Monday, November 17, 2008

A Response...

I wrote a response to a chap called Hugo in this earlier thread criticising a the letter those top economists wrote, I put a fair bit of effort into it, so I thought I'd make a post out of it. To summarize I suggested that public works would actually be an effective way to boost the economy and that the private sector would simply adapt itself to that spending. I was challenged on the point of opportunity cost, that this spending would be at the expense of some indeterminite private sector economic activity. I was also challenged on the point that if the state intervene's in the economy it is no longer free.

First, your point on "free" economies. Even in a what might be termed a "free" economy there are government interventions, taxation is determined by arbitary government choices, interest rates are also set by state bodies it's almost impossible to have a proper free economy 100% free from state directon. We'll always be stuck in a middle ground of some sort.

On your next point the government is an economic actor like any other, but as an actor it has both disadvantages and advantages. It has access to resources on a much greater scale than most private entepreneurs and also is much better at building up an overall picture of the economy. It is also far less risk averse than private entepreneurs and able to consider social externalities beyond the simple profit motive.

I don't accept the conclusions of the writersof the letter because I simply don't accept that leaving decisions to the private individuals is the best way (perfect information, time delays etc), a large number of risk averse investors got their fingers burned on sub prime mortgages because as individuals they failed to realise the big picture, there is a serious opportunity cost to those decisions.

As far as the correllation between state involvement and economic growth, I don't believe there is one. Private property rights and personal economic freedom are, I believe, essentials but beyond that state involvement is of little consequence. To make this clear the best performing advanced economies between 1950 and 1980 were (per capita income growth in brackets) : 1) Japan (6.0%), 2) Austria (3.9%), 3) West Germany (3.8%), 4) Italy (3.7%), 5) Finland (3.6%), 6) Norway (3.4%), 7) France (3.2%)

Of those, Austria, Finland, Norway, Italy and France had very large state owned industry sectors in the industrialized world. Japan and Germany also followed very active industrial policies. Correlation may not imply causation, but we would appear to be 7 for 7 for state involvement, it's a powerful pattern. Investment in public works us unlikely to have any great opportunity cost.

As a final note, it pains me to see how often a preference for right wing ideology is taken as a sign of economic literacy. It seems that sometimes the only qualification for being a professional economist is a tendancy to repeat right wing ideological dogma.

Edit: Added brief summary of the initial argument to the first paragraph.

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