‘Hopelessly wrong’ is a great phrase. So wrong that there is simply no hope whatsoever of ever being right; a wrong so profound that one might as well despair. The phrase features in the title and body of a recent blog post by Dr Geoff Davies, an Australian scientist, author and commentator. It was brought to my attention because of what Davies believes is hopelessly wrong – free market “fundamentalists”. Or perhaps the free market “doctrine”, or “mantra”, as Davies puts it – there isn’t a great deal of precision in his broadsides. This conflation of many discrete (if interdependent) entities and concepts is perhaps the most pervasive error in this post and its follow-up, and will no doubt feature in the finale. My reply will focus on part 1, subtitled ‘The Evidence’, possibly following with another post if I won’t be repeating myself too much.
The conflation most damaging to Davies’ thesis is his assumption that there is an indivisible block of policies called “the doctrine of free trade”. Davies seems to feel that this concept doesn’t require explicit definition, though he does come close when he glibly lists “de-regulated, privatised, free-trade economies”. It is this vagueness about his target that allows Davies to present a handful of examples of widely disparate events as ‘evidence’, and to claim they are sufficient to support his theory. In contrast to Davies’ simplistic false dichotomy between ‘free trade’ and ‘other’, any one policy will necessarily be on a continuum between various politico-economic poles. The vagueness extends to who exactly implemented these free-trade policies, and when, citing various dates as the supposed beginning of this new economic era. The picture Davies draws, showing no concern about his sweeping aggregation, is of a world that woke up one morning and for no good reason flipped a giant switch labelled ‘free trade’:
The mediocre performance of free markets is demonstrated comprehensively in a 2005 study by Mark Weisbrot and others. They show that during the free-market era, 1980-2005, GDP growth rates in over 100 countries averaged only 1.09%, less than half of the 1960-1980 growth rates, which averaged 2.47%.
The complicated truth about the global political economy of the last four decades is that, continuing as they have for their entire existence, the hundreds of countries in the world have been continuously making economic changes and interventions, only a portion of which would classify as part of the free market doctrine even when broadly defined. The casual belief of Davies that free market reforms were sprung on the populace in the 1970s is itself incorrect – they have in fact been implemented in various places since the restructuring of wartime economies from the late 1940s. There has been a general trend towards greater liberalisation in recent decades, but to such a variety of degrees that blanket statements about “the free-market era” are, if not hopelessly wrong, a caricature at best. This fundamental point goes unrecognised by Davies, despite it being spelled out in the Weisbrot et al study he cites. In addition, the very large economic effects of technological change, demographic change, military conflicts and natural disasters, and fiscal and monetary policies (to mention only a few of the major factors) are completely ignored.
The simplistic theoretical framework leads to equally simplistic treatment of evidence by Davies. The first body of evidence – comparison of average GDP growth between different periods – is the natural measure to look at when one believes that there was a sudden paradigm shift. The reasoning seems to be: GDP growth was better before the Big Shift, and is worse after, therefore the Big Shift made it worse. Unfortunately Davies does not, as one would expect of a scientist, apply any tests to see how correlation can be teased from causation. I would assume that he would be well practiced in using regressions and other statistical tools to find meaning in the huge quantity of geological data, and the failure to make any similar attempt with economic data is fatal to his thesis. No mention is made of specific policies or specific outcomes, and how cause and effect can be tied together. The large amount of people who have tried to do exactly that don’t rate a mention by Davies.
As well as cross-country studies, Davies makes some specific claims in his only foray below the global scale about three countries – Argentina, Australia, and the US – to demonstrate his Big Shift formula:
In 2001 Argentina suffered a near-total financial collapse brought on by following free-market strictures.
A bare assertion, and one that runs ignores the events leading up to that economic crisis – a massive run-up of debt, currency manipulation and associated inflation, state control of key industries, high levels of spending by the Argentinean government, very large-scale industrial promotion, blocked privatisations, and tax increases. I hardly need to point out that these are all quite clearly not free-market policies.
Since 2002 it has been recovering strongly, but only by explicitly re-asserting control over the economy, especially the financial markets.
Apparently moving from a government-mandated currency valuation to a market-driven price, which increases exports and limits imports and thus creates employment and output growth, is “re-asserting control”. Even the default rightly belongs in ‘free market’ column. Many people make the mistake of thinking that increasing the ambit or effectiveness of market forces (which is what free trade policies seek to do) means serving the interests of the rich and powerful. On the contrary, freer markets frequently act against those interests, as exemplified by debt default, which is just a normal market process.
[In Australia] the period 1983-93 features slower growth, higher inflation and higher unemployment than in the pre-1974 period. Australian unemployment averaged 1.3% (1953-1974) and inflation averaged 3.3%, all while growth averaged 5.2% (1960-1974).
Note the excision of the 1974-1983 period, the two different periods for unemployment and growth, and the lack of any period for the inflation claim. This scattershot approach is typical of the post, and immediately raises the question – why cherry-pick these dates? Have they been carefully chosen to provide support for the theory? Without any explanation by Davies, the reasons for the odd selection of data is up for debate. Taking them at face value, regarding the first period, 1983-93 includes two recessions that can hardly be attributed to free trade reforms. As for unemployment, there are numerous factors that played a role – increasing female participation rate, entry of developing countries into the world market, etc. Another necessary consideration is the cost and sustainability of government measures to minimise unemployment; high tariffs, for example, impose a cost on consumers, lower productivity gains, hinder the development of export markets, reduce economies of scale, and the taxation needed to finance the tariffs have a deadweight burden all of their own. Not to mention the opportunity costs. It is amusing that Davies brings up inflation, because it was the dramatic increases in inflation of the late ’60s and early ’70s (and the inability of Keynesian economics to cope) that contributed to the passage of free market reforms. Since the years of the supposed Big Shift, the inflation trend has been very distinctly and consistently downwards.
In the US median incomes have been nearly stagnant for three decades, and male incomes have been steadily declining.
For some unknown reason, Davies has suddenly shifted from macroeconomic aggregates to inequality measures. Why he picks this, and not another equally important statistical category – like poverty levels, consumption levels, or the misery index – is unclear. Again, there is no context provided by Davies. No mention is made of the increase in benefits (effectively acting as pay increases), the shift from manufacturing to services that had been in progress since the 1950s, the greater competition from developing countries (to their enormous benefit), the increased premium to higher education, the decline in union numbers and influence, etc. No, it’s just more Big Shift reasoning.
The second bit of ‘evidence’ presented by Davies is an assertion, completely devoid of supporting data or argument, that:
The clearest indictment of free-market economics is the Global Financial Crisis that began in 2007. Deregulated financial markets essentially seized up through the creation of excessive debt
There are three ideas here that are on shaky evidential ground, to put it mildly. The first is the assumption that the only economics in operation prior to the GFC was free-market economics, the second is the implication that it was the free-market policies that led to the GFC, and the third is the assertion about the role of debt to the exclusion of other factors.
The first is an obvious absurdity. As for the second, let’s take a look at just some of the ways in which government interventions exacerbated the normal business cycle. Central banks (anti free market), particularly the US Federal Reserve, pumped tremendous amounts of money into the global financial system during the 1990s and especially the 2000s, inflating asset price bubbles in an attempt (anti free market) to cushion previous downturns. Interest rates were kept low (anti free market) to stimulate the economy, skewing economic decisions about debt. In the US, the government-backed enterprises Freddie Mac and Fannie Mae (anti free market) accumulated vast mortgage portfolios without having to worry much about their viability. Laws were passed to expand home ownership (anti free market), to the detriment of responsible lending. Lastly, it’s true that large-scale debt and risk management errors were made by banks, but a big reason for that was the manipulation of market price signals by government efforts to finesse the economy (such as artificially cheap credit), causing market beliefs and expectations to diverge from the underlying reality.
Dr Davies’ blog post reminds me a great deal of the AGW sceptics. The problem leading to the criticised response is ignored or downplayed. The criticised response is self-evidently wrong, and can be demonstrated as such by someone with no training in the discipline by reference to a couple of data points, carefully selected, and a blasé attitude towards causal mechanisms and verification of results. The work of experts, and the consensus they arrive at, is dismissed. Arrogance and high dudgeon are in good supply, critical thinking and testing of hypotheses are not. It is disappointing that a respected scientist has made so many elementary mistakes in his analysis. Perhaps he should stick to mantle dynamics.