Does the credit crisis indicate the failure of the “free market”

Matt McCarten was someone I enjoyed listening to when I was a young Alliance supporter many years ago – however, even in the heyday of teenage communist sympathies I would not have agreed with his conclusion that the recent credit crisis is undeniable evidence that voluntary trade does not work.

Now Kiwiblog and Anti-dismal have already gone to task explaining why they don’t believe this is a fair criticism of free trade, and good on them I think they are on the money (David Farrar focuses on why the criticism doesn’t sit well while Paul Walker paints the case for regulation being the cause of the problem – more here). The Hive also mentions dis-satisfaction with his choice of historical comparison. However, even after reading these posts you may still harbour some confusion surrounding the fact that I said voluntary trade instead of free markets.

Ultimately, his criticism of the “invisible hand” draws out something incredibly naive about the point of view that the free market is bad. Supporters of the free market are not so much saying that corporations should be allowed to manipulate information and “defraud” the public as they are saying that voluntary trade among groups is a good thing.

If two people choose to trade, it must be in their benefit and therefore giving people the freedom to trade is an important part of a society – this is what free trade represents.

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Macroeconomics: The scientist and the engineer

Over at Econlog, Arnold King is telling us how he lost his macro religion. It is an interesting post, and it gives me the impression that he believes any type of technical macroeconomics (either empirical or theoretical) to be somewhat of a fraud – a fair description given the difficulty of stringing out cause and effect in macroeconomic data.

In the post he discusses a essay by Greg Mankiw called the Macroeconomist as scientist and engineer. Far from presuming that macroeconomists do the same thing as scientists and engineers, the point of the essay is to describe the difference between macroeconomists that thrive in the abstract and those that work in the face of policy and data. Although there is not a clear split between the two – the distinction allows him to discuss how many of the recent (last 20 years) conclusions in macroeconomics do not appear to be useful for forming policy.

The essay by Mankiw is very good, and it provides a much better description of the evolution of macroeconomics ideas then my earlier retort to Chris Trotters claim about Keynesianism. However, I would also beware the partisan element of what he states.
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Good question!

Over at Econlog Bryan Caplan asks a good question – he asks why economists who often rail against the free market will also often state that they strongly support civil liberties. Fundamentally he is asking, why do these people not support freedom to trade but do support freedom of expression.

Now I agree with Dr Caplan that economists should use the same tools to discuss civil issues as they do trade issues – any limits on civil liberties should be the result of externalities, asymmetric information on the value or relevance of ideas, or the undue power of an idea which in turn reduces social welfare (in the same way that in trade, people will rally against externalities, asymmetric information, and undue market power).

However, this does not suddenly imply that I am a stanch supporter of a completely free market – in the same way that I am not a stanch support of blanket calls to remove regulations that reduce civil liberties. Ultimately, in both cases there are trade-offs, and our ultimate goal is to maximise social welfare.

Lets discuss the “social-democrat economist’s bias” a bit more below the flap:

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Happiness, policies, and economics

It is good to see the Frog Blog discussing happiness and policy – as fundamentally the goal of policy should be to promote the highest social happiness, not necessarily to promote the largest GDP number.

The article that Frog links to can be found here, and on Saturday there was an article in the paper by Chris Worthington on the subject as well. However, I get the feeling that Mr/Mrs/Miss Frog interprets this policy implication a little differently to me (and both are different to this previous post) – lets discuss.

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Is economics not transparent enough?

Is economics not transparent enough?

I ask this question after reading this awesome post from the Freakonomics post (ht Antidismal) (Disclaimer: It is really only awesome if you are into economics 😛 ). Specifically, these two points that are often raised in presentations:

23. The motivation of the agents in this theory is so narrowly egotistic that it cannot possibly explain the behavior of real people.
24. The flabby economic actor in this impressionistic model should be replaced by the utility-maximizing individual.

Now as you might notice – these two criticisms contradict 🙂 .

Over time I have stated that one of the advantages of mainstream economics is that the assumptions it makes are transparent.  However, if us economists can’t agree on the appropriate characterisation of an economic actor (and thereby we adjust our characterisation in an ad hoc manner), how can the results of our economic models be transparent (as what determines the fundamental “rational agent” is unclear)?

Discuss 🙂 (I will try to come up with an answer when I wake up 😉 )

Do economists ignore workers?

Over at Econospeak

There appears to be a fair amount of disdain in his post about the mathematical nature of economics. However, I will forgive him for this – he is a heterodox economist after all, so his very discipline is focused on critiquing areas where mainstream economic thought makes a wrong turn. Although I do not share the mis-trust of mathematical theory (infact I believe it is a very useful way to organise ideas (sort of like writing them down), I do agree with the concept that an over reliance on technical models, without an understanding of the underlying assumptions, can lead to spurious conclusions in economics (however, as we have said before, this is a problem with the subjective application of a model – it is not invalidate the model in of itself).

Anyway, the authour appears to believe that economists ignore the idea of a worker. Fundamentally, I get the impression that he is believes economics discusses the rights of capital owners in far more detail than we talk about the rights of workers. However, I’m not certain that I agree – let me try to explain:

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