Using the failure of anti-market policies as evidence markets don’t work

Now here’s an article I find really gets the point. By Per Bylund on Mises Daily with the quite nice title, Economics Is Dead, and It Is Being Killed Again. It’s hard to pick a best bit since you really do need to read it all. But to find someone as on the money as this is a rare event and needs to be brought to the attention of others. Here he is pointing out that the stimulus – as anti-market a policy as there has ever been – made us worse off which the left now uses as evidence that markets don’t work.

You have to applaud the anti-economics left for this rhetorical masterpiece. They have struggled for decades to sink the ship of economics, the generally acclaimed science that has firmly stood in the way of their anti-market and egalitarian policies, hindered the growth of big government, and raised obstacles to enact everything else that is beautiful to the anti-economics left. The financial crisis is exactly the excuse the Left has been waiting for. It is a slam dunk: government grows, Keynesianism is revived, and economics is made the culprit for all our troubles.

We see this now in education, as students demand to be taught (and professors demand permission to teach) a more “relevant” economics. Relevance, apparently, is achieved by diluting economics with a lot of the worst kinds of sociology, post modernism, and carefully structured discourse aimed to liberate us from our neoliberal bias. And, it turns out, we must also teach Keynesian ideas about how government must save the market economy.

We see this same agenda at academic research conferences, where it is now rather common to hear voices (or, as is my own experience, keynote talks) claiming that “it is time” for another paradigm: post-economics. The reason is always that economics “has failed.”

If this weren’t so serious, it would be amusing that the failure of Keynesian macro-economics (whether it is formally Keynes’s theory or post-Keynesian, new Keynesian, neo-Keynesian, monetarist, etc.) is taken as an excuse to do away with sound micro-economic theory to be replaced with Keynesian and other anti-market ideas. But it is not amusing. If most of the discussions heard are to be believed, the failures of central planning is a reason for central planning, just like socialism is a reason for socialism. The success of the market, on the other hand, is not a reason for the market.

It is incredible that economists in general don’t get it, but there is at least one who does.

Anyone who invokes aggregate demand as part of an economic argument is wrong

A market economy in recession, left more or less to itself to adjust to circumstances, will find its way back to growth and full employment within a year, a year and a half at the outside. That same economy, under the administration of managers unsympathetic to the market, may travel in the desert for a very long time before coming good, assuming it comes good. I would like to come back to a post put up yesterday, The Next Phase of Economic Stagnation, which contains the transcript of a debate between a defender of Quantitative Easing in Europe and someone who thinks it is a very bad idea. But what I particularly wanted to comment on was this, stated in defence of QE:

If you’re in a situation where aggregate demand is very weak and that’s a position I think the eurozone is in and you are in danger of slipping into the sort of deflation which I at least and some other judges think is pretty damaging, then this is a mechanism for fending that danger off. And I have to say, I don’t think that there will be much impact from quantitative easing within the Eurozone, apart from through the exchange rate. In driving the exchange rate lower that’s going to help to boost eurozone net exports. It will boost aggregate demand. It will tend to keep up the price level. On balance I think those are pretty good things to be aiming at.

Anyone who invokes aggregate demand as part of an economic argument is wrong. Once universally understood, now universally disregarded, there is no independent force in an economy called aggregate demand. You can shift who gets to do the spending – and in every case where aggregate demand is invoked it is the government that gets to do the extra spending – but you cannot increase the rate of growth or employment. In fact, over time, it weakens an economy’s structure so profoundly that you are frequently worse off than when you began.

Recessions are inevitable, and there are actions a government can take, but increased public spending and higher levels of public debt are not amongst them. The sad part is that economists have so comprehensively invested in this nonsense theory, governments find it perfectly in tune with their basest political desires, and the public cannot understand why it shouldn’t work and like to see more spent on them by government. So here we are, a perfectly constructed downwards spiral based on the latest most up-to-date theories, in which no one can ever quite see the way out again.