We Need Our Heads Examined, Says Harvard

Last weekend, Harvard University sponsored a conference called (I am not making this up) “The Free Market Mindset: History, Psychology, and Consequences.” Its purpose was to try to figure out why, since everyone knows the current crisis amounts to a failure of the market economy, the stupid rubes continue to believe in it. The promotional literature for the conference opened with That Quotation from Alan Greenspan — the one in which he suggested that there was, after all, a “flaw” in the free market he hadn’t noticed before. Well, that does it, then! If our Soviet commissar in charge of money and interest rates says the free market doesn’t work, who are you to disagree? The promotional material continues: “If the current state of the U.S. economy makes clear that former Federal Reserve Chairman Alan Greenspan’s faith in free markets was misplaced, the question remains: what was it about free markets that proved — and still continues to prove — so alluring to economists, scholars, and policy-makers alike?” Because, of course, if there’s one guiding principle behind the largest government in world history, it’s free markets. Ahem. This conference, we were told, “brings together leading scholars in law, economics, social psychology, and social cognition to present and discuss their research regarding the historical origins, psychological antecedents, and policy consequences of the free market mindset. Their work illustrates that the magic of the marketplace is partially an illusion based on faulty assumptions and outmoded approaches.” The speakers then spent the day, I am sure, laying out their own faulty assumptions and outmoded approaches, and studiously ignoring the Austrian School of economics. In short, the conference was about this: Why do people still think the interaction of free individuals is a superior economic system to one directed by Harvard Ph.D.s like us? I mean, apart from the failure of central planning in every case in which it’s been tried, a failure so staggering that only a blockhead could miss it, why would people cling to the idea that being herded into a collective run by the experts isn’t the best way to live? So by assuming from the outset the very thing that needs to be proven — namely, that the current state of the economy just occurred spontaneously, as the result of wicked market forces — our betters relieve themselves of the need to consider that central banking, a government-established institution, just might have had, you know, a little something to do with what happened. George Reisman has already demonstrated the absurdity of referring to our present system as a “free market” one. Naturally, of course, none of the participants bothered to notice that a Soviet commissar in charge of money and interest rates amounts to something like the opposite of the free market, or that the economic distortions he causes cannot, therefore, be the fault of the free market. This is exactly why, in my book Meltdown, I call the Fed “the elephant in the living room.” We’re not supposed to notice it, and we’re supposed to pretend the damage it causes is the result of wildcat capitalism, unfettered free markets, or whatever other juvenile phrase is currently in vogue to describe the usual bogeyman. Now I don’t want to list all the paper topics at this conference, since it’d be a shame to make all of you feel stupid for having frittered away your weekend when you could have listened to, say, Stephen Marglin’s paper on “How Thinking Like an Economist Undermines Community.” Now there’s a topic I haven’t heard quite enough platitudes about. (If you must, you can view the whole schedule here.) You could also have heard a bunch of totally conventional polemics about how the market economy allows for “too much” pollution, when in fact a genuine free market — which, I need hardly point out, is not actually considered in any of these alleged papers — would punish polluters and bring about the internalization of so-called externalities. Murray Rothbard dealt with this matter in an extremely important article none of the participants had read. I wonder if anyone at the conference asked questions like this: When Greenspan flooded the economy with newly created money and brought interest rates down to destructively low levels, thereby distorting entrepreneurial calculation as well as consumers’ home purchasing decisions, was that the fault of the free market? Do you think the Fed’s creation of cheap credit out of thin air makes market participants more careful or less careful in how they allocate borrowed funds? When Alan Greenspan bailed out Long Term Capital Management in 1998, was that a “free market” phenomenon? Do you think he thereby encouraged more or less risk-taking among other major market actors? The Financial Times spoke in 2000, in the wake of the dot-com boom, of an increasing concern that the so-called “Greenspan put” was injecting into the economy “a destructive tendency toward excessively risky investment supported by hopes that the Fed will help if things go bad.” “All the insane dot-com investment we’ve seen, all this destruction of capital, all the crazy excesses of the past few years wouldn’t have happened without the easy credit accommodated by the Fed,” added financial consultant Michael Belkin. Did the free market cause that? Do lending standards decline for no particular reason, or could this phenomenon have a teensy weensy bit to do with (a) government regulation aimed at increasing “homeownership” and (b) loose monetary policy by the Fed? When the banks get the additional reserves the Fed creates, they naturally want to lend it out — and in order to do so, they wind up lending it to people they either have or would have rejected previously. As I show in Meltdown, the phenomenon of lax lending standards in the wake of an inflationary boom by a central bank is traceable all the way to the nineteenth century. There is nothing even slightly unexpected — or market-driven — about it. Questions like these could go on and on. Not one, you can be certain, was raised at this conference. Now if you really wanted to sponsor an event whose purpose was to try to understand why people believe inane things that have been falsified by reality, you’d do much better to hold a conference on socialism, or on Keynes and his school. It would be fascinating to learn the psychological motivation behind the persistence of Keynesian economics, whose popular version is a non-falsifiable, ersatz religion. Is Japan’s economy still suffering? Why, that’s because Japan didn’t spend enough — even though it spent so much that it became the most indebted country in the developed world. Have people spent so much that they’re now burdened with debt they can’t possibly repay? Then we need more spending. Is the economy a distorted mess after an artificial boom? Then instead of letting the economy restructure itself along sustainable lines, let’s instead “stimulate” the system just as it is, with the goal of bringing about more “consumption,” more “labor” employed, and higher “income,” without bothering to disaggregate any of these things and deciding what kinds of labor need to go where, what kinds of consumption are sustainable and what are figments of the bubble economy, or how the capital structure needs to be reassembled in order to cater to genuine consumer demand. In fact, let’s actually boast about neglecting capital theory altogether (as indeed Keynes did in a 1937 article in the Quarterly Journal of Economics). Here’s another thought: given how many Keynesian economists predicted a return to depression conditions when World War II spending came to an end, and that what we instead got was the single most robust year the private economy has ever seen, isn’t it a little strange that not one of these economists went back and re-examined his premises? On the other hand, consider the names Jim Grant, Peter Schiff, Ron Paul, and Jim Rogers. Apart from having predicted the current crisis — unlike anyone at the Harvard conference and indeed unlike the paper-tiger economists they unsurprisingly preferred to spar with during their deep-thinking session last weekend — one thing these men have in common is that they are all Austrian economists, they all believe in the Austrian theory of the business cycle, and they all pin the blame for the crisis on the Fed, a non-market institution. These men believe in the real free market, not the centrally planned market of Alan Greenspan, Ben Bernanke, and the Federal Reserve. And they saw a crisis coming at a time when everyone else was predicting new highs for the Dow and singing the praises of a world economy that was more robust than it had ever been. Maybe that’s why people believe in market economics: unlike the Rube Goldberg models of their counterparts in the profession, the things Austrian economists write and say actually have some connection to the real world. People who believe in the market economy support a social order in which free individuals make voluntary contracts with each other, and no one can initiate physical force against anyone else. Is that vision so obviously unattractive that we have to refer its supporters for psychological evaluation? We might instead wonder at the psychological condition of those who would denounce such a system: might they be motivated, for all their noble talk, by nothing but base envy of those with more material wealth than they, or by a pathological desire to dominate other people? I’m sure that will be covered at next year’s conference.