Tuesday, May 26, 2009

Where are the Milton Friedmans?

Maybe it is the media I consume. When I read policy solutions proposed by different economists on how to get over the economic crisis, I can't seem to find much in the form of diversity of opinion. Everyone seems to have teh same elements in the mix - monetary policy, some fiscal stimulus, greater regulation of financial entities, housing reform .... Where are the free market solutions to the crisis? (By the way, are we still allowed to call it a crisis, or has Wall Street banned the word after eleven weeks of euphoria?)

Maybe it is the media I consume. Maybe it is some unconscious internal bias. Or maybe ... it is real. Could that be? Could it be that there just isn't that much mainstream economic thought supporting purist free market principles? Is it possible that there aren't many economists out there saying - 'let the market do what it does, let the bad apples rot themselves out, let people get foreclosed on ... on the other side there is a much more efficient economic enterprise'?

It was my (uninformed) guess that economists in general tend to believe more hardily in the futility of government intervention in economic markets, and tend to be more free market oriented than your average Joe. From what I read about proposed solutions for the day though, it is difficult to draw that conclusion. So I decided to poke around a little bit.

Turns out, this question was asked and addressed in a formal academic paper by Daniel Klein of George Mason University in Washington DC and Charlotta Stern of Stockholm University in Stockholm.

[Is there a free market economist in the house?]

"People often suppose or imply", say Klein and Stern, confirming my going-in bias, "that free-market economists constitute a significant portion of all economists." To test that hypothesis, they surveyed 1,000 members of the American Economic Association (AEA, entry on Wikipedia) on 18 potential areas of government "activism" and intervention in markets.

Here is what they found, almost all of which I found surprising -
- Only 8% of economists could, based on their responses, be truly called free-market advocates.
- By a margin of 2.5:1, economists voted Democrat, rather than Republican.
- There are two issues on which economists universally support free-market principles: everyone opposes 'Tariffs to protect American industries', and everyone opposes 'Government ownership of enterprise'.
- Apart from the two areas above, economists of the AEA are not close to being free-marketeers on anything else. This includes issues like economic tuning through monetary policy, use of fiscal policy, pharma regulations, gambling restrictions, government produced schooling, immigration etc.

The one non-surprising part of the study to me was that on average, economists are more free-market oriented than professionals in most other academic disciplines. But still, they are far from the wild west, invisible-hand free marketeers of my imagination.

So, back to my initial question: Why do we not hear wildly free-market oriented policy opinion on the current crisis? Maybe because there aren't that many mainstream economists that hold such positions in the first place.

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