Streetwise Professor

In a reply to the Paul Romer post, ex-colleague and friend Scott points out the richness of Romer calling for a “new humility” among economists. But not all economists, mind you, just those who value freedom and express skepticism about regulation:

Among these pretend economists, the ones who prized supposed freedom (especially freedom from regulation) over all other concerns proved most useful—not to society at large but to companies that wanted the leeway to generate a profit even if they did pervasive harm in the process. 

This brings to mind Hanna Arendt’s observation: “One of the greatest advantages of the totalitarian elites of the twenties and thirties was to turn any statement of fact into a question of motive.” This is exactly what Romer does. He ascribes venal motives to those who dare disagree with his eminence. He has precious few facts in his article, but casts many aspersions on motives of those with whom he disagrees.

Romer again refers to economists plural, but provides a single illustration–Alan Greenspan. To make him the Representative Agent for an entire swath of the economics profession is utterly ridiculous. He was the head of an economics consulting firm for decades before ascending to the Fed. He never held an academic appointment. He did not publish in peer-reviewed journals. He is an eminently bad person to serve as the epitome of regulation-skeptical economists.

Further, Romer has things exactly upside down. It was–and is–the pro-regulatory/pro-state/pro-government contingent of the economics profession (which has always represented a majority) that could have used, and could use, a dose of humility. Always dismissive of the knowledge problem, they believed that they could design regulatory and legislative schemes that would achieve superior outcomes, only to find out that unintended consequences are a bitch, and regulatory capture undermines the most well-intended schemes.

Indeed, in financial regulation in particular, major financial institutions play B’rer Rabbit, begging not to be thrown in the regulation briar patch, only to profit quite well from it.

In fact, it has long been government/regulation-skeptical economists who have counseled against hubris. In a book tellingly titled “The Fatal Conceit,” Hayek famously wrote: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The main issue I’ve always had with this quote is that it clearly expresses what Hayek thought economics should do, but did not accurately express the views of the profession at large. Those who view economies and markets as complex systems, as emergent orders, are very dubious of their ability–or the ability of anyone–to impose their designs. But they are, and always have been, a minority.

Another example of a great economist who was humble about attempts to control such complex systems via government was Adam Smith, who famously said:

The man of system, on the contrary, is apt to be very wise in his own conceit [there’s that word again]; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it.

He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

In sum, Paul Romer is projecting. As Smith recognized centuries ago, and Hayek echoed many years later, it is the statists who need humility, and those who advocate a reliance on freedom often do so out of a humble conviction of the difficulty in even understanding the operation of complex systems, let alone controlling or regulating them.