Friday, December 05, 2008

Does Economics Create Wisdom?

Brad DeLong looks at all 'we' have to figure out, and is exasperated:



The Obama administration is going to be rebuilding and reconstructing five major sectors of the American economy. It has no choice--there is no other option. It has to remake:

* Autos
* Housing finance
* High finance
* Energy
* And the big one—health care

On what principles and through what procedures is this extraordinary exercise in structural economic reform policy going to be accomplished? I get how to do the macroeconomics of Obama administration economic policy. I don’t get how to do the structural side…


He might add that we have nettlesome questions about the amount of subordination needed for mezzanine debt in the CDO's for Alt-A mortgages, what price--or is it 'level of price growth'--to set for housing, and how much chromium should be the standard dosage in weight loss supplements.

For me, the key principle in economics is that it studies the unplanned effects of individuals acting in their self interest. Like evolution it appears to be a product of design. Yet, many esteemed economists think that if we do not come up with a 'plan', all the key decisions in the economy won't be made anywhere near optimally, just as a bridge can't be built without a designer. Thus, its hard to say that learning more formal economics is a good idea, because clearly, there are no 'first principles' in this field, it still is merely a field for organizing and articulating your prejudices.

Margaret Thatcher famously told President Gorbachev that capitalism was superior to socialism because unlike Gorbachev, she didn't have to decide how many refrigerators to make this year--the market does that. Faith in the relative superiority of decentralized decisionmaking, by individuals who are not elected, is just as non-intuitive as it ever has been.

5 comments:

Anonymous said...

maybe she was wrong. people who never been there like to bullshit about socialism alot.

Jakob said...

Great post.

Politicians like to get credit for DOING things. Like all the affordable housing mandates out here in California. Which only end up discouraging development, driving UP pricing, making houses less affordable.

Sometimes the best thing to do for a government is to just get out of the way.

Anonymous said...

The "market" built a health care system around the well-documented adverse selection market failure all by itself.

Going back to the earlier post, what the big 3 need is to sluff off their benefits obligations on uncle Sam, just like the Japanese, French, and Germans do.

Anonymous said...

The "market" built a health care system around the well-documented adverse selection market failure all by itself.

Going back to the earlier post, what the big 3 need is to sluff off their benefits obligations on uncle Sam, just like the Japanese, French, and Germans do.

Anonymous said...

Hear hear Eric. Normally I have no patience for hardcore libertarian idealism because the people are so obnoxious, impractical, and dogmatic. Now I am more and more sympathetic to them. The CW now, left and right and center, is "we need massive stimulus immediately, it's only a question of HOW". No wonder the market is tanking...everything is going to be so ass backwards by the time the financial crisis is over that it will take years to restore normal capitalistic incentives, if we can at all.