All ideology aside: If the government had followed a laissez-faire policy for the last six months, and output, employment, housing, and financial markets stood exactly where they stand today, what fraction of people would conclude that “Events decisively prove that laissez-faire is a disaster”? Can you honestly give any answer less than 90%?
Mar 2 2009
I was reminded of this by Don Boudreaux's latest. In it, he cites a nice short piece by Robert Higgs and a great comedy riff by Louis C.K. Listening to the comedy sketch reminded me of what I wrote in a chapter titled, "The Joy of Capitalism" in my book, The Joy of Freedom: An Economist's Odyssey. I'll quote two pas...
Mar 2 2009
Brad DeLong pleads perplexity:I simply do not understand their arguments that government spending cannot boost the economy. As far as I can tell, they are simply burying their heads in the sand.At the start of 1996, the US unemployment rate was 5.6%. Then America's businesses and investors discovered the Internet. Over...
Mar 2 2009
All ideology aside: If the government had followed a laissez-faire policy for the last six months, and output, employment, housing, and financial markets stood exactly where they stand today, what fraction of people would conclude that "Events decisively prove that laissez-faire is a disaster"? Can you honestly g...
READER COMMENTS
Don Boudreaux
Mar 2 2009 at 2:02pm
Excellent question, my brilliant young colleague.
Equity Private
Mar 2 2009 at 2:07pm
The difference, Professor Caplan, is that laissez-faire policies didn’t promise a virtually instant transformation into green groves, sugar plums and chocolate waterfalls, and a painless re-inflation of the housing bubble.
Not to mention the fact that very little about the last 8, 12, 16 or 20 years in the United States looks very much like laissez-faire anything.
SpotCash
Mar 2 2009 at 2:11pm
When will Boudreaux start to call you ‘Grasshopper”
Brad Hutchings
Mar 2 2009 at 2:24pm
I sense a new Caplan book: The Myth of the Knowledgeable Politician.
Don’t just do something. Stand there!
DWAnderson
Mar 2 2009 at 2:30pm
“My brilliant young colleague?”
How about “my young apprentice?” 🙂
anon
Mar 2 2009 at 2:58pm
[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog.–Econlib Ed.]
scott clark
Mar 2 2009 at 3:03pm
No doubt there is a double standard, but the question really hinges on where in the world the will came from to try a laissez faire approach in the first place. Once you can convince them to do that, the whole battle is won. If you could say that government planning and intervention got us in the mess and you could keep villifying gov the way they can villify business, you might really have something. So i’m afraid the game isn’t about proving anything, though that the way we like to believe people are convinced,its just about persuasion and popular opinion. Most people have no idea how to even look at the evidence, no idea where to even look to find any actual evidence, so you’re barking up the wrong tree if you are appealing to reason.
8
Mar 2 2009 at 3:14pm
The financial markets would not be where they are today. They would be much lower, and job losses would be higher due to a bankruptcy wave in the financial sector. Of course, the crisis would already be over and recovery would have started.
Peterargus
Mar 2 2009 at 3:34pm
Conversation overhead at health club.
Gentlemen 1 to gentlemen 2: What do you think of the new president?
GM 2: What president?
GM 1: Obama.
GM 2: Well I don’t know how to fix this mess so I think they have some smart guys who do.
GM 1: Yea, at least he is doing something unlike Bush.
GM 2: Well I am afraid they don’t know what they are doing either.
Jake McCloskey
Mar 2 2009 at 3:53pm
There is no single definition of laissez-faire (for example, Rothbard would say that fractional reserve banks are not part of the free market but I disagree). I think many people would still argue about whether or not we had a “real” free market.”
MHodak
Mar 2 2009 at 4:01pm
A clever, disingenuous question. You know better than most that there is a large, fairly constant fraction of people who would argue for government control or intervention regardless of circumstances, just as there is a fraction, probably smaller, who would always argue for less.
Most members of the press and nearly all members of government are clearly in the former camp. They invariably buy the argument of any elitist with an idea that merely needs government money and power to implement. Because the market is plainly too defective to give us what I think you should have.
Snark
Mar 2 2009 at 4:40pm
As others have noted, laissez-faire on its best day is useless without the support of public opinion. Mises nailed this one long ago:
“The supremacy of public opinion determines not only the singular role that economics occupies in the complex of thought and knowledge. It determines the whole process of human history.”
EM guy
Mar 2 2009 at 4:43pm
The market six months ago was not in its pristine natural state. It was a market that had been thoroughly distorted by government intervention for nearly a century, through Fed policy, incentives for housing ownership, and so forth.
These long standing government policies greatly exacerbated the natural tendency of markets to overshoot and undershoot, leading us to a problem so large that it requires further intervention by the federal government. The question now is: How does the government intervene in a way that will lead us back to a healthy market?
It is precisely because of tremendous government intervention, dating back, in some cases, to the beginning of the twentieth century, that there is no alternative than to turn to the government to rescue us.
If your house is on fire, you have to call the fire department. However, when it comes time to rebuild your house, you will certainly look to private contractors.
Sal
Mar 2 2009 at 5:24pm
Your 90% number is not far wrong for the simple reason that we have not had laissez-faire economics since about 1913.
The principal feature of economic history in the 20th century was intervention by governments to correct the unintended consequences of previous interventions by governments.
Markets & people have no idea of how things would actually work under a laissez-faire regime.
Laissez-faire would mean no Fed, no SEC, no FDIC, no HUD, no GSEs, no IMF and no WTO. Kindly erase all those letters before performing your thought experiment again.
Bob
Mar 2 2009 at 6:02pm
To be fair, that’s the same fraction of free market preferrers that would (do?) blame the disaster of the last six months on gov intervention.
I happen to agree, but to be fair we should acknowledge that the bias cuts both ways.
Bryan Link
Mar 2 2009 at 9:22pm
An excellent hypothetical that demonstrates the psychological power of activity bias. When in doubt, do something…and if it makes things worse, do something else later to fix it! 🙂
Dezakin
Mar 3 2009 at 1:11am
Its a stupid counterfactual. If we could see what the world would operate like without government intervention or far less government intervention, we might be able to get those public opinion numbers. But you wouldn’t call it laissez-faire, because at that stage the lines become blurred where public regulation ends and private armies begin.
Laissez-faire is a mirage, an fantasyland in the dreams of Ayn Rand fans and libertarian economists who seem to forget that people will form their own governments in a power vacuum. These power vacuums give rise to such entities as la cosa nostra, yakuza, and warlords. My specific problem with laissez-faire ideals is that abolition of regulation would lead to far less transparent accounting, and markets wouldn’t function efficiently anymore.
This is not to suggest we live in the best of all possible worlds or anywhere close to it, that the regulatory environment we exist in is more good than bad. But no regulation would be much worse.
Equity Private
Mar 3 2009 at 6:29am
It is interesting to me that so many people equate “laissez-faire” capitalism with some version of an anarchist utopia fantasy. Of late I have notice a marked increase in this (intellectually thin) tactic whenever “free markets” are discussed.
Step back for a moment from the temptation to engage in onanistic reductio ad absurdum. Even stop signs can be argued to interfere with commerce. Let’s grow up a little.
The point is that since the 1990s, GSEs have poured trillions and trillions of dollars into very specific segments of the housing market on the theory that the “American Dream of Home Ownership” should be “affordable” to a particular socio-economic profile: The poor and middle class. “Affordable,” of course, is a dangerous word here. It should be quite obvious to anyone who has attended, much less passed, a Freshman economics class that this badly mis-priced risk throughout the market and inflated asset prices. Moreover, it did so with debt. The fact that these entities in one way or another touch more than 40% of residential mortgages in the United States today, coupled with the realization that (despite public equity listings) they are politically beholden entities, used for years as parking grounds to put out to stud those to whom the political class owed favors, and that their incentives were in the form of direct quotas based on providing low-cost housing in massive quantities, should resoundingly end all discussion on the “free market” nature of the housing market. These requirements, interestingly, were passed down directly from the “central planning committee” of HUD and various Congressional bodies, determining what would be politically appropriate levels of lending, politically appropriate rates at which to lend, and politically fashionable rewards to bestow to loyal vassals (I won’t even get into the incidents we know about where Committee members engaged in romantic affairs with GSE executives). Having reflected on all this, ask yourself two questions:
1. Is it any surprise at all that the housing market imploded?
2. Forgetting entirely philosophical questions about the worth of central banks and the Fed, and those other contentious issues that bring out the wing-nuts, how could anyone ever argue that the current bust bears even the slightest connection to a failure of market economies? Or that this was any recognizable form of “capitalism.” Sure, there was plenty of price discovery for MBS securities. But that is a convenient veneer over the fact that nearly half of the market was subject to effective price controls. Charges by the left that “crony capitalism” has failed are exactly correct. It was the left’s crony capitalism.
I am astounded that no one seems to want to make this argument in reply to the many cat-calls from the audience to the effect that “capitalism failed, time for new ideas!” Scary years ahead.
Josh
Mar 3 2009 at 7:42am
Amen. I’ve been wondering exactly the same thing.
Ike
Mar 3 2009 at 7:53am
@spotcash, the term is “Padawan.”
Bryan, “Dezakin” tries to cast free-markets as a Utopian absolute, but it actually prompted a better question from me.
Consider that government entities have DISCUSSED putting more money in the markets artificially than they have ACTUALLY injected.
The real question is “Would we be better off if the proposals had never been made?”
I would argue yes, as much of the freeze and indecision has been on the part of private entities unsure what the 8,000 pound gorilla will suddenly decide to subsidize.
The spent TARP then becomes less of a hindrance than the unspent TARP.
Discuss….
Sal
Mar 3 2009 at 9:26am
What has failed is the illusion that government can engineer boom without bust. It is impossible to banish the economic cycle and actually very harmful to even try. I think it would serve us all for government to be a lot humbler about its ambitions this time around. Sadly, there is no sign of that.
Give me the old pre-Fed days when the busts were deep but short, when many banks failed but never the entire banking system. Do you realize that our banking system is more impaired now than it was during the Depression? There is no major bank in America today that dares stand without the Federal crutch.
Bob D
Mar 3 2009 at 9:27am
If we were half way through a correction due to letting the market shake out malinvestments, I think that while many would be clamoring for gov. action, we would be on the road to recovery for flushing out poor actors and firms and much closer to fixing our mess! The stock market is not waiting for the Gov. to act. Do you really think that Dodd, Frank, Waters, Pelosi, Schumer and for that matter most Dem. politicians know enough about economics other than socialist economics! Give me a break! They are using the chaos to put forth their socialist agenda.
Drunken Priest
Mar 3 2009 at 5:59pm
Bryan,
do you remember this post by James Surowieki? He wrote:
The point is that it isn’t just some group of pointy-headed Keynesians saying that a big stimulus package will be good for the economy: the collective wisdom of the market is saying the same thing. And it seems peculiar for a supposed believer in the efficiency and intelligence of markets—which, as a libertarian economist, I assume Kling is—to simply disregard what the market is saying in this case. In effect, libertarian economists are saying that they have a better sense of what’s good for the economy than the aggregated wisdom of investors does.
Question: what does the wisdom of crowds say now?
Jesse
Mar 3 2009 at 10:47pm
Here’s a thought experiment to you.
Let’s say we lived in a world very much like the one we have now, but the stock market was twice as high and rising, GDP was growing rather than shrinking, and so on.
Would Bryan Caplan, Don Boudreaux, etc. say about the strength of our economy and its relationship to laissez-faire?
My thought experiment is better than Bryan’s because we can actually run it in the real world and check the results. Just flash back two or three years.
Oh, and Equity Private:
But that is a convenient veneer over the fact that nearly half of the market was subject to effective price controls.
I’d love to hear your explanation for how AIG went bust. Did it have something to do with Barney Frank or liberals trying to help black people or the government putting a gun to someone’s head? Maybe AIG management was brainwashed by socialists.
rdn
Mar 4 2009 at 10:58am
I’m with Dezakin. Lassaiz-faire is an idea destined for the intellectual dustbin with all the other tautalogical utopian ideologies whose outcomes are dependent on false assumptions about human behavior.
D. F. Linton
Mar 4 2009 at 1:56pm
rdn,
Including the tautological utopian ideology that the demigods of Washington see all, know all, and can fix all of our boo-boos using only money from those nasty rich people?
Equity Private
Mar 4 2009 at 2:57pm
“I’d love to hear your explanation for how AIG went bust. Did it have something to do with Barney Frank or liberals trying to help black people or the government putting a gun to someone’s head? Maybe AIG management was brainwashed by socialists.”
Even though I know you were just being snide, I’m happy to tell you.
AIG did exactly what it was incentivized to. It was provided with a primitive and backward regulatory measure of risk and it capitalized on a loophole to lever up beyond all reason.
Again, I’m sure you didn’t really need this explanation, and that you were, instead, just trying to belittle a position that you imagined (erroneously as it happens) I held, but there it is.
As a firm, and absent some other indication of manifest fraud, AIG did nothing illegal. Managing your business to comply with regulation is the point. I don’t know any firms (or people) that spend a lot of time reading tea leaves to guess what a given statute is SUPPOSED to mean. They interpret what the statute SAYS. If you don’t see why this is important, there is little hope of having a logical discussion on the issue with you.
What AIG did was colossally stupid. But that’s not a crime. Or at least not yet. Any more than taking advantage of a tax loophole is. (I speak of avoidance here, not evasion obviously).
I would point out that this kind of leverage and balance sheet expansion seems to be regarded as an accident of the evil market when it happens in FRE or FNM (who had more government oversight than about any firm in the economy), but the result of evil capitalists when it happens with e.g, AIG. Interesting.
Also, Jesse, I notice that you didn’t bother to address any of the substantive points in my posting. I’m going to take that to mean you have nothing to add there (except, perhaps, a straw man or two).
JamesG
Mar 5 2009 at 6:06am
It’s interesting to see revisionism at work.
The unfortunate truth is that the majority of economists were cheer-leading this debt-splurge all the way and none of you who now see the crash as inevitable said so at the time. In fact, anyone, like Roubini or Bill Bonner, who criticized the growth of sub-prime debt, debt slicing and reselling, derivatives and all the other money-shuffling shenanigans was called “Doctor Doom” or “overly pessimistic”. Why of course “the market knows best” was bleated in unison. “This is the new economics, no more busts”. “The real problem is the Asian savings glut” and many similar meaningless and theory-bereft banalities.
Now of course CYA determines that the bust must be blamed, not on the market somehow not knowing best (can’t criticize the dogma can we) but on government – by conservative economists for doing too much and by liberal economists for doing too little. Well many of us blame the economists who failed to see it coming and failed to warn government. That’s what they are paid for after all isn’t it?
So the real failure lies fairly and squarely with modern economic teaching, ie you guys. You pretend to know things you just don’t, you prefer dogma to real-world evidence and you forever fail to account for the human element; that every system is doomed to failure if greed and fear are allowed to dominate.
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