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Enough with the GOP's Faith-Based Economics

Some politicians believe that less regulation, spending and taxes will help the economy -- this belief comes from a longstanding blind faith in the so-called "free market."
 
 
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Photo Credit: Bête à Bon-Dieu

 
 
 
 

 "I will do all I can to help you," Montague answered. "And you must be very severe with me," Lucy continued, "and not let me spend too much money, or make any blunders. That was the way [former business advisor] Mr. Holmes used to do, and since he is dead, I have positively been afraid to trust myself about."

-Upton Sinclair, "The Moneychangers"

From Ron Paul to Mitt Romney, politicians consistently employ their own framing of why the economy is performing poorly, and thus, promote a consistent remedy for how to improve it. Government doesn't need to do more, they contend, it needs to do less - less regulating, less spending, less taxing. They believe in these solutions, I argue, not necessarily because of some secret allegiance to the rich, but because of their longstanding blind faith in the ability of the so-called "free market" to correct economic problems on its own.

During a recent appearance on The Daily Show, the libertarian Sen. Rand Paul (R-Kentucky) championed the need for free-floating interest rates by analogizing interest rate movements to the human body's production of insulin. [1] That such a complex economic process could be equated with an automatic physiological process was not at all accidental. Just as though it were a natural science, free-marketers firmly believe in capitalism's ability to self-correct. Government, they argue, will only mess up (or, as they like to say, "distort") this process. This is precisely what Ronald Reagan was intimating when he famously declared, "Government is not the solution to our problems, government is the problem."

The Myth of Self-Correction

But how could an economy correct itself, and what does that even mean? Basically, the argument proceeds as follows: the economy comprises economic actors (consumers, workers, households, firms, investors, etcetera) who operate rationally - that is, according to their individual self-interest, maximizing the things they want (economic and material gain) and minimizing the things they don't want (economic loss and material deprivation). [2] Thus, economic outcomes are determined by what is fondly referred to as "the democracy of the marketplace": bad products don't get purchased, so the producers of those products stop producing them. Alternatively, the makers of good products are able to sell their products, which consequently encourages new producers to also make those good products. But, if those new producers want to be competitive and capture market share (which they do, because they are rational), they must figure out a way to make those good products at a lower cost. They thus relentlessly increase efficiency so as to lower prices and outcompete their competitors, which leads into a virtuous cycle of efficiency increases, falling prices and ever-rising standards of living. In the end, we have a society filled with goods and services that we enjoy, in the quantities we want, at prices we can afford. [3] Government intervention can only do harm, for how could a bunch of bureaucrats possibly know what the people want more so than the people themselves?

The late economist Robert Heilbroner beautifully captures this "rational economic actor"-based worldview when he writes that, in effect:  "The complex irrational world is thus reduced to a kind of rational scheme where human particles are magnetized in a simple polarity toward profit and away from loss. The great system works, not because man directs it, but because self-interest and competition line up the filings in the proper way; the most that man can do is to help this natural social magnetism along, to remove whatever barriers stand before the free working-out of this social physics, and to cease his misguided efforts to escape from its thralldom." [4] The entire free-market argument must therefore begin with the existence of the rational economic actor already assumed.

 
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