Last summer, I read a post by an economics professor named Mark Steckbeck called Three Edicts of Economic Thought. He identifies three schools of thought and highlights the epistemological implications of each. (Note: GMU = George Mason University):
The leftists: "That what is is inefficient." Given the abundant examples of oversupply, undersupply, and information problems, (i.e., market disequilibrium), market inefficiencies abound.
The Chicago School: "That what is is efficient." There are no market inefficiencies given the perfectly informed and rational actions of individuals. Any oversupply or undersupply or information problems (i.e., market disequilibrium) are efficient responses to transaction costs.
The GMU School: "That what is is." The epistemological problem precludes us from ever knowing if there exists a preferred social outcome other than what is – what evolves naturally and spontaneously from individuals freely choosing their preferred outcomes. Seeming inefficiencies are unexploited profit opportunities for entrepreneurs.
I think the third option gets it pretty much right. A market economy is a complex evolutionary organism with highly integrated feedback loops. It adapts and evolves as it interacts with its environment. Given sufficient latitude, it will evolve to address existing problems. That does not mean that adaptations will occur in smooth, non-disruptive ways.
Lest I be misunderstood, I’m not talking about the survival of the fittest contest between human beings. I’m talking about a contest between alternative behaviors within an economic system. Nor should it be concluded that “market economy” means the American economic system. The American economy is one approximation of a market economy.
I think there is a role for government in softening some of the shocks that occur to people’s lives as economies morph, but the primary role of government is to provide safe boundaries in which solutions can emerge from individuals, families, and civic/economic institutions searching for solutions. The problem with big top-down government solutions is not that they are malevolent. The issue is one of modernist epistemological hubris, believing that an individual or body of officials can rationally discern with accuracy the ramifications of their actions in a massively complex human ecology.
Thus, I reject the Chicago School idea that the world operates with perfect rational efficiency and that what is is the best we can do. But I’m doubtful that very many solutions can be developed from the top and implemented by the federal government. Instead, virtuous individuals combined with strong families, strong civic institutions, and strong economic institutions, with government playing a supportive mediating role, is the best way to a just and flourishing society.
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