied heavily on the visible hand of government."

Contrast this levelheaded middle path with America and Europe, which have each gone ideologically overboard in their own ways—and whose utter lack of pragmatism helped precipitate the global financial crisis. Since the 1980s, America has been increasingly infatuated with the ideology of unfettered free markets and dismissive of the role of government—following Ronald Reagan’s dictum that “government is not the solution to our problem; government is the problem.” Former U.S. Federal Reserve chief Alan Greenspan took this ideology to the extreme by refusing to regulate the large new market in derivatives that emerged under his watch and that quadrupled between 2002 and 2008 to 12 times the size of the total world economy. Of course, when the markets came crashing down in 2007, it was decisive government intervention that saved the day. Despite this fact, many Americans still espouse a deep ideological opposition to “big government,” as evidenced by the current wave of antitax Republicans and Tea Party candidates who swept into Congress during the midterm elections.
If Americans could only free themselves from their antigovernment straitjackets, they would begin to see that the U.S.’s problems are not insoluble. A few sensible federal measures could put the country back on the right path. A simple consumption tax of, say, 5 percent would make a significant dent in the country’s huge government deficit without damaging productivity. A small gasoline tax would help wean America from its dependence on oil imports and create incentives for green energy development. In the same way, a significant reduction of wasteful agricultural subsidies and other earmarks could also lower the deficit. But in order to capitalize on these common-sense solutions, Americans will have to put aside their own attachment to the rhetoric of smaller government and less regulation. American politicians will have to develop the courage to follow what is taught in all American public-policy schools: that there are good taxes and bad taxes. Asian countries have embraced this wisdom, and have built sound long-term fiscal policies as a result."

1 comment:

Ann said...

I appreciate your synopsis, Beth! George Will's remark about Enron didn't seem to ripple the conservative waters sufficiently. Would that conservatives had paid attention to the lax regulatory conditions that allowed Enron to do what they did! Perhaps the escalating & spiraling Wall St insanity could have been checked earlier, had they looked at the signs. I commented, then, that I thought Enron signified worse for this country than 9/11. I think people considered that heretical & ignored it. :-/ Nothing to do but wince, now, and pray for leveler heads & wiser advisers to gain stature! May we pray, rather than become cynical.