by Mario Rizzo
I was recently at the Summer University in Aix-en-Provence. I heard more than once about the need to educate people in economics in order to get better public policy.
My purpose in this post is not to go over the issue of the relative power of ideas about the “general welfare” as compared to special interests in determining public policy. Instead, I want to raise the question of whether today’s economics is homogeneous enough to teach basic lessons about the desirability of free markets. Let us put aside the old socialism and central planning issue. We can say that “economics” defeated that.
I want to suggest that many threats to free markets come from “respectable” economics in today’s world. There are at least three major areas:
- Externality environmentalism. By this I mean the view that Pareto-relevant externalities abound. Many of these arise from environmental considerations but others can be found in networks of all sorts. Economists following this approach craft policies that, in principle, could make things better as they see it. They do not think that the public choice issues are their business.
- The revival of Keynesianism. Perhaps there are not more Keynesians in the economics profession today than before the financial crisis but those that are around have gained credibility with the educated public. But, even more basically, so much of the standard analysis is of the income-expenditure variety that one must wonder about where “Keynesianism” begins and ends.
- Behavioral economics. Behavioral economics has successfully sewn confusion among neoclassical economics about the meaning, validity, and applicability of the rationality assumption. The “market failure” idea that dominates much of the literature in the externality area has been supplemented with “decisionmaking failure” in welfare economics, securities and consumer regulation and so forth. Economists cannot so easily claim that “free exchange” tends to benefit both parties.
So which economics? Some of us (myself included) are in a kind of bubble. Good economics is so obviously good. Teach people economics and things will be better (or at least no worse). Maybe. Perhaps even the worst economics is better than none. But I am not so sure.
What I do know is that many threats to free markets and the free society are emanating from economics today.