Microfoundations are not a “Morality Tale”

by Mario Rizzo


In his column today in the Financial Times the often-excellent Martin Wolf drops the ball. He endorses the view which he associates with J.M. Keynes “that one should not treat the economy as a morality tale.”  

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis. ……

This same moralistic debate is with us, once again. Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over.


Mr. Wolf deals with a number of aspects of Keynes’s vision including the idea that Keynes was a moderate who saved capitalism. But the main point here is whether the idea that there are distortions in the relative price structure and in the allocation of capital is a morality tale. It is true one could present this technical economic claim as a morality tale for those innocent of complex thought viz., “The guy got drunk and now he must suffer.” But so what?


Were not F.A. Hayek’s and Ludwig von Mises’s  analyses of the business cycle based on the capital theory of Eugen von Boehm-Bawerk and the interest theory of Knut Wicksell – two of the greatest names in economics? Wolf’s point is absurd. We could also caricature Keynes’s view as: “The key to wealth is spending as if there were no tomorrow.” Keynes’s morality is traditional vice. Stop! This gets us nowhere.


Analogies are not substitutes for analysis. Keynes did not invent this idea. He just used it in promiscuous fashion against his opponents. Let us now not make the same mistake.

One thought on “Microfoundations are not a “Morality Tale”

  1. What a Knut.

    Seriously though, I stopped reading Wolf’s book on globalization in part because he says things without backing them up, like The Economist. Example: “Finance needs regulation.” Period, end of discussion.

    Mario, you’re right. The economy is sick — the solution is not more poison. Calling for a correction isn’t ideology, it’s simply recognizing WHAT the economy is. The economy exists to fulfill our wants and needs, not the other way around. Consumers don’t exist to continually expand nominal GDP so the likes of Wolf can get their ideological rocks off. And that’s why this whole article is an example of projection — we are not the ideologues, the GDPers like Wolf, Keynes, and Krugman are.

    Finally, this bit of Wolf’s article:

    “The election of Mr Obama surely reflects a desire for just such pragmatism. Neither Ron Paul, the libertarian, nor Ralph Nader, on the left, got anywhere.”

    is absolutely absurd in its reasoning. The voters know nothing about economics and so the policies they vote for could never be confused for being correct.

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