The arrogance and absurdity of economists

June 3, 2012     
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In order to better understand the policy fiasco in the European Union that drags out and exacerbates the recession, one needs to look no further than the writings of John Taylor, a renowned Economics Professor at Stanford. His article in Saturday’s Financial Post, an article adapted from his Hayek Prize Lecture, highlights the arrogance and absurdity of economists.

According to Taylor: “an unpredictable economic policy…is the main cause of the persistent high unemployment and our feeble recovery from recession” in the United States. His solution is a “reform strategy built on more predictable, rules-based fiscal, monetary and regulatory policies”.

To his credit, Taylor does admit that rules are critical for the functioning of an economy. However, rarely, if ever, do economists discuss the rules underlying the whimsy of their economic models. We develop our models in a vacuum with no specific rules set out.

But admitting that we need rules is not the same as describing what the rules should be. Herein Taylor starts down the path of irrelevance and absurdity. What are the minimal set of rules necessary for an economy to function well and for a country to avoid the march to serfdom? Obviously Taylor has his own set of rules in mind.

What happens though when there are differences of opinion? Undoubtedly, Paul Krugman has a different set of rules in mind. Who is right? How are differences to be arbitrated? Where does public opinion enter into the picture?

Taylor does not address these questions because he believes that he is right, and thus, only a fool, unworthy of any opinions, would question his authority and views backed up by years of “scholarship”. At a minimum, he should set out his preferred set of rules and participate in the inevitable debate, a debate that includes the general public. No one has a monopoly on good ideas!

Further, in arguing in favour of fixed rules, Taylor is implicitly suggesting: Once the “right” rules (his) are in place, there is no need to change them. They should become fixed in stone for the ages, unless, of course, new research by either him or his disciples indicate that some change is warranted. Basically, there is no role for government and politicians in his world, other than adhering to and enforcing the rules.

Taylor criticizes the Dodd-Frank financial reforms as an example of the unpredictable policies that are contributing to the ongoing economic malaise in the United States. But once upon a time, Glass-Steagall prevailed for decades as the regulatory basis for the financial industry in the United States. Was this “predictable” regulation acceptable to Taylor? It should have been since it was a fixed rule.

However, it is highly unlikely that Taylor favoured Glass-Steagall. No, Taylor wants rules that limit the scope of government, and rules that conform to his economic views. In other words, rules can be changed, but only according to the analysis presented by himself and/or his disciples. Yes, academic freedom is an oxymoron.

It requires a remarkable degree of arrogance to believe that one is capable of defining the “right” set of rules for all time, and that one’s wisdom is so great, that future events can never justify changing the rules because of one’s omniscience.

Moreover, by eliminating any role for politicians and governments, a country following Taylor’s advice is already in a state of serfdom. Taylor, like his hero Friedrich Hayek, believes in elitism, where a small group of self-selected individuals with supposed superior intellects selects what is and will be in the best interests of all people. The common man is simply too stupid to know what is in his best interests. And it is dangerous to allow such inferior people to select leaders who can change rules. They can be bought by the false promises of demagogues.

Perhaps, but these risks are worth taking for the sake of democracy and freedom. I always will take my chances with the common man than with the “superior” intellect. To do otherwise would be absurd!

Taylor ignores the history of the 19th century and first third of the 20th century where government inaction resulted in prolonged and deep recessions/depressions. The “natural” adjustment process espoused by Hayek and others in the neo-Austrian School of Economics never worked well. John Maynard Keynes recognized this reality - too bad modern day critics of Keynes haven’t done so.

Fortunately for the U.S. and the world, Taylor was not the Chair of the Federal Reserve in 2008. For if he had been, the U.S. and most of the world would now be mired in a depression with unemployment rates comparable to those in Spain and Greece.

The opinions expressed in this blog do not reflect the views of either Global Brief or the Glendon School of International and Public Affairs.

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