The triumph of delusion

Blaming the recession on free markets is unscientific

By Geoffrey Lawrence
  • Thursday, October 8, 2009

Harold Meyerson is right in his Sept. 30 Washington Post column. But he doesn't understand why. Free-market economists do theorize about a world that doesn't exist. They theorize about a financial industry that isn't arbitrarily manipulated by the intervention of a central bank operating under the moral suasion of government. They theorize about a world with private property rights where politically connected bankers cannot afford to make unsound loans by forcing investment risks onto taxpayers.

That world doesn't exist. The world that exists, the one that has plummeted into economic recession, is one in which interest rates are arbitrary and money has no backing. It is one in which the well-connected can make a fortune at the expense of the little man by socializing all the risks and privatizing all the gains. It is one in which hard work and prudent decision-making no longer pay. It is one where the free-market economy — the most extraordinary system of peaceful human cooperation ever devised — has long since disappeared.

It's not surprising that Meyerson fails to recognize this, since he apparently doesn't know what a free-market economist is. He calls free-market economists the most "spectacularly wrong" group of professionals in known history because of their supposed inability to foresee the recent financial collapse. Meyerson believes free-market economists live inside mathematical models that are supposed to be able to accurately measure the value of all commodities — you know, just like a Soviet commissar. He claims it was these models' failure to accurately reflect the real world that led to the recent financial collapse.

Yet, true free-market economists — those belonging to the Austrian school — were actually the only economists to correctly predict the collapse. Austrian economists began warning about the housing bubble and impending collapse as early as 2003.

Austrians saw how the Federal Reserve's prolonged easy-money policies had inflated bubble after bubble, from dotcoms to housing. They saw Fannie Mae and Freddie Mac using their implicit government guarantees to acquire loans at below-market interest rates from large banks, then turning around to purchase higher-yielding but risky mortgage assets from those same banks. It was a government-sponsored Ponzi scheme that encouraged subprime lending. If anything went belly-up, taxpayers would bear all the risk while those involved made millions. It was anything but a free-market system. It was state corporatism. It was fascism.

Failing to recognize this, Meyerson praises the Keynesian school of economics for its supposed wisdom in advocating for even more government intervention. The Keynesian remedy is to redouble the disease.

It envisions the Federal Reserve printing money even faster than before — it has doubled its liabilities in the last year — leading inevitably to a further misallocation of resources as manipulated interest rates misinform investors about the amount of savings available in society. It envisions the political class enslaving citizens with debt in order to pursue pet projects instead of allowing market forces to allocate resources in concordance with the individual needs of the greatest number of people. It envisions autocratic state control instead of individual liberty. Indeed, as Keynes himself once wrote, his theories "can be much easier adapted to the conditions of a totalitarian state."

Considering Meyerson's criticisms of free-market economists, his adoration of Keynes is particularly confounding, given its complete disregard for empirical evidence. Meyerson is guilty of the very thing with which he charges free-marketers — the triumph of faith over science. Whether one considers the failures of the New Deal, the stagflation of the 1970s or the Keynesian renaissance under Bush and Obama, in every instance Keynes' ideas have led to widespread suffering and despair.

The only instances in human history when mankind has progressed have been characterized by individual freedom and laissez-faire economics. Meyerson would do well to take note of this before penning his next column.

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. This article originally appeared in the Washington Examiner.

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