Grist: Economics as pathology, part two

[marmar]

Economics as pathology, part two


5 Jan 2010 3:38 PM
by David Roberts


The other day I complained about an article by Brookings economist Ted Gayer. So did Brad DeLong, Paul Krugman, Ryan Avent, and Ezra Klein. As I am a nobody writing on an obscure website, I was roundly ignored by all parties, but Gayer has responded to the others. His response only reinforces the impression that he sees the world entirely in terms of platitudes from Economics 101.

Gayer’s basic shtick in his response is to set up a dichotomy: either people and businesses behave rationally or they don’t; either “firms are better at identifying profit-making abatements” or “regulators are better at identifying profit-making abatements”; either people do what economists predict or we might as well abandon capitalism. There are, after all, no gray areas in matters of faith.

When DeLong points out that McKinsey gets paid lots of money to identify profit-making abatements for businesses (which, by definition, hadn’t identified the profit-making abatements prior to hiring McKinsey), Gayer responds that it isn’t “evidence against the profit-maximizing assumption” because ... the companies paid McKinsey to help them maximize profits. Those who haven’t hired McKinsey presumably know, in advance of hiring McKinsey, that there are no profit-making abatements available to them. Efficiency consulting, like all resources, is optimally distributed in this best of all possible worlds!

It’s handy: if your definition “what businesses do” is “profit-maximizing,” and your definition of “profit-maximizing” is “what businesses do,” then yes, it’s hard to find counter-evidence. Businesses do in fact do what they do, and not something else.

Even better: Responding to Avent’s point about the housing bubble, Gayer warns against “abandoning economic principles” just because people mechanically applying those principles have been spectacularly wrong in the recent past at the cost of widespread suffering. Let’s not be hasty! .................(more)

The complete piece is at: http://www.grist.org/article/2010-01-05-economics-as-pathology-part-two