Galaxy
08-14-2008, 07:54 PM
This is the best summary that I have found of what modern real economists know (and agree upon) from their research. Some of you guys, undoubtly will find things in Sorman's piece to dispute what I have said in the past. Go for it!
I have quoted here only the main points of the piece. I encourage you to read it all, especially as background knowledge to evaluate the claims of politicians of all parties in this election year and beyond.
Economics Does Not Lie
by Guy Sorman
The dismal science is at last a science—and the world is the beneficiary.
If economics is finally a science, what, exactly, does it teach? With the help of Columbia University economist Pierre-André Chiappori, I have synthesized its findings into ten propositions. Almost all top economists—those who are recognized as such by their peers and who publish in the leading scientific journals—would endorse them (the exceptions are those like Joseph Stiglitz and Jeffrey Sachs, whose public pronouncements are more political than scientific).
The more the public understands and embraces these propositions, the more prosperous the world will become.
1. The market economy is the most efficient of all economic systems.
2. Free trade helps economic development.
3. Good institutions help development. All economists acknowledge today that economic development requires an independent and reliable legal system to enforce contracts and ensure fair competition.
4. The best measure of a good economy is its growth. Unlike other proposed measures (happiness, for example), economic growth can be determined objectively: it is the rate of increase in a country’s gross domestic product (GDP) over a given period. Yes, some economists believe it necessary to temper that purely quantitative measurement with such factors as quality of life and efficient management of resources, and there is wide agreement that GDP omits important aspects of economic activity, such as home production. But all economists agree on growth’s importance: while a high rate of growth doesn’t solve every problem, its absence doesn’t solve any.
5. Creative destruction is the engine of economic growth. As the Austrian economist Joseph Schumpeter famously argued, capitalism unleashes a “gale” of innovation that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” This ceaseless replacement of the old with the new—driven by technical innovation and entrepreneurialism, itself encouraged by good economic policies—brings prosperity, though those displaced by the process, who find their jobs made redundant, can understandably object to it.
6. Monetary stability, too, is necessary for growth; inflation is always harmful. No reputable economist today would deny that a stable money supply encourages investment and bolsters social cohesion, since it helps people save for the future. Inflation, on the other hand—always caused by governments’ spending more money than they have, and then printing extra money or borrowing to finance the expenditure—destroys entrepreneurship, slows growth, and generates social inequality. It is an incentive not for investment but for speculation: those who can afford to will buy goods, wait, and then resell them at higher prices, a process that creates nothing at home—least of all, new jobs. Those with less money fall victim as wages and pensions lag behind prices. It’s no surprise that hyperinflation often leads to revolution. Milton Friedman’s advocacy of monetary stability, “monetarism,” considered revolutionary when first proposed in the sixties, is now common wisdom.
The best way to restrain inflation, economists now understand, is to transfer money management from governments to independent central banks like the Federal Reserve and the European Bank, which—monetarists all, these days—try to create only enough credit to provide liquidity and prevent the financial panic that often accompanies credit crunches, resisting vocal politicians who believe that printing more would generate new jobs. Even in a slowdown, the banks seek to keep money stable in order to stimulate investment.
7. Unemployment among unskilled workers is largely determined by how much labor costs. So regulating the labor market (with a minimum wage, for example) adds to labor costs, economists acknowledge, and increases unemployment. No solution to excessive unemployment is conceivable without reducing such regulations. The rigidity of European labor markets—in France, for example, firing an employee requires paying him a large indemnity and obtaining a judge’s consent—is likely one reason that the unemployment rate in European countries remains much higher than in the United States.
8. While the welfare state is necessary in some form, it isn’t always effective. Economists recognize that government assistance always produces incentives that may affect, for good or ill, recipients’ behavior and well-being. The key is to avoid making individuals and groups dependent on state assistance, locking them into sustained semi-poverty.
9. The creation of complex financial markets has brought about economic progress. These sophisticated instruments, like derivatives, have facilitated risk-sharing on a global scale, boosting innovation and hence prosperity. There is no economic rationale for distinguishing this “virtual capitalism” from “real capitalism”: nothing real has ever been produced without first being financed.
10. Competition is usually desirable. Beyond that, there is no unanimity: some economists believe that under certain circumstances, a private or public monopoly may contribute to innovation or progress.
http://www.city-journal.org/2008/18_3_economics.html (http://www.city-journal.org/2008/18_3_economics.html)
I have quoted here only the main points of the piece. I encourage you to read it all, especially as background knowledge to evaluate the claims of politicians of all parties in this election year and beyond.
Economics Does Not Lie
by Guy Sorman
The dismal science is at last a science—and the world is the beneficiary.
If economics is finally a science, what, exactly, does it teach? With the help of Columbia University economist Pierre-André Chiappori, I have synthesized its findings into ten propositions. Almost all top economists—those who are recognized as such by their peers and who publish in the leading scientific journals—would endorse them (the exceptions are those like Joseph Stiglitz and Jeffrey Sachs, whose public pronouncements are more political than scientific).
The more the public understands and embraces these propositions, the more prosperous the world will become.
1. The market economy is the most efficient of all economic systems.
2. Free trade helps economic development.
3. Good institutions help development. All economists acknowledge today that economic development requires an independent and reliable legal system to enforce contracts and ensure fair competition.
4. The best measure of a good economy is its growth. Unlike other proposed measures (happiness, for example), economic growth can be determined objectively: it is the rate of increase in a country’s gross domestic product (GDP) over a given period. Yes, some economists believe it necessary to temper that purely quantitative measurement with such factors as quality of life and efficient management of resources, and there is wide agreement that GDP omits important aspects of economic activity, such as home production. But all economists agree on growth’s importance: while a high rate of growth doesn’t solve every problem, its absence doesn’t solve any.
5. Creative destruction is the engine of economic growth. As the Austrian economist Joseph Schumpeter famously argued, capitalism unleashes a “gale” of innovation that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” This ceaseless replacement of the old with the new—driven by technical innovation and entrepreneurialism, itself encouraged by good economic policies—brings prosperity, though those displaced by the process, who find their jobs made redundant, can understandably object to it.
6. Monetary stability, too, is necessary for growth; inflation is always harmful. No reputable economist today would deny that a stable money supply encourages investment and bolsters social cohesion, since it helps people save for the future. Inflation, on the other hand—always caused by governments’ spending more money than they have, and then printing extra money or borrowing to finance the expenditure—destroys entrepreneurship, slows growth, and generates social inequality. It is an incentive not for investment but for speculation: those who can afford to will buy goods, wait, and then resell them at higher prices, a process that creates nothing at home—least of all, new jobs. Those with less money fall victim as wages and pensions lag behind prices. It’s no surprise that hyperinflation often leads to revolution. Milton Friedman’s advocacy of monetary stability, “monetarism,” considered revolutionary when first proposed in the sixties, is now common wisdom.
The best way to restrain inflation, economists now understand, is to transfer money management from governments to independent central banks like the Federal Reserve and the European Bank, which—monetarists all, these days—try to create only enough credit to provide liquidity and prevent the financial panic that often accompanies credit crunches, resisting vocal politicians who believe that printing more would generate new jobs. Even in a slowdown, the banks seek to keep money stable in order to stimulate investment.
7. Unemployment among unskilled workers is largely determined by how much labor costs. So regulating the labor market (with a minimum wage, for example) adds to labor costs, economists acknowledge, and increases unemployment. No solution to excessive unemployment is conceivable without reducing such regulations. The rigidity of European labor markets—in France, for example, firing an employee requires paying him a large indemnity and obtaining a judge’s consent—is likely one reason that the unemployment rate in European countries remains much higher than in the United States.
8. While the welfare state is necessary in some form, it isn’t always effective. Economists recognize that government assistance always produces incentives that may affect, for good or ill, recipients’ behavior and well-being. The key is to avoid making individuals and groups dependent on state assistance, locking them into sustained semi-poverty.
9. The creation of complex financial markets has brought about economic progress. These sophisticated instruments, like derivatives, have facilitated risk-sharing on a global scale, boosting innovation and hence prosperity. There is no economic rationale for distinguishing this “virtual capitalism” from “real capitalism”: nothing real has ever been produced without first being financed.
10. Competition is usually desirable. Beyond that, there is no unanimity: some economists believe that under certain circumstances, a private or public monopoly may contribute to innovation or progress.
http://www.city-journal.org/2008/18_3_economics.html (http://www.city-journal.org/2008/18_3_economics.html)