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Economics in Freefall

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I admire Joselph E. Stiglitz, because he has a social conscience and a sense of justice, the absence of which turns economists into monsters. Despite his virtues and Nobel Prize, Stiglitz sometimes falls down as an economist. Readers of my new book, How The Economy Was Lost, will be aware that I take him to task for the Solow-Stiglitz production function, which seriously misleads economics about the scarcity of nature's capital.

Another of Stiglitz's shortcomings, one that he shares with most economists, is his habit of reifying the market economy. The market is a social organization. The results of market activity reflect the behavior of the human participants in the market. When economists reify the market, they attribute the behavior, ethics, and morality -- or lack thereof -- of humans to the market itself. Thus, Stiglitz describes human failures as "market failures," and he asks in his new book, Freefall, "Why didn't the market exercise discipline on bad corporate governance and bad incentive structures?"

Social institutions are inanimate. They do not possess life and cannot impose good outcomes on human action.

Libertarians also reify markets, but instead of blaming markets for human failures, they imbue the market with human virtues and even with the super-human virtue of producing results that human intelligence cannot improve upon. Economists' "risk models" for which Nobel Prizes have been awarded and Federal Reserve chairman Alan Greenspan attributed the social institution with economic wisdom beyond man's.

It is likely that the practice of reifying the market economy developed as a form of shorthand. It was convenient to say that the market did this and that rather than to have to describe the human interactions that produced the results. The market was transformed from an abstraction into a life form and became the actor instead of the humans operating within the institution.

If the outcomes are good, libertarians attribute the good results to the market's virtues; if bad, libertarians blame human interference -- government regulation. Economists of Stiglitz's persuasion see it in the opposite way. Good results are produced by regulation; bad results are the result of allowing the market to make decisions on its own.


This way of thinking, which reifies a social institution, is ingrained in economics. It is the source of enormous confusion and has resulted in a pointless, long-running ideological battle that Stiglitz calls "a battle of ideas."

It is possible to clear away the confusion. First, understand that a free market is one in which prices are free to respond to supply and demand. Economists of all persuasions understand that to fix a price below the price at which supply and demand equate results in shortages. Economists have learned this from rent control. Fixing a price above the price at which supply and demand equate results in surpluses. Economists have learned this from agricultural subsidies. A free market does not mean a market in which human behavior is not regulated. A free market is one in which supply and demand are permitted to equate.

Second, understand that regulation regulates human behavior, not the market. It is the actors in the market who are charged with regulatory infractions, not the institution itself. Regulation is necessary because of human faults, such as greed, fraud, and carelessness, not because of market faults. Regulation is necessary because of human failure, not because of market failure.

Third, understand that the problem of regulation is that it is done by flawed humans. Human flaws do not disappear by moving human action from the economy to government. Most likely the flaws worsen, as government decisions are often unaccountable. Many economists assume that regulators act in the public interest. However, as George Stigler, another Nobel Prizewinner, pointed out several decades ago, regulators are invariably captured by the industries that they regulate.

There are endless examples of regulators -- indeed, entire governments -- captured by the private interests that they are supposed to regulate. For example, in a recent subscriber's edition of CounterPunch (June 16-30), Jeffrey St. Clair describes in detail the incestuous relationship between the government's Minerals Management Service and the oil industry. An agency charged with regulating the impact of oil drilling on the environment became "a bureaucratic facilitator of big oil." Thus, the environmental catastrophe in the Gulf of Mexico and looming catastrophes along Alaska's fragile coastline.

Indeed, economists themselves and academics are often captured by private interest groups and turned into shills. In How The Economy Was Lost, I accuse economists of shilling for transnational corporations when they falsely describe jobs offshoring as the beneficial workings of free trade. Like the Israel Lobby, corporations have found that money will purchase professors, academic departments and think tanks, as well as journalists.

Offshoring transforms American workers' wages into performance bonuses for executives, capital gains for shareholders, and honoraria and research grants for economists who shill for the practice.

The problem that the US economy faces is far more serious than the financial crisis resulting from financial deregulation. The reason that traditional monetary and fiscal policies cannot produce an economic recovery is that so much of the US economy has been moved offshore. As the jobs have departed, there is no work to which low interest rates and massive government spending can recall workers. This is the real freefall.

 

http://www.paulcraigroberts.org/

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

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The great clarity of the explanations in this colu... by Henry Pelifian on Thursday, Jul 15, 2010 at 7:25:41 AM
...to Professor Roberts, once again!... by JimZ on Thursday, Jul 15, 2010 at 2:13:11 PM
It is so darned refershing to read this piece and ... by Jeffrey Rock on Thursday, Jul 15, 2010 at 4:37:29 PM
It'll happen when the CEOs of large multi national... by Dave Kisor on Thursday, Jul 15, 2010 at 5:31:49 PM
I keep getting bugged by the naive belief in peopl... by Elizabeth Hanson on Thursday, Jul 15, 2010 at 10:27:09 PM
This is a night mare of America. Only to wake up a... by Debbie S on Thursday, Jul 15, 2010 at 4:37:56 PM
Obushbama has surrounded himself with the economic... by 911TRUTH on Thursday, Jul 15, 2010 at 10:33:59 PM
Assuming that this claim is correct, the reason fo... by David Chester on Friday, Jul 16, 2010 at 2:54:42 AM
From 1975 through mid-1995 I was an independent, b... by Ed Tubbs on Friday, Jul 16, 2010 at 10:30:43 AM
Roberts is on to an important issue here.He writes... by Alan Kerns on Friday, Jul 16, 2010 at 1:25:35 PM
An excellent and very timely article! Yes, regulat... by Gusto on Saturday, Jul 17, 2010 at 3:37:34 PM