Leaders Go Left, But Economists Get Back To Basics

The conventional view at Davos is that a previous consensus in favor of free enterprise has taken a huge beating from the Great Crash of 2008-2009. What is much less known is that many economists are not willing to play along.

Instead, the crisis seems to have scared many economists of all kinds–including some previously heterodox–to reassert the orthodox recommendations of Econ 101. …

…What is going on? I think we economists love to speculate about heterodox theories when times are good and we feel free to discuss experimental alternatives to economic orthodoxy (and nobody is paying us much attention during good times anyway). But when the global economy is in free fall and everyone else seems ready to throw each and every Econ 101 principle out the window, we get desperate to save the core principles that lead to prosperity and development.

Free trade does create opportunities for firms and workers doing what they do best. The government can't forever spend money it doesn't have. Competitive markets reward innovation and efficiency and punish customer-abusing would-be monopolies.

Rapid deregulation has its risks, which we have learned that financial regulators should manage carefully, but too much regulation is far worse. This is what the Principles textbooks teach us. These ideas made their way into Principles textbooks by some process of natural selection–they were the ideas that stood the test of time in economics, because they were associated with the steady climb toward prosperity of the rich countries and, in the last half century, of the global economy.

There are variations around these core ideas of course, but the variations are always grounded in a home of sensible economics 101. In the midst of the scariest crises of our lifetimes, economists are coming home.