Rhetorical Rebound

From an article in today's editorial section of the Taipei Times, this time written by one Dani Rodrik, a professor of political economy at Harvard:

"Here are seven commonsense principles of global economic governance that they might agree on. One, markets must be deeply embedded in systems of governance. The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all.

Markets require other social institutions to support them. They rely on courts, legal frameworks and regulators to set and enforce rules. They depend on the stabilizing functions that central banks and counter-cyclical fiscal policy provide. They need the political buy-in that redistributive taxation, safety nets and social insurance help generate. All of this is true of global markets as well."

What I find objectionable in these two paragraphs, more than simply the content of the assertions themselves with which I disagree and which I hold to be partly false and partly presumptuous, is that these assertions are presented as "common sense" with the implication of that term being that anyone who disagrees must be lacking in "common sense" and whose views ought therefore perhaps, to be "taken with a pinch of salt" if not simply dismissed outright. It is just another form of the argument from authority, so often relied upon by poor propagandists. This isn't necessary. Some additional criticisms:

Rodrik uses the language of empirical statements to describe his political prescriptions - he presents his political values as mere facts. So he merely asserts that central banks, counter-cyclical policies, taxes and welfare schemes are necessary for the functioning of the market without at least a precis, or even a single sentence of justification for why he believes them to be so. Like the argument from authority, the intended effect is presumably to render his prescriptions as equivalent to facts not subject to dissent except by those whose views he presumably deems unworthy of attention anyway. Yet I believe that his assertions are at least problematic (where they are not largely false), and that this can be partly shown by their ahistorical nature, and partly by further argument and evidence. Prior to the passing of the Federal Reserve Act in 1913, for example, the people of the United States, without the services of a central bank, nonetheless enjoyed a market economy; the same can be said of the U.S. prior to the passing of the Social Security Act in 1935 and likewise prior to the passing of the various Federal Income Tax Acts from the civil war onwards. Moreover, although Rodrik's assertion that markets require other social institutions to support them, such as courts and laws, is true, it does not mean either that such institutions are logically prior to the market (they are not) or that they can only be established or operated by the right to violence presumed by the State (an entirely separate discussion). If it was Rodrik's intention to claim merely that markets may function better with such institutions than without, then perhaps he ought to have clearly expressed that view and gave at least some hint of argument for it.

The rhetorical effect of Rodrik's language is also reinforced by sleight of hand: his assertion that "the idea of self-regulating markets received a mortal blow during the financial crisis" is an assertion which obscures the fact that U.S. financial institutions were and are subject to government regulation, much of which may be easy for the naive observer to miss (or dismiss) because it is indirect - this is particularly true, for example, of the Communities Reinvestment Act. Michael Barr, a law professor at the University of Michigan wrote in his testimony to the House on their hearing on this act:

"...more than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision..."

Yet this claim ignores the fact that these independent mortgage companies arranged loans between sub-prime borrowers and CRA regulated lenders. Without the CRA, it is questionable whether many of subprime loans would have been made in the first place.

As against the substance of Rodrik's views expressed in the above quotation, I believe (with the Austrians) that, in spite of the Fed's attempt to draft effective counter-cyclical measures, it is precisely the Fed's exercise of monetary policy which actually creates and sustains the trade cycle by keeping interest rates artificially low, encouraging excessive lending and malinvestments (e.g. the housing bubble) and thereby distorting the structure of both capital and labour markets. So, I would say, with Hayek, that markets could function far more efficiently in the absence of a central bank with its monopoly on the issue of currency being replaced by competition among competing commodity-exchange currencies. The primary reason for this is that under a competitive system, any tendencies on the part of one currency-issuing institution toward inflation or deflation would be restrained by the freedom of the public to switch their custom to another currency.

Rodrik is, and should continue to be, free to express his views in whichever way he likes - quite irrespective of criticism. Yet it is nonetheless true that he could have presented his opinions as precisely that - as opinions which depend upon argument, rather than "common sense" matters of fact.

My comment to Rodrik himself:

"Mr Rodrik: I will say to you that not only do I strongly disagree with you, but that the manner in which you present your views is transparently manipulative and therefore unworthy of academic virtues."

Update: Look at this post by Rodrik from November last year. The manner in which the questions are asked is all important. The guy is not an academic - he's a propagandist, and a cheap one at that.