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”
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.