13 August 2015

Economists do not make the economy


Adam Smith published the Wealth of Nations only after having observed the economic reality in his time. He famously compared nail production in France and in Great Britain before concluding that the division of labour led to higher productivity. He favored free trade but also a modicum of government intervention to support infrastructures after he saw that good harbors and international exchange were factors of growth. This academic tradition, where science is rooted, is still with us today, be it in macro or microeconomics. Microeconomics, which tends to be all the rage among younger scholars, is entirely based on the observation of human behavior and how we react to incentives.

On the other hand, a rival school of economists tends to be more vocal if not vociferous, but impervious to reality : they have chosen to imagine a more perfect economic world than the real one. Following these imaginative scholars, if only governments would implement their prescriptions, we all would be wealthy in a more just society. The realistic school has been pro market since Adam Smith. The imaginative one has gone under different names, from one failure to the next: statist, protectionist, socialist, Marxist, Keynesian, neo Keynesian.

Whatever its denomination, the basic principles of the imaginative and unrealistic school have remained identical: hubris and central planning. It actually started in the Napoleonic era when the French emperor tried, to no avail, to replace free trade in Europe with what he called The System: a blockade against English and American traders and import substitution through public subsidies for the “national” producers. The conflict between the two economic schools, the realistic and the imaginative, has been perfectly illustrated by a dialogue which took place between Jean-Baptiste Say and Napoleon. Say, considered the father of economics in France, had written the first Treatise for the education of scholars and enlightened readers. In this Treatise, he coined the word “entrepreneur”, the true actor of growth according to the author; a disciple of Adam Smith, Say elaborated on free trade . He defined the so called Say’s Law, better known today as supply-side economics. Napoleon would buy none of this: he demanded that the entrepreneur be replaced by the government and free trade by the blockade. After Say refused, his book was censored. This dialogue between Napoleon and Say, in a way, is still going on.

Napoleon’s System led to his self- destruction: Wellington’s victory at Waterloo would not have happened if the French Empire had not been previously weakened by the Blockade. One would think that the success of economic reality versus economic imagination would be the end of the game. On the contrary, after the downfall of the System, imaginative economists went further by proposing to destroy the entrepreneurs and replace them by the State: in the 1830s, socialism was born. This dialectic is still with us: any failure of socialism or Keynesianism will be explained by state intervention that is too timid. Paul Krugman’s weekly column in the New York Times is undoubtedly the most systematic demonstration of this ideology. If budget deficit does not cure an economic recession, explains Krugman, it can only mean that the deficit was too small. If monetary policies do not work, it can only mean that an absurd fear of inflation has stifled monetary creativity. Krugman will never tell us when enough is enough, nor offer specific figures. According to the Keynesian high priests, Keynesianism does not work because it is not thoroughly applied, not because it could be wrong. In a similar vein, in Stalinist and Marxist times, any failure of central planning was explained by the perversity of “saboteurs”.

How can we understand , in spite of the poor record of these statist economists, that they are still with us and appealing to many? The answer pertains to philosophy more than it does to Economics. Thinkers like utopia: as Isaiah Berlin declared, “intellectuals are not that much interested into reality”. According to Hayek, “fatal conceit” is the fodder or arrogant economists and politicians in search of power: whatever the actual outcome of fatal conceit, utopia remains attractive as such and kind of a free intellectual lunch. Utopia promoters never need to prove anything ; on the contrary, realist economists are judged on results not on good intentions . Therefore, to accept free trade, entrepreneurship and “destructive creation”, the Schumpeter’s pithy definition of capitalism, is not for the faint-hearted nor for the pure idealists. Socialists, Keynesians, Neo-Keynesians will go on dreaming of a more perfect economy, a more perfect world, a more perfect mankind: they will never tolerate, as Adam Smith explained, that the baker sells his bread through self- interest (“self-love”, wrote Smith). All the Krugmans in our Universities and media will remain persuaded that, if power were granted to them, they would prove more efficient than the invisible hand of the market. In reality, these supposedly enlightened despots often had and still have the power to mold the economy: it has been tried, it did not work. The debate should be over but it is not, it will never be. But it has some dire consequences.

Denial of reality leads to weird policies. Global institutions like the World Bank, the IMF, the European Union like to apply the same rules to all countries, in order to be politically correct, never to admit that culture, geography, corruption may be more decisive than policies. Greece is a seminal illustration of this  gap between creative economic discourses and reality. Before debating the necessity for Greece to stay in or quit the Eurozone, repay its debts or not, it should be observed that the Greek State never had the slightest legitimacy in the eyes of the Greeks: why would they pay taxes? It should be underlined that along its modern history, the Greek State has been bankrupt regularly: why would it repay its debts this time? It also should be observed that the creditors negotiate with the “legal” government when the real power and wealth belong to the Greek Church and off shore entrepreneurs. Greece, two centuries ago, was a political invention devised by the European powers. Today, Greece is an economic invention made by the same powers assisted by their economic minions: a political utopia followed by an economic utopia. Krugman’s position on Greece? “They should follow the Argentinian model”. Does Krugman know soybeans do not grow in Greece, the crop which saved Argentina? Where is the common sense which led Adam Smith to visit nail factories before passing judgement?

Guy Sorman was an economist at the University of Paris and author of many books on classical liberalism including: The American Heart, In Praise of Giving, 2014. He is also publisher of France Amerique and founder of Action against Hunger.