Wednesday, January 6, 2010

No, the Financial Crisis Has Not Enhanced the Reputation of Marx's Economics

The usually very smart John Quiggin of the reliably interesting blog Crooked Timber has a post today that begins with the most baffling and wrongheaded assertion I have read in some time: "The financial crisis has, justifiably, enhanced the reputation of Karl Marx as an economic thinker."

Here are a couple of questions for Professor Quiggin:

(1) In what respects has the financial crisis cast doubt on the fundamental economic laws of supply and demand or price theory more generally?

(2) In what possible way could Marx's theory of economics, based as it is on an unworkable and environmental destructive labor theory of value, be of any use? (On the environmental destructiveness of Marx's labor theory of value, see my book Instituting Environmental Protection: From Red to Green in Poland (Macmillan and St. Martin's 1998).

If one wants to explain the financial crisis and fix the system so that it is less likely to happen again or, if it does happen, to avoid such deep recessions or depressions, one has only to look to the New Institutional Economics (NIE) and Public Choice Theory. New Institutionalists (who seek to amend but not displace neoclassical economic theory) explain that markets (a) do not develop and operate in institutional vacuums and (b) cannot be expected to improve, let alone maximize, social welfare if the institutions that structure it  - the 'rules of the game' as Doug North calls them - are not structured for efficiency. Public choice theory, meanwhile, explains that interest groups, including financial organizations, will lobby (and have lobbied successfully) to structure the market institutions within which they operate so as to secure super-normal profits or rents.

In order to prevent such financial crises in the future, we perhaps need some new regulations that alter the institutional structure and, therefore, the incentives for market participants. But Public Choice theory and the NIE also remind us that we should not be too sanguine about our ability to fine-tune regulatory institutions so as to maximize economic welfare. First of all, public choice pressures remain; financial institutions will continue to lobby to prevent or minimize the effects of reform legislation. Second, just as the market and firms frequently fail, so too does the government. There is no reason to believe ex ante that any likely set of new institutions will do more good than harm to social welfare.

By the way, nothing we know about Marx's economics would change the basic fact that all human-created institutions are fallible. That proposition should be as mother's milk to anyone who writes for a blog called "Crooked Timber."

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