Wednesday, October 22, 2008

The Blind Leading The Blind

Arnold Kling writes:
I am shocked at the behavior of my fellow economists during this crisis. They are claiming to know much more than they do about causes and solutions. Rather than trying to understand and explain what is going on, they are engaged in a fierce battle over narrative.

For example, many economists breathlessly cited high short-term interest rates in interbank lending markets as an indicator of credit markets "freezing up." However, as some Minneapolis Fed economists point out, the volume of lending does not indicate such a freeze. In fact, very short-term interest rates are a ridiculously melodramatic indicator to use, because even a small increase in default probability can cause the annualized interest rates to soar. (Thanks to Alex Tabarrok for the pointer to this article.)

Where are the stories of businesses canceling projects because of lack of funding? Yes, I am sure that there are homebuilders who want to do their part to contribute to the excess of housing stock and are being told to get lost by banks, but are there economically sensible projects being canceled? Continue reading.

This is why liberals who are running around proclaiming the death of libertarianism are so full of crap. Our modern economy is almost unimaginably complex. Now more than ever it's clear that no one really understands how the whole thing works. Thus, the best strategy is to avoid excessively centralized economic decision making.

Mucking around in areas we don't understand is always dangerous--particularly when those doing the mucking claim to know more than they actually do. Especially in times of crisis, we must maintain healthy skepticism about the decisions the government is making. Fiscal liberals' faith in our government is barely more rational than social conservatives' faith in their religion.

Though critics often accuse libertarians of putting too much faith in the free market, favoring laissez-faire policies is in reality more about a lack of confidence in central planning than it is faith in the invisible hand. The idea is just that the people most closely connected to given sets of circumstances are best equipped to make decisions about them. Of course people often make mistakes. That's why we don't want to put all our eggs in one basket.

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