Market correction

40Ebenstein False move: Ebenstein says the political right in the US has wrongly predicted hyperinflation, keeping the government from doing more to combat unemployment | AFP

One book sees a problem with applied economics, another sees a perversion of the Chicago School's message

He believed that government had a crucial role to play in a well-functioning economy. It should finance and run good schools, as well as build roads, bridges and parks, he argued. It should tax alcohol, sugar and tobacco, all of which impose costs on society. It should regulate businesses to protect workers. And it should tax the rich—who suffer from “indolence and vanity”—to help the poor.

Which leftist economist was this? None other than Adam Smith, the inventor of the “invisible hand” and the icon of laissez-faire economics today. Smith’s modern reputation is a caricature. He was a giant of the Enlightenment in large part because he was a careful and nuanced thinker. He certainly believed that a market economy was a powerful force for good. The exchange of goods and services, as he explained, could lift living standards and free 18th-century Europeans from the tight strictures of tradition and government. Yet he did not have a religious faith in the market. Smith was a classical liberal, in the European sense of the word, who emphasised the essential equality among human beings.

Lanny Ebenstein’s mission, in Chicagonomics, is to rescue not only Smith from his caricature but also some of Smith’s modern-day acolytes: the economists who built the so-called Chicago school of economics, chief among them Milton Friedman. From their home base at the University of Chicago, these economists became influential around the world. They provided much of the intellectual ballast for the free-market revolution of the late 20th century. They advised Ronald Reagan and Margaret Thatcher, became gurus to reformers in post-Communist eastern Europe and elsewhere and inspired others in China, India and the rest of Asia.

As the list of their protégés makes clear, Friedman and his allies were politically conservative, pushing against state control of industry much as Smith had. But Ebenstein argues that the message of the Chicago school has nonetheless been perverted in recent years. Many members of the Chicago school subscribed to “classical liberalism,” in Ebenstein’s preferred term, rather than “contemporary libertarianism.” Classical liberalism manages to grasp two different ideas: The state’s economic role can—and often has— become too large, but that does not mean its role should be as small as possible. Indeed, the state can become marginalised to the point of undermining the larger goals that Smith, Friedman and others championed, including freedom, prosperity and equality.

Ebenstein, the son of a political scientist who taught briefly at the University of Chicago, has written 10 books on economic and political history, including biographies of Friedman and Friedrich Hayek. With this book, he joins a group of detractors of modern-day American conservatism who are sympathetic to many of the ideas of conservatism, but harshly critical of how it is now practiced.

“Contemporary libertarianism, too, often denotes cranky obscurantism, intolerance, irrelevance and, frankly, poor scholarship and the manipulation of data, although these are not always the case or unique to it,” he writes. “There is no reason to compromise on anything. They are utopians working toward and often living in a mythical land, ‘Libertania.' ” Anyone who watched the House Republicans devour their own leaders—and prevent Congress from functioning—will recognise the description.

The radicalisation and nihilism of much of modern American conservatism is worrisome for many reasons, not least the important role that actual conservatism has played in recent decades and could play today. Friedman, after all, was a deeply creative thinker who shaped numerous policy successes, as did many of his brethren. (Although, Ebenstein notes, Friedman himself tilted toward zealotry in his later years.) The rise of market economies in Asia has led to perhaps the most rapid and widespread decline in poverty in human history. Friedman also argued for the end to the military draft, for flexible currency exchange rates and for a negative income tax to combat poverty, which became the earned-income tax credit.

Dani Rodrik, a Harvard economics professor, has written a much less political book than Ebenstein has, titled Economics Rules, in which he sets out to explain the discipline to outsiders (and does a nice job). Yet in surveying the larger “rights and wrongs” of economics, to quote his subtitle, Rodrik has diagnosed the central mistake that contemporary libertarians have made: They have conflated ideas that often make sense with those that always make sense.

Some of this confusion is deliberate. By pushing for less government, regardless of the situation, contemporary libertarians act as a kind of lobbyist working on behalf of the affluent. Less government tends to mean lower taxes for the people with the most money to lose to taxes. Less government also means cuts to schools, and health-insurance and retirement programmes on which the affluent do not depend.

But not all of the analytical errors of libertarianism are so cynical. Some stem from the honest intellectual mistake of confusing a good idea with the good idea. Because Rodrik’s focus is economics, he frames this mistake in terms of theoretical models, which are a central tool of both social science and natural science. Rodrik compares them, somewhat impishly, to fables, but he means the comparison as a compliment to both.

“What are economic models?” he asks. “The easiest way to understand them is as simplifications designed to show how specific mechanisms work by isolating them from other, confounding effects. A model focuses on particular causes and seeks to show how they work their effects through the system.” A fable, similarly, trades complexity and comprehensiveness for a clear but still true lesson.

The trouble comes when economists, and the rest of us, try to make such a lesson universal. Universality has its place in the physical sciences but rarely in the social sciences. “We cannot look to economics for universal explanations or prescriptions that apply regardless of context,” Rodrik writes. “The possibilities of social life are too diverse to be squeezed into unique frameworks.”

The lure of universality is not a uniquely right-wing phenomenon, of course. The left and centre suffer from it, too. Liberals, for instance, can slip from believing that government is often necessary into believing that it is inherently effective, and defend public schools and anti-poverty programmes that ill serve the poor. Centrists sometimes leap from the reasonable judgment that neither political party has a monopoly on the truth to the unreasonable one that the truth on any one issue lies roughly halfway between the extremes.

That last point has a particular relevance to modern American politics, and to the problems Ebenstein describes. While all political ideologies (not to mention all human beings) are susceptible to overlearning a lesson, the damages from that mistake come mostly from the right half of the spectrum in the United States today. The political right has spent five years wrongly predicting hyperinflation, and, in the process, kept the federal government from doing more to combat unemployment. There are similar stories about climate policy, tax policy, health care and even voting rights and voter fraud.


Reducing complex issues to their essence is unavoidable. The alternative is an often paralysing level of detail. Rodrik cites a story by the Argentine writer Jorge Luis Borges, “On Exactitude in Science,” about a mythical empire in which the mapmakers could not tolerate any oversimplification. Ultimately, they created a map as large as the empire itself, which is no more useful than a map consisting of a single tiny dot, or an economic philosophy that offers only one answer, no matter the question. As Rodrik says, quoting an adage often attributed to Einstein, “Everything should be made as simple as possible, but no simpler.”

Chicagonomics: The Evolution of Chicago Free Market Economics
By Lanny Ebenstein
Price Rs.29.99; pages 278

Economics Rules

Economics Rules: The Rights and Wrongs of the Dismal Science
By Dani Rodrik
Price Rs.27.95; pages 253

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