New Classical Economics

It’s good to see Paul Krugman weigh in on an argument I have been trying to make for years: the worldview that dominated the entire Reagan Bush era lies at the root of our current problems. In particular the pernicious view that ‘markets’ solve everything needs to be expunged from our collective memories. This piece of mischief actually predates even Reagan, but had little traction during the comfortable immediate post-war years. It was only when the seemingly inevitable onwards and upwards pattern of the American economy stuttered during the stagflation years of the early 1970’s that it became politically useful to portray the magic of the ‘market’ as the best, and, indeed, the only viable engine for economic activity.

That the Soviet Union imploded at precisely the same time left an indelible mark on American consciousness: the early 1980’s were witness to an economic revival and the ‘defeat’ of the Marxist/Leninist ‘Evil Empire’. It was simple to explain: the American form of capitalism, dominated by free-wheeling markets was invincible and could deliver unparalleled wealth.

Or so it seemed.

The nice conjunction of revived ‘new classical’ economic theory to supplant the older Keynesian version and the surge in conservatism across the US led many to believe most of the world’s economic problems had been solved. If left to its own devices the ‘market’ would encourage innovation, build wealth, and lead to ever increasing prosperity. The only thing that could get in the way was government. The dead hand of regulation had to be lifted. Government had to be demonized as perennially ineffective, chronically inefficient, and most likely corrupt.

Millions of students went through their entire education having the efficacy of free markets drummed into them. They are now the generation providing leadership in all our various elite groups: even in government itself. The worldview that presumes market supremacy is so deep rooted that we are having great difficulty in even framing discussions that lead to alternative conclusions. Instead we are leaning over backwards to protect the vision.

And this is even after Katrina, lead poisoning in imports, and the manifest failure of banking deregulation. The removal of government, the reduction in regulation, and the cutting back of oversight is the defining characteristic of the Reagan/Bush era. It was a coherent and well thought through political strategy drawing intellectual legitimacy from what is now standard text book economics.

It has even, through the work of people like Richard Posner, infected the legal system. His work and words are now eliciting a spirited debate, but his impact has been huge: good jurisprudence nowadays is concerned with establishing incentives and is continually pressing back against government ordained restrictions on business. It is a modernized and formalized version of Benthamite Utilitarianism: the greatest good for the greatest number, because we cannot possibly look after everyone. And we absolutely must not fall prey to silly notions like ‘equality’ or ‘rights’ because they are unstable and artificial constructs. They are not permanent or enduring ‘values’.

The failure of all this is clear.

We have undone the prosperity of the immediate post-war years by attacking its equalizing tendency of incomes distribution. We have unwound much of the security of the middle class. We have abandoned the poor. We have stripped away the protections we had against bad business practices. And we have exposed ourselves to economic volatility on a scale we have not seen since the Great Depression.

We have put everything up for sale. We have abandoned thrift. We have accumulated the greatest debt in our peace time history. And we have impoverished the future.

All in the name of the ‘market’.

To set all this right will take time. There is so much to do. But first we must be relentless in exposing the essential invalidity of the ‘market’ based view. Not everything is best allocated by a market. A market is amoral. Some might say immoral. And there are times when a society needs to engage itself and determine moral solutions. Relying on markets to do that for us is a lay way of avoiding tough discussions.

It was the Reagan/Bush way.

It is something we can no longer afford.