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On special request, our “beliefs”. Are we “hard left?”

November 4th, 2010 · No Comments

US discourse is increasingly substituting easy labelling and sloppy standards of proof for the rigours of scientific method. Which worries us a lot. Here a first sketch..

Of our core beliefs, and where they’re coming from (it’s only a first draft)

1) We believe in free trade and free markets

  • Wherever this happened, it has created wealth. Look what happened to China when they introduced land holdings for private agriculture in 1978. Within a couple of years, agricultural production tripled. It’s exactly what economics predicted. We like that. Theory confirmed by evidence, with alternative hypothesis refuted or less supported.
  • Freeing up international trade is a little more tricky (as it creates some losers as well, but there will always be net gains apart from some extraordinary circumstances) but in principle it’s no different from domestic trade
  • Apart from economic theory, there is a wealth of studies showing a solid correlation between more open economies and better economic performance. Since we believe in evidence based policies, this can be taken as a ‘stylized fact’, both predicted by solid theory and supported by a wealth of empirical evidence. The same result doesn’t hold for opening up financial markets though, so we’re much less keen on that.

2) Markets increasingly need regulation to function properly to deal with market problems, information asymmetries especially

  • This is what those free-marketeers don’t get. Modern life, products and services are becoming ever more complex as science and specialization progresses. This creates serious problems for markets, more especially information asymmetries. For instance, try to answer the following questions:
  • How do you know you’re lawyer is representing your interests, instead of his own (and doing the most perfunctory of efforts just to make it seem he’s doing something)?
  • How do you know the building you’re living in will not collapse with a minor earthquake?
  • How do you know that bright yellow paint on your child’s toy isn’t going to harm her health, now or in the long-run?
  • How do you know the treatment your doctor prescribes you is actually what you need? Or whether it’s the best treatment possible?
  • How do you know you can really trust the brakes of your car?
  • How do you know that diet product you’re wife just bought will work?
  • In each and every case, the seller of a product/service is likely to know more about it than you, way more. And the temptation is pretty big to exploit that information advantage, especially if he can get away with it. If you doubt this, ask yourself why second-hand car sales people have such a bad rep. Or remember who told you for decades that smoking was safe, that lead in gasoline posed no health risk, that X medicine didn’t have serious side effects, that frakking is absolutely safe :), or who told you that mad cow disease couldn’t be transferred to humans, that massive use of anti-biotica in the bio-industry wouldn’t produce serious public health concerns, or that all that plastic waste floating in the Pacific would absolutely never end up in our food chain?
  • With increasing complexity of products and services, these problems increase exponentially. We just don’t, can’t know everything and relying on the info of the seller is increasingly a dicey proposition
  • Markets can only partly remedy these problems. The main mechanisms here are reputation (a seller has less incentive to exploit his information advantage he wants you as a repeat customer, but with increasing complexity the link between product/service and outcome is increasingly tenuous, which is why the tabbacco industry could get away with it for so long, for instance), and transparency (the internet helps, it can rank doctors, lawyers, etc. to performance, compare products, etc. although strictly speaking, this isn’t a ‘free market’ solution). But remember this fundamental truth, markets are about price. It’s called the price mechanism. With increasing complexity, price as a substitute for real info is getting increasingly problematic.

3) We believe in free-markets as a means (to a more productive economy), not as an end in itself

  • Some of the people calling people like us “hard left” have a near religious belief in “free markets” (an ideology called ‘market fundamentalism’) which makes them completely blind to situations where they work less well and, more tragically, to simple, often market based remedies where tinkering with the institutional make-up of the market can make them perform better. For them, free markets are an end, not a means.
  • Markets don’t operate in a vacuum. They’re not the textbook abstraction of the economics101 text  those market fundamentalists
  • We have argued elsewhere that there are reasons why problems of information asymmetries are especially rife in financial markets (Abacus, subprime, anyone..). Which is why deregulating them has produced such a disaster. We’re hardly alone in that.

4) We believe in evidence based policy, not a-priori ideology

  • Simple fact. Look around in the world. Could there be a correlation between better regulated financial markets and less housing bubble, less overleverage, less ‘too clever by half’ financial products designed to confuse, less economic implosion as a result? Say Canada, Germany, anyone?
  • Read this again if you’re still not sure what damage ‘market fundamentalism’ has done to the US and the world. This is not by some conspiracy theorist. It’s the former chief economist of the IMF speaking.

5) On Government

  • “Always the problem, never the solution” according to those market fundamentalists.
  • Could it be that there are countries out there with significantly higher taxes, proportionally a much larger public sector, and still have dynamic, growing, productive economies? Germany, Denmark, Finland, Sweden, Norway, The Netherlands, Austria, anyone?
  • So could it be that it’s the quality, not the size of the public sector that matters more, as we tried to argue here?  when economies become richer, demand tends to shift a bit from private to public goods, and the public sector has an inbuilt tendency to grow somewhat disproportionally (a condition known as Baumol’s disease), as we argued extensively in the same linked article?
  • Could it be that Keynesianism (understood as countercyclical fiscal policy, that is deficit financing when private sector demand falls off a cliff, running surpluses during boom times) actually works?. If that link is too long for you, here is a simple irrefutable logic.

At heart, we have very little beliefs but a belief in the scientific method. That is, having an open mind, looking at problems from all sides, dispassionately considering all available evidence, and not be afraid to change your view when the evidence changes. All else derives from that.

Tags: Opinion