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June 14, 2010

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"A High-Five for the Invisible Hand"

Posted: 14 Jun 2010 01:26 AM PDT

Bill Easterly reviews "The Rational Optimist":

A High-Five for the Invisible Hand, by William Easterly, Book Review, NY Times: The word "market" tends to set off a religious war. Opponents accuse proponents of blind faith in the Miracle of the Market. The proponents too often seem to confirm this accusation by overpromising and underproving what the market can do. (Opponents are often guilty of equally unthinking belief in the Immaculate Government Intervention.) Each side recites its creeds, giving heart to the faithful but making no converts.
Alas, Matt Ridley's new book, "The Rational Optimist," which argues for markets as the dominant source of human progress, is such a case. It didn't have to be so. Ridley, the author of "The Red Queen" and "Genome," is a gifted science writer who could have brought a more neutral perspective to the debate. ... It's an example of a phenomenon many economists have noted: natural scientists have remarkably low standards for reasoned argument when they discuss social science, as compared with the rigor they bring to their home fields.
Ridley does synthesize a great deal of material, spinning the history of humanity from the stone ax to the computer mouse. He recites colorful stories of successive waves of traders...
Ridley's key concept is gains from exchange, which make possible gains from specialization, which in turn make possible technological innovation. Gains from exchange and specialization certainly rank up there with the most important economic ideas of all time. ... But Ridley repeats these ideas so often that the reader gets weary. He makes them into a comprehensive explanation for all of human progress, which is more weight than they can bear. ...
Ridley's free market history is one-­sided in another way: He stresses "market" a lot more than "free." We hear little of the political ideals of equality and individual liberty, usually considered prerequisites for both exchange and innovation. These ideals are doubly potent because people desired them for their own sake as well as for their utility in achieving prosperity. ...
Nor does Ridley grapple with why so many people doubt market-based progress. His entertaining account of how such pessimism is always in fashion ... is tone-deaf to the 20th-century traumas that were huge setbacks for the gospel of progress. "Despite the wars," he writes, "in the half-century to 1950, the longevity, wealth and health of Europeans improved faster than ever before" — a true statement that surely misses the point.
Ridley also fails to really address inequality and uncertainty. The free market may produce cornucopia, doubters concede. But it also gave Richard Fuld of Lehman Brothers $60,000 a day (in 2007, the year before the company went bankrupt) while one billion other people survived on a dollar a day. In his discussion of global warming, Ridley argues that we've avoided all previous doomsday predictions. But our resourcefulness, or our luck, could run out sooner or later.
A case for individual freedom and market exchange would have to convince doubters that alternatives would create even more inequality and uncertainty, or something worse. Such a case could argue that some of those 20th-century traumas were caused by a backlash against both the "free" and the "market," and that central planning tends to create even more rigid inequality between political "ins" and "outs" while lacking the creativity needed to cope with future threats. But the case must move from "maybe" to logic and evidence. Alas, this book does not get there.
So read "The Rational Optimist" for its fascinating history of trade and innovation. But also ponder whether the debate over markets can move forward while it remains a purely religious war. Those willing to confront honestly all the doubts about the "free market" might then actually be persuasive in arguing that it is the worst system humans have ever tried — except for all the others.

This arguments mostly about comparative systems -- capitalism versus everything else -- and there are certainly those who wish to debate this question and who would argue for some alternative system. But for most people that question is settled. And for me, that's not what the debate over the "Miracle of the Market" is all about. There's a difference between saying the present system can be improved through government intervention, and saying the system should be replaced by some other economic and social system.

I think that government intervention at the microeconomic level, e.g. breaking up firms with excessive market power, and government intervention at the macroeconomic level, e.g. through monetary and fiscal policy, can improve the operation of the market system we live under. That's not a rejection of the market system, it's an attempt to make it better by preventing the build up of harmful political and economic power, and by correcting the tendency of market economies to have harmful boom and bust cycles.

links for 2010-06-13

Posted: 13 Jun 2010 11:03 PM PDT

What Should the Price of Gasoline Be?

Posted: 13 Jun 2010 06:30 PM PDT

Barkley Rosser:

What Should the Price of Gasoline Be?: In today's WaPo Business section, in "Think gas is too pricey? Think again," Ezra Klein reports on a recent study by Ian Perry of Resources for the Future that attempts to estimate the cost of all the externalities arising from the use of gasoline in vehicular transportation. At the time of the report, the average price of gas in the US was $2.72 per gallon, but after adding in (in order of estimated costs), 52 cents for traffic congestion, 41 cents for auto accidents, 30 cents for energy security, 20 cents for climate change, 12 cents for local pollution, and 10 cents for oil dependence, this brings a supposedly more efficient prices of $4.37 per gallon. It is unclear if that 12 cents for local pollution was estimated before or after the BP oil spill in the Gulf of Mexico happened.

"It's Not Fears About Inflation"

Posted: 13 Jun 2010 11:07 AM PDT

What should fiscal and monetary policymakers be worried about, inflation or economic growth? Jim Hamilton:

There's a common thread to all the above figures, and it's not fears about inflation. Instead it's worries about the level of real economic activity, showing up in a flight to safety.

The market is worried about growth. There are both monetary and fiscal policies measures that could help. So where are all the people who think policymakers should address market worries? Why aren't they calling for policymakers to do something to spur growth (and employment)? Do the market worries only count when they point to austerity?

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