If Economic Intervention Fails—We Need More

   Do not think about, write about or deal with  human behavior without determining the effects of incentives.

This is an endorsement for:
Why We Bite the Invisible Hand: The Psychology of Anti-Capitalism by Peter Foster

   I don’t know the author, nor do I have any financial interest. I like the book wherein Peter Foster explains that Adam Smith’s precepts have proven true while Marx’s are always wrong, yet some version of Marx is practiced while Smith is ignored.  Actually, the principles of Smith are practiced continuously by entrepreneurs who don’t know  Smith’s work.

National Post
Peter Foster

Socialism’s die-hard TRUE BELIEVERS
In a new book, National Post columnist Peter Foster explores the psychological roots of anti-capitalism

Even as the U.S.S.R. was crumbling, Western economists sought to find new ways of justifying their morally-based interventionist pretensions

The crumbling of the Soviet Union coincided with the 1990 bicentennial of the death of Adam Smith. To celebrate the latter occasion, there had been an exhibition and conference in Edinburgh. Its attendees included a gaggle of Nobel laureates in economics. Other laureates sent academic papers to be read for them. These men were theoretically Smith’s heirs, but they all had grown up in an era when Smith’s free-market theories had been regarded as crude and unsophisticated. Indeed, some had been unembarrassed fans of the Soviets’ “noble experiment” or admitted they had entered economics to prove that socialism worked.

The program for the Edinburgh exhibition, titled “Morals, Motives and Markets,” asserted: “Modern economic analysis constructs models of human behaviour and uses computers and statistical data to map this process at work and predict changes in it.” One exhibit featured a computer with a program in which players could put themselves in the position of the British Chancellor of the Exchequer. By fiddling with government expenditures, tax rates and the money supply, they could attempt to bring down unemployment, stop inflation and balance the budget.

Nobody, it seemed, thought to square such pretensions with the quote from The Wealth of Nations featured in the exhibition’s doorway: “It is the highest impertinence and presumption, in kings and ministers, to pretend to watch over the economy of private people.” And wouldn’t any Chancellor be a member of that breed to which Smith referred cynically as “that insidious crafty animal, vulgarly called a statesman or politician”?

The exhibit and the conference spoke volumes about economics’ drift into both abstruse mathematical model building and down-and-dirty economic manipulation for political purposes, the very antitheses of Smith’s thrust. Many economists had retired to the ivory tower to pore over an ever-growing flood of statistics, which they attacked with matrix algebra and analytical geometry. Those models were eagerly sought by politicians eager for guidance on intervention.

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  One of the pretensions of the controller is that, while past interventions have failed, future interventions will work. What the interventionists don’t realize is that it’s the intervention, not the kind of intervention, that is wrong.

The oldest laureate represented at Edinburgh was Jan Tinbergen, a Dutchman who had won the first Nobel Prize in economics in 1969. His academic paper suggested that the “birth of econometrics [data-based mathematical economics] meant the transformation of economics into a mature science.” Such a view was far from universal. Indeed, some believed it represented a dangerous delusion.

Statistics were the raw material of economic modelling, the servant of the twin conceits of government forecasting and planning, which Smith and his heirs — men such as Alfred Marshall, Ludwig von Mises, Friedrich Hayek and Milton Friedman — had refuted and which were at that very moment coming so spectacularly unstuck in the Soviet Union.

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   Failure has never meant anything to true believers.

Economic models were only ever Rube Goldberg–type conceptual contraptions, bound to be inaccurate for the simple reason that they could never either mirror the complexity of reality or forecast the essentially unknowable developments on which economic growth ultimately depended. What couldn’t be measured was inevitably left out. The American Theodore Schultz, one of the laureates more in touch with reality, suggested that economics had abandoned Smith’s notion of the critical importance of “human capital” — that is, what was inside people’s heads — presumably because it couldn’t fit it into any equation.

Nevertheless, even though their interventionist ideas had received an enormous setback in the previous decade, many of the laureates were keen to assert that the important thing was that their moral sentiments were in the right place. Jan Tinbergen was not embarrassed to admit that he had entered economics “to find a scientific base for a socialist order.”

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   True believers don’t know things by seeing, they see things by knowing.

Significantly, socialism — the notion that governments could guide economies both more efficiently and more morally than the Invisible Hand — wasn’t the conclusion of Tinbergen’s studies any more than it had been for Marx. It was his starting point, his unshakable moral conviction. He saved his political praise not for Margaret Thatcher or Ronald Reagan, leaders who had together sought to hold back the advance of the megastate, but for Mikhail Gorbachev, the man who had cluelessly presided over the inevitable collapse of Soviet Communism.

Paul Samuelson was perhaps the most prominent representative in Edinburgh of the many followers of the macromanagerial pretensions of John Maynard Keynes, even though Keynesianism had collapsed in a heap in the previous 20 years (and would be back to collapse again in the wake of the 2008 crisis). Samuelson was famous for introducing complex mathematics into the profession. His predictions had included that the United States would suffer a postwar depression (it had boomed) and that the Soviet Union likely would surpass the United States in economic performance (it was collapsing). He had described capitalism as being like a car without a steering wheel, a telling analogy since it betrayed the aspirations of himself and those like him to “steer” the economy. Like many of his brethren, Samuelson saw market failure everywhere. Depressingly, he was the author of America’s best-selling economics textbook.

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   Samuelson was famous for stating in a late 80s version of his much revised and used textbook in introductory economics that the Soviet Union was an example that, “A command economy could not only survive, but thrive.” The economy of the Soviet Union collapsed shortly thereafter. Samuelson’s textbook continued to be used in as many university courses as before.

Samuelson’s presentation had a few kind words for Smith, but was otherwise almost a parody of the discipline’s increasing obscurity. “Thus,” he wrote in his conference paper, “in 1933, Bertil Ohlin revolutionized Ricardian trade theory by explicit use of Smith-Walras-Cassel cost-price equations; and he did so for the explicit purpose of formulating a Heckscher-Ohlin model of non-labour factor endowments that negates the Ricardian comparative advantage cost constancies.” Got that? Though their interventionist pretensions were under attack, several of the laureates were not prepared to go down without a fight. The French laureate Maurice Allais declared, “I don’t agree with the statement, as many people are saying, that the meaning of what we are seeing in Eastern Europe is the definite victory of the market economic system. That is not right, because if I look, for example, in my own country, so many people are agreeable to what they call humane socialism.”

This raised that pregnant issue of why what was “agreeable” to so many people — not merely reflexively, or in theory, but in terms of bureaucratic and political career prospects — might not work in practice. The fruits of Allais’s “humane socialism” could be seen in Europe 20 years later.

Other laureates, too, were clearly miffed at the reported death of the centrally planned economic dream. James Tobin declared that the collapse of communism represented a victory for the “mixed economy” — in which government and business “worked together” — rather than Reaganism or Thatcherism. “We don’t have any right to be complacent about our own organization of economic and social affairs,” he claimed, “to think that wholesale deregulation and trusting everything to market forces, whatever that means, will solve our problems. There is some irony that the victory of Adam Smith over Lenin comes just at the time that capitalist economies face very serious problems that markets are not probably able to solve well.”

So there. Meanwhile, the idea that the government half of the “mix” might still be the problem remained remarkably unanalyzed.

Allais declared, “In my opinion, what we need just now in Europe is some moderate protection against the outside world, particularly in agriculture but also in the textile industry and in ship building.”

Was that whirring sound the patron saint of free trade spinning in his nearby grave? Smith had been against government economic intervention except under certain strictly limited circumstances. Instead, as this conference made clear, economists had become the handmaidens of intervention. This process had become ever more self-reinforcing. When it came to advising governments, non-believers in planning and macroeconomic management and skeptics about the pitfalls of the perpetual expansion of the “welfare state” mostly needed not apply.

It wasn’t so much that you couldn’t teach old economists new tricks as that economists perpetually sought to find new ways of justifying their unshakable, morally based interventionist pretensions. The proud socialist Jan Tinbergen fretted about overpopulation, pollution and the distribution of income, “which,” he bemoaned, “is terribly unequal.” Amazingly, at least for a Nobel prizewinning economist, Tinbergen spoke about the prospect of “running out of resources.” However, he saw a ray of hope in the ability of grand transnational organizations such as the United Nations Environment Programme (UNEP) to deal with environmental problems at the global level.

The reference was profoundly significant, because instead of rolling over and dying in the wake of its manifest failures, socialism was morphing in a new, environmental direction, under the aegis of “sustainability.” The UN, and in particular organizations such as UNEP, would be central to the push, at the heart of which was, as ever, anti-capitalism. The grand new cause was the theory of projected catastrophic man-made global warming.

Excerpted, with permission, from Why We Bite the Invisible Hand: The Psychology of Anti-Capitalism, by Peter Foster. Published by Pleasaunce Press. Available from Amazon.com.

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   Failure is called success in government work Newspeak Dictionary.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies

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