How Markets Fail by John Cassidy (2009) is as instructive as it is readable. On reading it again, I was struck by how evangelical many leading economists are. They assemble in platoons preaching ideology masquerading as science. One economist said of Hayek: ‘This kind of writing is not scholarship. It is seeing hobgoblins under every bed.’ Friedman was the ultimate evangelist. He could rewrite history to suit his program – he taught that the depression was not caused by market failure but by government failure.
In 2003, one of Friedman’s successors said that macroeconomics had succeeded in solving the central problem of depression-prevention. He reminded me of the heart surgeon who said of my chest pain that whatever its cause, it would not kill me. Six months later, it bloody nearly did just that – because I had delayed in reporting to casualty for hours relying on his advice. It was, as his Grace the Duke of Wellington observed, a damned close run thing. So was the Great Financial Crisis – another painful case of a pretty syllogism broken by a sad fact.
It is not as if no one saw the GFC coming. Mr Cassidy reminds us that in 2003, Warren Buffett told his shareholders that ‘In our view…derivatives are financial weapons of mass destruction that, while now latent, are potentially lethal.’ But there you go – the Harvard Business School had knocked back Warren Buffett. Not the right kind of academic aura – like that of Mr Greenspan.
You can therefore imagine my relief when I read:
The economics department of Morgan Stanley…was refusing to hire any economics Ph D’s unless they had experience outside academe. ‘We insist on at least a three-to-four year cleansing experience to neutralise the brain washing that takes place’…..’Academic economics has taken a very bad turn in the road’….’It’s very academic, very mathematical, and it really doesn’t – I want to choose my words carefully here: it is nothing like as useful to the business community as it could be.’
Political parties and think tanks should take note.
When Mr Cassidy goes from ‘utopian’ economics to ‘reality based’ economics, we get:
….the essence of utopian economics is that the free market, by generating a set of prices at which firms and consumers equate private costs and private benefits, produces an efficient outcome. But from the point of view of society, what is needed is a balancing of social costs and social benefits. Free markets don’t lead to such a balancing….The market fails, and fails in a very specific and predictable sense.
This is not hard to get. Dealing in cigarettes or alcohol has social costs – that might be met from taxation. The same goes for dealing in carbon. The simple thing to do to meet the social cost would be to impose a tax.
But you can’t do that if tax is an ideological blind spot. And if you subscribe to the ultimate dream of utopia – that money grows on trees. It’s a bit like asking a keen footy fan to explain a Grand Final that his team just narrowly lost. After the first few words, you can sit back and hear the needle in the groove as the record revolves fixatedly on its own axis until its predetermined end.
In a blunt message to corporate leaders, the Prime Minister told The Australian the government wanted them to step up and focus on discussions that led to better outcomes for workers and their families. ‘If you want to advance the cause of your employees so they can earn more, there isn’t time for distractions…The most successful businesses are those that focus on that.’
The Australian, 13 September, 2019
This is hilarious beyond belief. The Minister for Thongs knows nothing at all about business – absolutely nothing – but he feels free to tell business how to run itself – while saying that business has no place in talking about politics – which business has been driven to do because the politicians are so inept. And this is from a political party that once had aspirations to being ‘conservative,’ but which is now introducing legislation to enable government to intervene at will in what used to be a free market. Do those galahs really believe that we came down in the last shower?