Misunderstanding the Fiasco

Tibor R. Machan

My concern here isn't with identifying who or what produced the recent financial fiasco but with whether and how one might produce such an identification.

It is my contention that in a thoroughly mixed economic system such as that of the U.S.A., untangling the macroeconomic or general cause and effect process is nearly impossible. It is not possible, in any case, without a comprehensive theory of how an economy works in terms of which one could then determine, despite the mass of confusing data, what could have gone amiss. Unless one has a good theory about such matters, the mere listing of events and factors just will not suffice. All that gives is hints, at most.

In the Sunday New York Times of April 11, 2010, Frank Rich tries again, as have many others, to assign responsibility of what happened as is still happening to such people as former Fed Chief Greenspan and treasury secretary Rubin. But once one appreciates the difficulty involved in sorting out what did and did not contribute to what went down, which public policies, the decisions of which public officials, the practices of which market institutions or the actions of which market agents--of whom there were, of course, millions--it can been conjectures with considerable confidence that Rubin and, especially, Greenspan are mere stand-ins in a philosophical and macroeconomic conflict between those who trust everything to government and those who have confidence in free institutions.

Because Greenspan was once associated with radical capitalist thinking, such as Ayn Rand's Objectivism, he is constantly being derided. But it's pure politics or ideology; no one really knows what or who in this country's terribly mixed economy brought about the recent financial fiasco. Most who seek to blame are scapegoating, nothing more, using the occasion to score points against what they disapprove of. (Greenspan was generally approved of by most as the Fed's chief even though he himself never made much of the job--just read his 1997 lecture about central banking to the Association of Private Enterprise Education at http://www.bis.org/review/r970502b.pdf) Frank Rich himself is but a latecomer here. It is Paul Krugman, his colleague at The Times, who puts forth the most dogmatically stated blame, namely, that what is responsible is the legacy of Reaganomics and so called market fundamentalism, a phony whipping boy if there ever was one.

When wide ranging events of very serious harmful impact occur in a mixed economy, to be able to figure out which portion of the mixture was most responsible is very tough. One needs, oddly enough, a general framework, just the sort that the likes of Krugman and Mr. Obama disparage constantly. These people are avowed pragmatists and for them any theoretical analysis of such events amounts to nothing more than cheap ideology.

By "ideology" they mean something unspecified--I have never read anything by either Krugman or Obama that explains their use of the term, as if it were a simple concept, which it isn't. One can only infer their meaning indirectly, from the fact that they tend to contrast it with pragmatism and "pragmatism" does have a pretty specific, commonly understood meaning. It refers to an intellectual disposition that rejects systematic analysis of events and things in the world. "Unprincipled" may capture it correctly and the reason for this is that a serious, traditional pragmatist claims there simply are no fundamental principles in such disciplines as economics, political economy, or even philosophy. All that's possible is a kind of catch-as-catch-can approach, a focus on what happens to bring about what one likes to bring about.

The general framework approach would start with the development of certain theories of human economic life that produce such systems of analysis as laissez-faire capitalism, socialism, fascism, communism, communitarianism, the welfare state and the like (with the ultimate goal of applying the best to actual public policy). From extensive historical study and sorting out of data, thinkers arrive at such broad systems and use these to analyze the very messy world in which economic events occur.

There simply is no way to escape theorizing, contrary to pragmatism. And so the only approach to figuring out what happened is by deploying the best of these general accounts of human economic life and see what it tells us. Yes, in this case theory comes before adequate understanding (but the theory has to be a sound one, which is no easy requirement to meet).

Until such an approach is recognized as the sort needed to figure things out, all that will be in evidence is a nearly random but emphatic finger pointing, with the hope to clinching the case for one's partisan analysis through intimidation.