From Perfect Rationality to Utopia
Dr Eamonn Butler writes on the admirable Blog of the Adam Smith Institute (London) another piece of excellent analysis from the pro-market ASI (HERE) :
“Stiglitz: A new economic model”
“I believe Professor Stiglitz is tilting at a straw man. Advocates of free markets have never believed them perfect. Markets are not static, like the textbook picture of supply and demand curves magically balancing at a particular price. As Mises and Hayek observed, markets are in constant motion: perhaps they are always tending towards balance, but with millions of buyers and sellers in millions of markets all competing for the same resources and getting in each other's way, they never quite achieve the textbook bliss. Nor are economic agents rational in the way the textbooks would have it, always demanding more of whatever is cheap. They are not computers, but human beings. There is a limit to the amount of anything they want. They value non-economic goods (such as honour) as much as economic ones, and will often give up the latter for the former. Economics is driven by those highly personal, emotional, wants and values: it is never going to be a matter of rational calculation....
It is perfectly possible to believe that markets do not clear perfectly and automatically, and that economic agents do not behave rationally, and yet conclude that markets work better if the government stays out of them. Sure there is market failure, but there is also government failure too. At least markets work through the wisdom and information of the whole population; government reflects the decisions of a small, distant, and inevitably self-interested class of politicians and civil servants. Sure we act as irrational human beings, and make mistakes in our planning that lead to losses and imbalances. But would we really trust that same small, distant (and, to be honest, rather slow) coterie to be able to plan our future better than we, ducking and weaving through a world that constantly changes, could do for ourselves?”
Comment
I think part of the problem was (and remains) the passionate search for making ‘political economy’ (as Adam Smith envisaged it) a ‘hard science’ from the 1870s and the subsequent formal achievement if that objective by the 1960s (though physicists in the Sante Fe Institute found that what passed for advanced maths among economists were somewhat primitive by the standards of 'hard science').
Starting with calculus, the rate of change of two variables and compressing the complexities of human behaviour into the single dimension of rationality and tracing the influence of variations in price, predictable outcomes were found, assuming that the world conformed to the stripped-down models that became prevalent in Economics textbooks from the 1950s.
With invented associations between rational self-interest and assumed ‘good outcomes’ for society, a narrative was created that bore little relevance to the real world. Predictions from such models were not realized – and occasionally proved to be disastrously out of kilter with real events – which caused and causes resurgences in ‘anti-market’ rhetoric from the Marxists, who never really went very far away, social-democrats and people like Stiglitz, who looks for a ‘top down’ new economics, as if anything as complex as an economy can be ‘designed’ (by who) for what agreed purpose?
History shows no such design capability exists.
“Stiglitz: A new economic model”
“I believe Professor Stiglitz is tilting at a straw man. Advocates of free markets have never believed them perfect. Markets are not static, like the textbook picture of supply and demand curves magically balancing at a particular price. As Mises and Hayek observed, markets are in constant motion: perhaps they are always tending towards balance, but with millions of buyers and sellers in millions of markets all competing for the same resources and getting in each other's way, they never quite achieve the textbook bliss. Nor are economic agents rational in the way the textbooks would have it, always demanding more of whatever is cheap. They are not computers, but human beings. There is a limit to the amount of anything they want. They value non-economic goods (such as honour) as much as economic ones, and will often give up the latter for the former. Economics is driven by those highly personal, emotional, wants and values: it is never going to be a matter of rational calculation....
It is perfectly possible to believe that markets do not clear perfectly and automatically, and that economic agents do not behave rationally, and yet conclude that markets work better if the government stays out of them. Sure there is market failure, but there is also government failure too. At least markets work through the wisdom and information of the whole population; government reflects the decisions of a small, distant, and inevitably self-interested class of politicians and civil servants. Sure we act as irrational human beings, and make mistakes in our planning that lead to losses and imbalances. But would we really trust that same small, distant (and, to be honest, rather slow) coterie to be able to plan our future better than we, ducking and weaving through a world that constantly changes, could do for ourselves?”
Comment
I think part of the problem was (and remains) the passionate search for making ‘political economy’ (as Adam Smith envisaged it) a ‘hard science’ from the 1870s and the subsequent formal achievement if that objective by the 1960s (though physicists in the Sante Fe Institute found that what passed for advanced maths among economists were somewhat primitive by the standards of 'hard science').
Starting with calculus, the rate of change of two variables and compressing the complexities of human behaviour into the single dimension of rationality and tracing the influence of variations in price, predictable outcomes were found, assuming that the world conformed to the stripped-down models that became prevalent in Economics textbooks from the 1950s.
With invented associations between rational self-interest and assumed ‘good outcomes’ for society, a narrative was created that bore little relevance to the real world. Predictions from such models were not realized – and occasionally proved to be disastrously out of kilter with real events – which caused and causes resurgences in ‘anti-market’ rhetoric from the Marxists, who never really went very far away, social-democrats and people like Stiglitz, who looks for a ‘top down’ new economics, as if anything as complex as an economy can be ‘designed’ (by who) for what agreed purpose?
History shows no such design capability exists.
Labels: Joe Stiglitz, New Economics
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