I have had very little actual economics teaching in my neglected life.  So I can only daydream about what an ideal Lesson 1 might have been about**.  If I could choose a single theme for lesson 1 of Macro, it would be this:

“Economics – it is not a religion.”

By this I mean: statements should not be taken as a matter for inviolable, timeless faith, but subjected to the test of repeated experience. Econ 101 models are there as ideals, and deviations from them should be believed in.

I’ve been thinking about this partly because I am reading an otherwise excellent book by a young Cato Institute thinker (Johan Norberg) about the crash, called “Financial Fiasco“. (I may be reviewing it for a newspaper some time. ) He describes many of the preconditions for the subprime mess, with all the usual characters (Chuck “dancing” Prince, Jimmy “Bridge Playing” Cayne, the AIG “Freebies on Government money” sales team, etc), and many of the systemic reasons – political and economic – that drove individually rational actors into collective madness.

It is a decent piece of descriptive history,  and tends to side with the multiple-causes approach to the event.  In fact, he even uses the Perfect Storm analogy in the intro.

If you read the book as a piece of descriptive history, you might not be swayed one way or another about whether unconstrained markets or silly government bureaucrats are the greater threat to prosperity. But every now and again, as if possessed of a sudden brain shock, Norberg feels obliged to blame everything on a single government action. If only British bureaucrats had not insisted on Barclays asking its shareholders, then Lehmans could have been taken over, for example.  Never mind the many other reasons Lehmans ought to have failed: this is *the* reason.

Something about working for Cato make it a point of religious principle that when a significant bad economic event takes place, of the possible causes it is the ones related to the government that should be blamed.  You can find a dozen such instances, alongside a dreadful explanation for how government interventions* did not help the US in the depression, that stop a good read being a really great book.

It has also come up when thinking about this thread on the IEA blog, where Richard seems ideologically unable to accept the idea of a paradox of thrift.  Not: “It can happen, but I don’t think it will here”, but “The paradox of thrift is nonsense”.  So it is impossible that people can save too much and create a deficiency of demand.   I imagine a classroom where people learn to be IEA.

Teacher: “Why is there unemployment?”

Class: “Because the government makes wages go too high”

Teacher: “Why is there inflation?”

Class: “Because the government makes the prices too high”

Teacher: “Under what circumstances can the government boost economic well being”

Class: “Under no circumstances”.

Teacher: “How do we know this?”

Class: “From deep within our pious souls”.

Teacher: “What happens if everyone in an economy tries to defer consumption at once?”

Class: “Great levels of investment blossom forth to take the savings. Yea like flowers on the banks of the Jordan investment shall grow and all good things shall happen”

Teacher: “How?”

Class: “Search me.  A good Fairy. If it didn’t, I would have to quit this class.  So it must”.

This said, I have enjoyed the IEA’s Philip Booth’s criticism of ResPublica:

His idea that free markets inevitably lead to big corporations and monopoly is empirically and objectively wrong. It is true that, in the banking sector, the state has supported big banks and that big banks have dominated the market – but one cannot describe the banking sector as a free market. In fact, in the wider economy, small firms have boomed in the last 30 years. . . . The idea that the free market has pushed out mutuality and widespread ownership is empirically and objectively wrong (and there is a lot of academic work on this). Mutuality and community organisations in finance have been pushed out by state regulation. At the bottom of Blond’s distributist notions is support for entities such as guilds – though I have never seen Blond say anything explicit about this. These are exclusive organisations that stop many people (especially migrants) from getting a foot on the ladder. Many other aspects of the distributist approach are exclusive and unappealing to all but the highest of high Tories.

By the way, I appreciate that the Left has these failings as well.  The nutters in the Labour party in the 1970s increasing public spending no matter what (yes Tony Benn, we’re looking at you), because as a matter of principle it must be doing good, had much the same disease.

It also happens in business. In my one 10 year business job I had constantly to fight people who thought, say, that cutting prices is always good, or always bad. Then I had to do the microstudies to work out the actual answer, and you know what?  It depends.

It is difficult, intellectually, to be pragmatic and empirical.   It is very easy to be a principled, evidence-less zealot.

*most of which seems to be about proving how interventionist Herbert Hoover was, which proves very little.  Krugman is much better on this subject.

** as a matter of fact, it may have been about moral hazard and adverse selection, with Simon Cowan of Worcester College, Oxford.  I missed the first year.

Advertisements

7 thoughts on “Economics as a sort of religion

  1. I’ve read Johan Norberg’s book too, and I thought it was very good, if not excellent.

    It’s worth pointing out that he’s not a trained economist (MA in the History of Ideas), so I think the idea that he takes economics to be a religion is stumbling into guilt by association.

    But every now and again, as if possessed of a sudden brain shock, Norberg feels obliged to blame everything on a single government action. If only British bureaucrats had not insisted on Barclays asking its shareholders, then Lehmans could have been taken over, for example. Never mind the many other reasons Lehmans ought to have failed: this is *the* reason.

    I have to say I didn’t read that passage that way – it is surely true that Lehmans could have been taken over had the FSA not said no to an immediate rescue? I never got the impression that Norberg thinks that everything would have been hunky dory had Barclays taken over Lehmans.

    The value of Financial Fiasco is that it reminds us that many government interventions in the financial system have had perverse effects. The lesson is that we should be wary of knee-jerk interventions meant to “save us from future crises”. Surely that’s a very good reason to write a book?

  2. HI there

    On the Lehmans thing, I have heard other interpretations: that it was the government refusing to offer backstop finance that floored it. I don’t think we’ll ever know – there may be a dozen answers – and indeed if it had been taken over (shepherded by the government breaking some rules) like in HBOS-LLOY, would the result have been good? I am not sure what the Cato-Libertarian view on this is.

    I have been harsh on Norberg here. It is a very good book, and the sections on the housing build up are excellent. There just seems to be something jarring about the attacks on TARP and so on. Sure, government inadvertent actions/less than perfect judgement can hurt – they are very big, after all, and have large consequences – but I am never convinced that an absence of ANY government action would have been preferable.

    Thanks for your comment: I hope to put a more reasoned review online within a week.

    Giles

  3. I agree that the HBOS-Lloyds “merger” was a complete failure, and one that was obviously a bad idea at the time (except that that wasn’t obvious to Lloyds’ board for some reason). A takeover of Lehman by anyone may well also have gone pear-shaped; so might indeed the impending merger between Yorkshire and Chelsea Building Societies (with Chelsea playing the role of Lehman/HBOS). As a member of the Yorkshire I’m wondering whether to vote against the merger given past form….

    Back on topic, I look forward to seeing your full review. The (large) part of the book devoted to the housing market at subprime lending is truly superb, though for a blow-by-blow account of what happened Andrew Ross Sorkin’s Too Big to Fail is proving too exciting for me to put down at the moment! From the book I got the overall impression that Norberg was not trying to argue for “the absence of ANY government action”. In fact, I exchanged e-mails with him on the subject of bank nationalisations, asking if he meant that a nationalisation of a failed bank would be the least bad option given that deposit guarantees are here to stay. He replied: “That is roughly what I meant. It’s paradoxical, but nationalisation can be more pro-market than protecting those who made mistakes.”

    P.S. He writes an interesting blog in English and Swedish here: http://www.johannorberg.net/

  4. This is the impression I am getting – of a man too bright and principled to ignore the evidence of market failure, but somehow feeling that his theme requires him to emphasize the government failure.

    I am glad you think the housing section excellent – me too. Where I am struggling is to put it in context. There are not as many figures as quotes – which may make it very readable but robs it of context. For example, an unnumbered reader would put down the book expecting to find that subprime was 50% of the mortgage market, not just 13% as Wikipedia seems to believe. As a result of which, that particular segment of the crisis, while important for its role in being first, and possibly most egregious, was by no means the whole thing, nor the cause of what followed. Canary in mine (though a damned big canary).

    I am less forgiving of the rather swift destruction of Keynesianism. “It depends” is a very important qualifier here.

    Given the predominant view that a good-bank bad-bank solution is best (Willem Buiter?), making a big half-good half bad bank – reversing the process – seems particularly, um, optimistic . . . Barclays did very well by not taking LEH

    later

  5. I think Johan wanted to remind people about government failure because the prevailing narrative of the financial crisis has been that it’s all the fault of the free market casino etc. As he points out, there is no casino in the world (other than the financial markets) where the finance minister and the central bank governor follow punters inside and offer to cover their losses! And as Andrew Haldane (Executive Director, Financial Stability at the Bank of England) pointed out in a recent article unregulated and unguaranteed hedge funds have been both much more competitive and much less dangerous to financial stability than heavily regulated commercial banks and regulated investment banks (see p. 9). A pause for thought, even though it does not necessarily follow that reintroducing unlimited liability and leaving retail bank deposits unguaranteed would make sense in the banking sector.

    I agree that the lack of figures in Financial Fiasco is a problem (especially for the minority of the population that finds them informative, of which we are both no doubt part!). Incidentally, Too Big to Fail puts the size of the subprime market somewhere inbetween the two figures you quote.

    I think Johan’s objection to Keynesianism is less about whether it is the correct economic theory and more to do with the fact that demand management is essentially politically impossible: after all, fiscal stimulus in bad times must go with fiscal retrenchment in good times, but few (if any) governments voluntarily raise taxes and cut spending during booms. Tim Worstall argues this point rather well. If politicians cannot be relied on to implement restrictive fiscal policies when everyone else is drinking from the punch bowl (to use the famous central banking metaphor) then all we get for fiscal stimulus is a temporary reduction of the pain of recession followed by a permanent hangover of debt.

  6. I thought he exaggerated there about the CB making good the casino losses. Equity holders have not had their losses covered – the bondholders have. This is the sort of detail that his role as a historian of ideas rather than an economist showed up.

    But I agree about the useful role his book plays in counteracting the dominant leftwing narrative.

    Also, your last para about keynesianism (sorry baby crying so rushing) is not quite right. Deeply below capacity, the growth from keynesian spending creates the revenues to pay for it. I do agree about needing devices for saving in the god times – see last recommendation in “a balancing act” – link on right.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s