Wednesday, January 14, 2009

Fair Weather Free-marketers

I was surprised by the recent article in Time by Jeffery Sachs, "The Case for Bigger Government." My introduction to Sachs was his being featured prominently in the PBS production The Commanding Heights (though only briefly mentioned in Yergin and Stanislaw's book of the same title.) He was portrayed both places as as a proponent of free markets, and was more recently severely attacked for being a free-marketer by Naomi Klein in Shock Doctrine.

Here's what was said about him in The Commanding Heights (book):

From the mid-1980's on, [Sachs] was at the center of economic reform in Latin America and since then in eastern Europe, the former Soviet Union, Asia and Africa. His experience in confronting the results of government control of the commanding heights proved profoundly disillusioning; he lost his confidence in the ability of governments to control their economies in a rational way. "The more that I have sat and discussed the economy with government ministers," he said, "the more I have come to believe in the anonymous, competitive processes of the market. And now I am attacked all over the world as a Friedmanite. Considering where I came from, that's amazing for me.

Where he came from was Harvard, steeped in Keynesian economics. (Part of the paradox of Keynesians is that they view themselves as the saviors of capitalism.) Looking into it further, I found that Sachs had subsequently abandoned his confidence in free markets as evidenced by his more recent work in developmental economics and "sustainability". He serves as yet another example of the effects of economic pragmatism so painfully illustrated by Bush and others who claim to support the free market, "except when it doesn't work."

During a boom, it's easy for even Keynesians to support the "free market," but upon the arrival of the inevitable bust, they'll cry out for relief via government interventionism. Naomi Klein accuses Milton Friedman and other supporters of capitalism of celebrating disasters as the means to thrust their agenda on the desperate and ignorant masses. As evidenced from all the Keynesians and leftists finding a renewed public platform for their statist agenda, if Klein wants to be consistent, she needs to include them in her accusations.

But I disagree with Klein that attempts to promote one's ideas in times of crisis is an act deserving of condemnation. It is precisely when things go wrong that we need to take a fresh look at things, reexamine our assumptions and attempt to deepen our understanding of the underlying principles. Friedman correctly identified this response to disasters and the importance of ideas in the search for solutions:

Only a crisis--actual or perceived--produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible become the politically inevitable.1

I think what we are seeing now is the result of the fact that economics is so poorly understood by the general public--and the understanding which does exist is an uncritical acceptance of the basics ideas of Keynes. This should be no surprise since authors like Samuelson and Norhaus, or McConnell and Brue (who espouse Keynesian principles without adequate presentation of the critiques offered by the Austrian school of economics) dominate the market for introductory economic texts. Without an understanding of basic economic principles and controversies, the intelligent citizen is significantly handicapped when trying to understand and analyze economic events, in times of crisis or otherwise. This ignorance leads to intellectual vulnerability.

Without the proper principles to serve as an anchor, the pendulum continues to swing --and the commanding heights2 remain up for grabs.

1. Friedman, Milton, Capitalism and Freedom, Chicago: University Press, 1982, ix
2. Explanation of the term "commanding heights" from The Commanding Heights, Daniel Yergin and Joseph Stanislaw, Touchstone, 1998: In a speech on Nov. 13, 1922 to the Fourth Congress of the Communist International, Lenin defended the inclusion of private property into his New Economic Plan by explaining the state would continue to control the " 'commanding heights,' the most important elements of the economy." This meant "government control of the strategic parts of the national economy, its major enterprises and industries." For the Soviet Union, this meant outright ownership. "In the United States, government exerted control over the commanding heights not through ownership but rather through economic regulation, giving rise to a special American brand of regulatory capitalism."

1 comment:

Darin said...

Great blog, Beth. I am in complete agreement with your last paragraph (especially since it rings so close to home with my and economic learning experiences).

I like seeing you write and elaborate more!

However, I suppose that you are my competitor now (in subject matter, only) as I had planned to take a stab at Sachs, this weekend. When I received that issue in the mail this past weekend and saw the title of that article - a big grin hit my face.