Market Fundamentalism

I’m always amused by those who use the term “market fundamentalism,” particularly by those who have won Nobel prizes in Economics, when I suspect these debunking wizards not only can’t coherently define what the term actually means but also share the same underlying dismissive precepts in common with the thing they are supposedly ridiculing.

Let us define what “Market Fundamentalism” actually is. It refers to the 3rd Generational Chicago School(Lucas,Stigler,Becker, Posner, etc) that essentially displaced political economy from an encompassing Efficient Market Hypothesis model. Okay, so stock prices my follow a random walk, but should we believe that political lobbying is governed by an Efficient Market Hypothesis model, that policies that raise efficiency are likely to win out in the competition for political favors? Should we believe as Stigler wrote, in Law or Economics:

Tested institutions and practices found wanting will not survive in a world of rational people. To believe the opposite is to assume that the goals are not desirable: who would defend a costly practice that produces nothing? So I would argue that all durable social institutions, including common and statute laws, must be efficient.”

In the 90s, buoyed by roaring economies and financial secondary markets, this viewpoint certainly dominated the financial classes and was embraced, to a large extent, by the establishment political classes. It became the underlying ideology behind the “Washington Consensus.”

Now let’s look at the usual suspects who are “Straw Man” blamed for holding “market fundamentalist” views:

(i) Libertarians
While it is true that the 3rd generational Chicago School, that grew out of Friedman’s 2nd generational school, was associated with “libertarianism,” it was, nonetheless, a a distinct modern offshoot branch which flourished primarily in segments of academia, Wall Street and Beltway think tanks. Libertarianism historically proper is rooted in a profound critique of political economy. Political Economy is central, not an afterthought. In terms of modern academic literature, libertarianism is aligned with Public Choice, not Market Fundamentalism.

(ii)Adam Smith, Classical Economics
Anyone who has read The Wealth of Nations and The Theory of Moral Sentiments would laugh at the idea of equating The Invisible Hand with an Efficient Market Hypothesis in Political lobbying.

(iii)Ayn Rand, Objectivism
Anyone who has read Rand’s work would laugh at the idea of equating Objectivism with an Efficient Market Hypothesis in Politics and Law. Rand’s Atlas Shrugged and Stigler’s “Law or Economics” are in diametric opposition. In Stigler’s world, Wesley Mouch should be a hero.

(iv)Hayek
Hayek’s argument, in part, in the Road to Serfdom demonstrates how the worst rise to the top. It was not an Efficient Market Hypothesis argument that the most efficient rise to the top in political lobbying.

(v)Conservatives
Conservatives are supply-siders; they are not market fundamentalists. If they were, then we would have legal drugs and prostitution. In many respects, the application of an Efficient Market economic analysis to law is anathema to the conservative mind.

Frankly, these days, “market fundamentalism” as technically understood, is dead. No one takes seriously anymore an Efficient Market Hypothesis applied to political economy. Market Fundamentalism now only survives as a straw man term.

However, I can only point out those, such as Jonathan Chait, conducting their running libertarian diatribes are actually embracing the same principles of market fundamentalism, that is, the relative unimportance of political economy–political economy as an afterthought. For Chait, things like Social Security, The Earned Income Tax Credit, and Seat Belt laws demonstrate the unimportance of Political Economy. As Chait writes, if “regulations are captured, they will eventually be uncaptured.”

Writes Chait concerning Peter Orszag:

I don’t see any evidence that Orszag was corrupted by the prospect of private lucre during his tenure as Budget Director. His most important contribution to the Obama administration may have been a fierce insistence upon using health care reform to control the growth of health costs — a goal that serves almost no narrow private end and opposes many.

Compare that quote to the above Stigler quote regarding political lobbying and law. Not much of a difference, now is there? Fundamentalism, indeed…

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