Tuesday, 14 April 2009

The FT's Pot Shots at Chicago Economics

The op-ed page of yesterday's Financial Times contains not one but two pieces attacking the Chicago school of economics. As a Chicago alum, I'm quite happy to see critiques of the lessons taught at my alma mater, but these pieces strike me as unsubstantiated, lacking focus, and wildly idealistic.

In a piece titled, It is time to put finance back in its box, Philip Augar claims the Chicago school of free-market economics is "busted." And what evidence does he use to support this claim? Augar writes, "The big beasts of free-market economics, Britain and America, are more wounded than other species." That's it -- the sum total of Augar's claim that free-market economics is "busted."

Augar ignores countries that in many respects appear to be faring worse than the US and Britain. For example, industrial production in Japan has declined by almost 40% over the past year, and in Germany the decline has been just over 20%. In contrast, the declines in the US and the UK have been just over 10%, similar to the declines in Russia and South Korea.

And Augar appears to ignore the fact that London and New York would be expected to suffer disproportionately in a global financial crisis, given their roles as global banking centers.

But if the first half of Augar's piece suffers from being poorly-supported, the second half suffers from Augar's unbridled idealism, as evidenced by his final paragraph.

"But now is the time for change. Unless governments in America and Britain really open themselves up to new ideas, emerging economies in Asia and mainland Europe, places where alternative economic and corporate governance models do exist, will seize the initiative and redefine the global agenda. In parallel, academics need to recapture their heritage of creative, independent thinking and throw off the influence of finance. Wall Street and the City need to be grown up about this. They might not like the prospect of losing their grip on government and exposing themselves to new ideas. But unless they do, they might just find that the page has indeed been turned and they are no longer on it."

Augar's plea for governments to be open to new ideas is well and good, but Augar doesn't offer any ideas -- new or otherwise. What alternative economic and corporate governance models does Augar support, and why?

But if Augar's op-ed piece in yesterday's FT is naive, Phillip Blond's is downright fanciful, starting with its title, "Let us put markets to the service of the good society." Blond has just become the director of Demos' Progressive Conservatism Project, and this piece is part of the Tory effort to re-brand the party ahead of the next general election.

Using the language of George Soros, Blond derides "the now clearly bankrupt ideology of the free-market fundamentalists." Whereas Augar at least offered a single sentence in an effort to convince us of the failings of free-market economics, Blond dispenses with any such effort, perhaps believing that this statement is simply self-evident. But the advocates of free markets never claimed they would prevent financial crises or recessions, and critics like Blond should at least be expected to make their case.

Blond states the view that bank that are too-big-to-fail should be broken up -- a view that could be argued quite reasonably given recent events. But rather than arguing this view based on recent events --or on the basis of any events whatsoever -- Blond appeals to pure philosophy. In particular, he justifies the break-up of large banks because it would represent a rejection of "...the neo-liberal and Chicago school-inspired dictum that market-generated monopolies are the most efficient distributor of resources and price utility." Let's resist the temptation to discern some meaning from Blond's term "price utility." Let's ignore the fact that Blond resorts to the time-tested rhetorical artifice of creating a straw man by mischaracterizing the views of the Chicago school. The fact remains that Blond is advocating policy on the basis of philosophy - the very definition of an ideologue.

But as the piece wears on, Blond descends into a virtual jabberwocky of meandering claims for the philosophy of political economy supported by the more fanciful elements of today's Tory party. Consider a few chestnuts.

"If carried through, the new logic of British Conservatism requires a break-up of this cosy corporatist duopoly and its replacement by a decentralised civic economy that crafts together moral values and economic power to create the type of society that most people want to live in: empowered, secure and sustainable communities of shared virtue and prosperity."

What is a "civic economy?" What are "communities of shared virtues?" Who decides what is virtuous? How would we ensure that such virtues are shared? What would these communities of shared virtues be empowered to do?

With the reader still reeling, Blond moves to the topic of antitrust. With an enthusiasm that would have made Teddy Roosevelt proud, he argues for breaking up not only monopolies but also oligopolies, citing the retail food industry in Britain, apparently ignoring the many thousands of local grocers in the UK. In support of this proposition, Blond avoids such bland concepts as predatory pricing and tying, arguing instead, "Allowing more people to participate in markets will help to address rising inequalities of opportunity, character and capability." The concept of equal opportunity is widely-discussed and widely-understood. But what is an inequality of character or an inequality of capability? Could Blond be arguing for government policies that attempt to foster equivalent outcomes resulting from differences in personal character?

Blond unleashes the final salvo in the next paragraph. "A fully engaged economy requires new associative models of equity and ownership such as time banking, fractional ownership and social bonds to generate wealth and influence for all."

What is meant by the term "fully engaged economy?" What is an associative model of equity and ownership? And how is the Conservative Party allowing itself to be intellectually hijacked by such drivel? And finally, why is the FT printing this dross?

I believe the mainstream financial press has an obligation to exercise some discretion to ensure minimal standards when selecting opinion pieces for publication. Even if the pieces are poorly-supported by a reference to actual events or observations, they should at least have some readily-discernible meaning to a typical reader. To the extent that these pieces by Augar and Blond have any meaning, they appear to me as unfocused diatribes against free-market economics rather than clear expositions in favor of an alternative, and I believe the readers of the FT deserve better.

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