ONE STEP TAKEN, ANOTHER STEP NEEDED

LL Thursday 15 Jan

Dr Kamal Monnoo posts HERE

“Economics – Bad Ideas”

“So what are some of these global bad ideas, which in fact also come across as being quite relevant in the context of continuous wrong policy directions that our economic managers in Pakistan have been steering in recent years? In particular, bad idea No. 1 – “The Invisible Hand” – is pretty hard to distinguish from bad idea No. 3, “Milton Friedman’s case against government intervention”, and it segues fairly seamlessly into bad idea No. 7, “globalization that is always good.” 

As an aside, this sometimes makes Mr. Madrick’s argument more disjointed with key propositions spread across nonconsecutive chapters; however, he is actually trying to make an important point here: Adam Smith used the phrase “invisible hand” only once in “The Wealth of Nations,” and he probably didn’t mean to say what most people now think he said. Today the phrase is almost always used to mean the proposition that market economies can be trusted to get everything, or almost everything, right without more than marginal government intervention. Is this belief well grounded in theory and evidence? No. As Mr. Madrick makes clear, many economists have, consciously or unconsciously, engaged in a game of bait and switch. 

On one side, we have elegant mathematical models showing that under certain conditions, an unregulated free-market economy will produce an efficient “general equilibrium,” in the sense that nobody could be made better off without making anyone worse off. Yet, as he says, these assumed conditions – including the assumption that people “are rational decision makers, and that they have all the price and product information they need” – are manifestly not met in practice. Further, he contends that in the real world and especially in the ‘developing’ world where economic governance structures tend to weak the reliance on the sheer competence of the economic leadership of the day tends to be even more critical than otherwise – Pakistan certainly falls in this category”.

Comment

Dr Kamal Monnoo’s post struck me as unusual for most modern day economics commentators, as suggested in the paragraphs quote above (follow the link to read his full paper).

The views of which he complains are political and those attributed to Adam Smith are ideological, and not historically accurate. 

A scroll down the list of attributions made by many modern economists to the writings of Adam Smith would show they are quite misleading, though they are made regularly by those who preach them, including leading scholars in the otherwise very best universities in the world.  However, their claims are not supported by Smith’s texts. But as their readers have seldom read Smith's Works, beyond some clipped quotations, they get away with it, filed under "everybody knows" what Adam Smith meant ...

The consequence is that when turned into policies by governments, whose personnel take what they are told about Adam Smith by their teachers on trust, the outcomes are invariably disappointing, and occasionally disastrous.  Moreover, competing ideologies tend to assert error-riddled Statist ideas - that political governments are more efficient than theories from modern economics and reliance on imperfect markets - and they are often as disappointing, if not more so, because of failures like widespread top-down corruption and failing institutions, riddled with tribal or regional ideological and neighbourly tensions.

Dr Kamal Monnoo should write a companion piece to his “Economics — Bad Ideas”, entitled: “Politics — Bad Ideas”. We can re-start from there!