August 22, 2009
THE FUNDAMENTAL FLAW OF LIBERTARIANISM...:
Theory and Morality in the New Economy (DAVID LEONHARDT, 8/22/09, NY Times)
Beyond the immediate crisis, today’s overarching economic challenge is figuring out how the country can reap the benefits of Smith’s market-based system without experiencing the worst of its downsides. In the decades after World War II, the Keynesians who descended on Washington thought they had solved this problem. With the right mix of spending, regulation and interest rates, they believed, the business cycle could be tamed and unemployment largely eliminated. “This was hubris,” Paul Krugman, the Nobel laureate and liberal Times Op-Ed columnist, writes in “The Return of Depression Economics and the Crisis of 2008.” Technocrats overestimated how many jobs they could create without aggravating inflation, and aggravate inflation they did.Their failures, combined with the greater failure of socialist economies, set the stage for the ascendancy of laissez-faire economics. Much of Asia moved to a market-based system and experienced stunning improvements in living conditions. As Krugman writes, “capitalism could with considerable justification claim the credit.” These successes, however, created their own excesses. The principles of laissez-faire capitalism were elevated to the status of religious scripture, with Alan Greenspan as high priest. In “The Cost of Capitalism,” Robert J. Barbera, a longtime Wall Street economist, notes that Greenspan and others confused the fact that market capitalism was thebest economic system with the misguided notion that it was the perfect system.
Barbera calls instead for “an enlightened synthesis.” Such a synthesis — one that takes Smith at his word rather than his caricature — is at the core of almost every serious vision of a postcrisis American economy. For Barbera, it means the Federal Reserve should recognize that bubbles are the norm and that preventing them is its job. For the conservative appellate judge and law professor Richard A. Posner, it means seeing the crisis as “A Failure of Capitalism,” as he titled his latest book. Among other things, Posner suggests a modern-day version of Smith’s tax on luxury carriages: “increasing the marginal income tax rate of persons who have very high incomes, in order to reduce their appetite for risk-taking.” And in “Animal Spirits,” George A. Akerlof (another Nobel laureate) and Robert J. Shiller (who issued early warnings about the dot-com and housing bubbles) say the synthesis must take into account the many ways in which people are not the coldly rational, utility-maximizing beings that laissez-faire economic models imagine.
Smith, as it happens, would have been quite comfortable with this notion. At the University of Glasgow he held the chair of moral philosophy, and his second most famous book was titled “The Theory of Moral Sentiments.” In “The Wealth of Nations,” he wrote of the ways that pride, envy, respect and other emotions influenced decisions.
...is its faith that the free man is moral.
MORE:
-REVIEW: A Smith for All Seasons: Adam Smith in His Time and Ours: Designing the Decent Society. By Jerry Z. Muller (Michael Novak, First Things)
-ESSAY: Is the Market Moral? (Jerry Z. Muller, Project Syndicate)