Economists Fail to Learn?

One of the lessons of the current crisis in our economy is that the ‘free-market’ ideology of the right wingers is not a serious long term proposition: constant deregulation, which is designed to ‘free’ the market and let it find its own way, has led us into the current malaise. Apparently no one bothered to read the history of the 1920’s.

I believe that the political system and eventually the will of the people as expressed through that system will sought out the mess and we will end up in a more European style of mixed economy.

This adjustment will be much harder for the academic community: academic economists are mostly ardent free market people who advocate leaving markets completely alone. This near religious advocacy is especially strong in the University of Chicago where the legacy of Milton Friedman, Eugene Fama, and Robert Lucas lives on.

However it has been odd to watch neo-classical economists [that’s what those folks are called] clamor aboard the media to offer views on the bailout passed last week. Apparently they don’t find it at all odd to give earnest commentary on a situation, which according to their theory, cannot happen. Not only this but they seem to think the rest of the world is nuts for objecting to a bailout. As an example I give you Tim Harford of Slate:
Americans should stop complaining about the “moral hazard” problem and enjoy the bailout. – By Tim Harford – Slate Magazine

Now Harford is usually a fairly benign analyst. Notice the part towards the end of commentary: he argues that “It is also because a civilized society tries to save people from accidentally burning themselves to death. If the consequence is a little more carelessness, so be it.”.

Hmmm

This sounds exactly like an argument for a government run health care system. Surely a “civilized” country would ensure health care for everyone so that the social costs of epidemics arising from the lack of health care to the poor can be avoided. Are we going to see a spate of neo-classically trained economists line up behind national health care?

Don’t hold your breath.

But I think a re-evaluation of their theory is in order. It doesn’t work.