The Bizarro World of Professor Sen
By Peter Klein • Thursday April 26, 2012 8:15 AM PDT • 4 Comments
Here is another of those head-scratchers, this one from Amartya Sen, about how neoclassical economics is partly responsible for the financial crisis because neoclassical economists hold that markets work “perfectly”:
Since the crisis broke out the economics profession in general and mainstream economics in particular have been severely criticised. Do you think this is justified?
The criticism of mainstream economics is justified to a limited extent. It is certainly true that the focus of attention in mainstream economics has tended to be on assuming the market to be working perfectly and there being no need for regulation. However, while this view has been a very dominant part of mainstream economics, you have to bear in mind that mainstream economics is not all centered around one unified theme. I don’t think all of mainstream economics should be held responsible.
Do you think that neoclassical macro economists should bear the brunt of the blame?
This would be an oversimplification. Neoclassical economics has many different paths. There are mainstream neoclassical economists who have been very critical of the complete reliance on the markets.
I’ve been around neoclassical economists since my undergraduate days and I can’t think of a single neoclassical economist who says that markets work “perfectly” and favoring “complete reliance on the markets.” David Friedman comes to mind, but even his arguments for anarchism are not based on the belief that markets are somehow “perfect,” but that they are less imperfect than regulation. The truth, of course, is that virtually all neoclassical economists favor a substantial amount of economic regulation — government production of law and order, government control of the monetary system, competition policy, and other government actions to combat purported market failures.
Statements like Sen’s make sense only as a rhetorical ploy to fool the reader. If the mainstream thinks, say, that government should control 25% of the economy, and you think government should control 75%, you describe the mainstream as “extremists” who believe in “no government,” thus making your position seem like a reasonable middle ground. Krugman of course employs the same rhetorical strategy. Sen is obviously too intelligent to mean what he says literally, so I can only assume mendacity. Am I missing something?
[Cross-posted at Organizations and Markets]
Tags: Economics, Free Market, Regulation 
Professor Sen is hell on strawmen.
Paul | Apr 26, 2012 | Reply
No economy is perfect. However,If you look at the history of most,not all,but most regulation in American business history it is mostly 2 factors that push for regulation and over-regulation. 1st, are the monopolist,crony capitalists who want to keep out new competition by throwing regulatory barriers in front of up and coming entrepreneurs. Many of these new businesses don’t have the financial resources or government connections that a large established well funded business might have,thus making it more difficult and expensive to comply with the law. 2nd. Are the various levels of government(Federal,State and Local)that want to shake down businesses for taxes,permits and fines. How often do these same regulators,when they retire, go to work for the corporations that they once regulated? In fact it has been shown, that often the regulations are written,submitted and put into law by the same corporations that the laws are meant to regulate. It is often a corrupt symbiotic relationship more aligned with Fascism then Free Enterprise. Yes indeed,Professor Sen has erected a straw man.
libertarian jerry | Apr 26, 2012 | Reply
One interpretation of Sen is that in many academic articles economists often assume a perfectly competitive market/economy. In that case, you can’t get welfare improvements via government policy. It is often a simplifying assumption, that might be over used. It is like assuming the economy is always in equilibrium.
Steve Verdon | Apr 30, 2012 | Reply
Indeed – we have much to fear from collaborations of big business and government on regulatory matters, both from a producer and a consumer perspective.
We also have established over the last century “petty tyrannies” in the form of government agencies that combine legislative, executive and judicial functions (e.g. EPA, SEC, FDA etc). These are especially pernicious and hard to root out, or reform to get them back in line with a Constitutional basis.
Ohio Libertarian | May 1, 2012 | Reply