This is a great article by Arnold Kling and Nick Schulz. And I like the way they open the discussion:
Two camps have fought the political and philosophical battle for influence over the economy in the United States for the past 100 years. They differ in their views over the nature of markets and government. And both are wrong.
In my earlier post on Ron Paul and von Mises, I alluded to the need to try something different in the field of economics. We know the math doesn’t always work (at least not the same way it does in, well, math and science), and in an earlier post, I talked about how naive it is to just rely on data and math in conducting monetary policy.
But this post also points out something else about economics: it’s inherently biased. Oftentimes, you have to understand the biases of the practitioner to understand the theories they lay out in the field. Further in the article, they explain this rather succinctly:
The second danger has to do with the nature of political economy. Politics creates its own kind of innovators who can be as destabilizing to markets as market actors themselves – but in far more pernicious ways.
Economists call these political entrepreneurs “rent-seekers.” Rent-seekers gain wealth, not by creating it, but by channeling it through political favors. Examples include government-sponsored monopolies, “targeted” tax breaks for special industries, and legislative loopholes inserted by lobbyists.
And here’s the clincher (emphasis mine):
Rent-seekers aren’t partisan. They used President Bush’s push for an ownership society to promote sketchy mortgage products. Before that, they used President Clinton’s push for a fairer economy to compel banks to make loans to poorer neighborhoods. In both cases, rent-seekers turned political slogans into profit, but at a steep cost to society when the boom ended.
The response to the current economic crisis has perpetuated and even intensified this process, as hundreds of billions of dollars of taxpayer funds have been used to prop up the very firms that took such reckless risks. The bigger the bad bet, the bigger the bailout.
The NAR (Nat’l. Association of Realtors), the MBA (Mortgage Bankers Association), Fannie Mae, Freddie Mac, etc. all have chief economists. They all have credentials from universities that tell you they’ve spent many sleepless nights using SAS and Matlab to build models that 99.995% of us don’t give a flying fart in space about. But at the end of they day, their job is simple: put “economic theory” (i.e. spin) together with some math to forward a business objective. That’s not real economics to me.
By the same token, the President has teams upon teams of economists around. For what? To tell you the country is almost down the toilet, but we just need a couple of good flushings and a plunger to really do the job? Of course not. They’re there to forward an agenda – the President’s. If it suits the President to say times are good, they’ll put on the pom-poms and give everyone a good old rah-rah-rah, sis-boom-bah story. If the President wants to legislation passed, they’ll tell us everything is OK, but if we get legislation X, Y, and Z passed, everything will be fantastic. Again, this is not real economics to me.
So here’s more evidence that economics is nothing like physics. You can’t hire a D.C. lobbyist to refute Newton’s observations on gravity, after all. Well actually you could. But it would be beyond pointless to do so.
The point of all of this is simple: we need to do better in coming to terms with what economics actually is. We also need to realize government can do harm as well as good, and we should be spending our time figuring out what that harm/good exactly looks like. Political/regulatory capture abounds as do unintended consequences that spring from government policies.
At the end of the day, government can’t solve all of our problems, nor should we expect it to. But we need markets. And they need to be transparent, efficient, and work for everyone.