I believe that the Neoliberal views of "evidence based research" which Dr Nelson invoked to support the national Inquiry into literacy in 2005 can be shown to be just as flawed as their economic theories.

Geoff, I loved your book "Economia" and this essay is a corker too!

"The core problem with neoliberalism is that there is no justification, in theory or in evidence, for the claim that free markets produce desirable results, let alone optimal results. "

Hmm... what about the 17 years of growth and prosperity that followed the Hawke, Keating and Howard governments? A period where minimum wages grew strongly nearly every year, where inflation was low and unemployment dropped to its natural levels?

This can of course be contrasted with the Whitlam years of low economic growth, out of control inflation and high unemployment.

The author fails to note that progressive policies played just as much a role than so called no-liberal ones: http://www.onlineopinion.com.au/view.asp?article=8242

And here's a total refutation of Rudd's ridiculous essay: http://www.onlineopinion.com.au/view.asp?article=8489

"The core problem with neoliberalism is that there is no justification, in theory or in evidence, for the claim that free markets produce desirable results, let alone optimal results. "

O.k., say that's true, what're the alternatives? The author mentions "managed markets" a number of times, but what does that actually mean? Is the author advocating a centrally planned economy? How then does the author expect that innovation and "generally moving forwards" will occur?

I think there may only be a few people who think that markets are a perfect solution. However accepting that markets aren't perfect, surely letting people exercise their own capacity to vote with their own dollars is better than a centrally planned economy and an intrusive government?

This is yet another piece where the author is having a whinge. Rather than just whinging, perhaps the author would like to make some policy suggestions on how we should fix things...

Methinks probably not.

There are a number of problems with the author’s argument.

The first is that, by refuting the neoliberal school, he has by no means justified his conclusion, which is in essence that free markets are dysfunctional and anti-social and need central management based on coercion.

Secondly, the fundamental idea is that the economic crisis arose out of free financial markets. According to this theory, governmental control of the money supply has got nothing to do with the economics of finance. Government can divert trillions of dollars worth of capital into bribing political favourites to engage in unproductive activity at the expense of the rest of society, and that has no economic effect, or can be presumed to be only beneficial. Government can set up a welter of controls over money – monopoly of minting, legal tender, protecting banks against demands for redemption, required reserves, central banking, deposit guarantees, lowering interest rates, compelling billions of dollars worth of loans to people specifically *because* they can’t pay it back – and all these have no economic effect, or can be presumed to be only beneficial. Government can indulge in a direct conflict of interest as against the rest of society by permanently inflating the currency, and this has no economic effect, or can be presumed to be only beneficial. *If* there had been a free market in any relevant field *then* the author might have got to square one.

Thirdly, even if the author’s premises were valid, which they aren’t, it would not follow that therefore governmental economic management is indicated, because there is no reason to think that government, in its nature, is any more capable of dealing with the original problem of rationalising priorities in resource use considering the different conflicting vested and non-vested interests, and there much reason to think that it’s not.

Governmental intervention is much more likely to exacerbate the original problem that the resources get diverted to a minority priviligentsia, because a) it’s government that is the root cause of that problem in the first place, b) government in its nature consists of nothing else, c) it is a true monopoly, d) it is force-based, and c) it is far far less representative of society’s will than a free market.

The fall-back to Keynesian, Marxian or interventionist positions on the basis of a supposed rebuttal to ‘pseudoscience’, is laughable: http://mises.org/story/3369

And the idea that government presumptively has a reserve of economic and moral super-competence would be laughable if it did not represent the very real danger of the slide into socialism or fascism that we are witnessing throughout the western world: a police state of enforced privilege in the name of ‘economic management’ and ‘social justice’.

Ludwig von Mises has definitively refuted all the arguments put forward by the author in this article, and by Steve Keen, in:
The Theory of Money and Credit 1912
Economic Calculation 1921
Socialism 1924
Human Action 1949

*After* you have understood and refuted the arguments for liberty and against interventionism and *not before*, you will be qualified to comment. Otherwise we just face the same old standard dreary problem that the enemies of liberty do not refute the arguments for liberty, but only satisfy themselves with ignoring or misrepresenting them

This article, like others I have read on this theme, is long on generalities and assertions and short on specifics. How do we go about regulating markets to reign in rampent whatever and improve the quality of life? And how, as one other commentators has noted, will we prevent these market interventions for simply being a handout to certain groups in society - perhaps grants to activists who will then spend their time explaining why they should receive more grants.

The problem with market interventions is that they have effects often completely different from the ones intended - particularly in Australia. The author would be better employed explaining just how he would design his market interventions to achieve a specific result.

Kevin Rudd's neoliberalism argument was simply an attempt to pin the Global Financial Crisis on the previous Howard government. The argument is simplistic and is absurd.

We are obviously in a crisis but to resort to socialism is surely not the answer. Compare East and West Germany before unification. Ask yourself why Deng Xiaoping introduced reforms to China? Socialism is a great idea but it doesn't work.

Note to the Faithful: I advocate a market-based economy, not a centralised, socialist, or communist (fascist anyone?) economy. There are a million ways to organise market economies. My article is an attempt to break us out of ideology so we can see that.

You may believe governments are innately wicked, but that's your story, not mine. The evidence I cite is against you.

You may believe unfettered markets are innately good, but the evidence I cite (and the crashing sounds all around us) are against you.

Markets are powerful, and so are wild horses. We've tried hitching our wagon to wild horses and giving them their head, and we're crashing in the ditch. Proposing to tame and harness the wild horses is just sensible. It does not imply getting out in front and pulling the horses along, it implies harnessing their power to our purposes.

AJFA, the 17 years of alleged prosperity (many didn't share it) were fuelled by borrowing (and a mining boom that has been squandered). The bills are coming due. See Steve Keen's Deeper in Debt, Centre for Policy Development, http://www.cpd.org.au . Even so the performance STILL didn't match the post-war years, as the evidence I cited makes obvious. Back then, the "natural" rate of unemployment was apparently something less than 1.3%.

BN, Curmudgeon, et al. This is a 1300-word essay. If you want policies and much more detail try my 500-page book, Economia. It's hard to get now but should be in a library near you.

Re-introduce competition into the domestic goods and services economy to return freedom of expression,invention,performance and choice as green labors big government and its regulated conformity is killing the economy, as we are now witnessing.

To continue the current smart milking, pogrom, of the now less productive private sector, by government fiat, while feeding the lefts green rolling agenda, has produced this clusterf..k And no, that does not mean government bureaucracy and their public servants, spending 7 more years delivering obstructionism for their own empire building, as they have done since rejecting competition policy reforms.

Geoff,

"AJFA, the 17 years of alleged prosperity (many didn't share it) were fuelled by borrowing (and a mining boom that has been squandered). "

Who didn't share it? The families that recieved generous handouts such as family tax payments and the baby vbonus, all paid by massive company tax revenues?

The unemployed, most of whom found work and therefore had much bigger incomes?

Minimum wage employees, who real incomes increased nearly every single year under the Howard govt?

Seniors and carers, who would recieve annual bonusses on top of their fortnightly payments?

I'm afraid your claim simply dosen't stack up to reality.

"The bills are coming due. See Steve Keen's Deeper in Debt, Centre for Policy Development, http://www.cpd.org.au . "

I'm afraid the only bills that are coming due will be from Kevin Rudd's excessive and poorly targeted handouts, 80% of which was saved or used to pay debt, rather than spent. Of the small fraction that was spent, many of it has been going on pokies, booze, prostitution, Asian imports and residents in other countries.

"Even so the performance STILL didn't match the post-war years, as the evidence I cited makes obvious. Back then, the "natural" rate of unemployment was apparently something less than 1.3%."

That period involved recovery from a Great Depression and a world war, so growth was always going to be greater as economies emerged from those very depressed years.

And back then, there was a very serious shortage or workers, because Australia was under populated. Hence why there was a huge migration program.

As a result, you are not comparing apples with apples.

Geoff - we are hardly going to read the book if the essay doesn't say anything new or different, or offer any specific solutions.. and I can assure you of this. Nothing whatever will change. How long do you reckon for the recovery? The great depression was several years but that was because of the US Snoot-Hawley bill (look it up - but check spelling), rather than the stock market crash. Two American legislators tried to protect their own countrymen and women by messing with the markets and ended up hurting everyone.. As no-one is seriously messing with trade barriers this time I would expect about a year for this lot, but that's just a guess.. I am not against messing with the markets, incidentally, but you really have to know what you are doing to get it right..

Money is only the lubricant that helps the real market work. Nothing more, and nothing less. Money is totally useless unless there is something to buy that you want to buy. It is only a medium of exchange for the Real Market.

Money is basically a second level aid to the proper workings of the real economy. Without the real economy there is no financial market.

So what is this stuff about controlling the money part of the real economy being anti competitive? Competition should exist in the real market, not the illusionary money market.

What money systems do farmers need to maximise production? Create those money systems. What monetary systems do we need to facilitate fair and free world trade? Create those money systems. Create the systems we need and control them.

As soon as we create 'money markets' that allow stock brokers and others gamble with other peoples super and create illusionary wealth on paper without any reference to the capacity or needs of the real economy there is going to de trouble. Putting the money markets ahead of the real economy is the tail wagging the dog.

If the money side of the market is to be bought under control there will be by necessity stringent controls, but this is not am ideological thing. Ideology does not come into it. All that matters is that is made to work.

The only ones to lose by the proper working of the money side as an aid to the proper working of the real markets are the greedy and the con artists. They are the ones who distort the money side of the equation at the expense of the real economy to transfer money from someone else's pocket into their own. This is not creating wealth. None of them ever grow a crop or built a bridge.

We would of course be creating unemployment amongst the stockbrokers, fund managers and various other 'professions' who feed of the real economy without contributing anything. I would rather see them unemployed than continue to foul up the real economy.

Great article Geoff Davies, and hear hear, Daviy.
Peter Hume, your constant panty wetting fear of "The Government" is tiresome. At the end of the day, the principal difference between the big bad -democratic- government, and your wonderful free market is this:
one person, one vote.
one share, one vote.
If some dead head, silver spooned moron inherits 1,000,000 shares, he gets 1,000,000 votes.
That's your free market.
If your daughter gets raped, will you not call the police, because they are an arm of the government?
In other threads, it has been mentioned that religion gets a 'get out of jail free' card. we can argue about everything else, but when it comes to religion, we must respect the right of religionists to believe what they want, no matter how irrational.
Apparently, the 'free' market is in the same boat.
We don't allow bullying in schools. We don't allow bullying in the workplace.
But in the free market, we applaud, laud and encourage bullying, as the measure of 'success'.
All that is required is that we apply the same principles of morality to the marketplace, that we apply to every other human endeavour.
Why should the marketplace enjoy immunity?

Geoff great article.

Free open transparent markets are an effective way of allocating resources according to perceived value of goods or services. In their current form they are not a very good way of deciding what to allocate and who should receive the allocations.

The way we have structured markets is one dimensional and is based on allocation according to perceived value and even that dimension is flawed.

The solution, as you say, is not abandon markets but to reform them so that they are not asked to do things they cannot do and they given capability to do things we ask of them.

We can make our markets information rich and include constraints and other objectives as part of the internal workings of the market. For example we can construct a market that sells infrastructure to produce energy with a constraint that the production of energy once the plant is built results in minimal green house gas emissions.

We can construct markets where people are paid not to consume rather than pay to consume.

Markets are good ways for us to work together and share the output of our activities. Let us start to think of them as ways of cooperating rather than ways of competing and let us design them so they can work effectively to achieve multiple goals.

I don't know what Online Opinion is doing publishing an article on economics by a geophysicist, but Dr Davies' ignorance and misrepresentations will hopefully make them think twice next time.

The claim about "unrealistic assumptions" is a common tactic, but it's a strawman. Perfect information or perfect rationality are assumed for economic models, not reality. No-one thinks the models are replicas of society, and it's mendacious to insinuate economists are blind to this.

"There should be no economies of scale"?? I challenge Dr Davies to provide one skerrick of evidence that 'neoliberal' thinking incorporates this.

"the central neoclassical conclusion, that free markets tend to an optimal equilibrium state"

They tend, they don't settle, because the market never stops changing. Fundamentally, it's a statement about the self-correcting nature of supply and demand and prices, something beyond dispute - unless government intervenes.

"Where is the evidence that neoliberalism is superior?"

Here we see the pitfalls of getting armchair economists to pronounce on economic history. Dr Davies completely ignores WWII, technological and societal change, decolonisation, etc. Talk about simplistic thinking!

Fatfingers

<They tend, they don't settle, because the market never stops changing. Fundamentally, it's a statement about the self-correcting nature of supply and demand and prices, something beyond dispute - unless government intervenes.>

I strongly disagree with this. The markets work on rumour and innuendo and greed. Who starts the romours and who starts the markets trends is anyone's guess but they seldom have anything top do with actuality. A few big 'players' (I hate the word because it so accurately describes the stock market) can manipulate and distort with ease.

Outside of the stock market anyone who sold something he/she did not have would be charged with fraud. Why do the stock broker's react so strongly against the idea that if they want to sell something they have to own it first?

There is nothing self correcting about supply and demand in the financial markets. Supply and demand operates in the real markets.

Let me correct that. The present situation is a correction of the sub-prime market so maybe it could be seen as a self correction we did not have to have or need. Boom/Bust is the corrections on a money market out of control.

I see Neoliberalism as the Buddhist hell of the land of the Hungry Ghost. The land of the Hungry Ghost is inhabited with fat grotesque creatures with little tiny mouths. No matter how hard they try they cannot stuff enough food into there tiny mouths to satisfy their insatiable hunger.

fatfingers

Mainstream economic theory is based around mathematical models derived from the equations of planetary motion. They are OK for planets but inadequate to describe economic behaviour. That is what Dr Davies is pointing out and it is not mendacious. Economists borrowed ideas to establish their models in the late 1800 hundreds. It is time they borrowed a few more ideas from thinkers like Davies in the early years of this century.

Your statement that markets tend to equilibrium completely ignores the role of feedback in systems which was well described in 1868 by Maxwell in his classic paper "On Governors". Systems with feedback like markets can easily get out of control from internal behaviour - not from external agents like "the government"

Apply Maxwell's insights to current day money markets and it tells us how to correct their erratic behaviour. When money is created by creating debt this in turn encourages more money to be created because there is more debt. Debt and money keep increasing until the pyramid collapses under its own weight. When we start to reduce debt we also reduce money which in turn reduces the amount of debt. These are classic internal positive feedback mechanisms so well described by Maxwell.

The link between debt and money can be broken by increasing the money supply without increasing debt. Doing this will almost certainly solve the Global Financial Crisis.

This is the sort of thing economists should be thinking about instead of looking for scape goats for the failure of their theories to predict let alone explain economic behaviour.

The problem with *most* criticisms of this article are that their entire rejection is based on two tired furphies:
• That this argument pretended to have any specific solutions. It was simply making the point that neo-liberalism had demonstateble failed to deliver better results that the previous “managed” approached.
In this aim he is incontestably correct. One critic claimed that every one has benefited, Try telling:
1. Self refunded retirees and who have worked hard to save a nest egg to watch it wiped out by lack of regulation.
2. The victims of high powered wanton corporate frauds or rogue behaviour (the most spectacular losses/crashes have happened in this time). Caveat Emptor is an excuse not a justification.
3. Middle aged people who saw their jobs follow greater profits overseas and who have no hope of a job and may lose everything. (Sit in on a crisis intervention line for a shift or two).
4. The 3rd world victims the “the coffee wars” et al.
5. Fixable diseases that aren’t profitable enough.
6. ‘Uneconomical’ dumped food etc then consider the poor/hungry.

A truism of capitalism is that where there’s an opportunity there is an entrepreneur it’s all a matter of proportion/expectation. (SA bottle refund)
The Neo’s simply want unlimited profit…hence the scramble for the most outrageous risky/highest/most exploitist.

• The second is that the absence of one extreme automatically implies the other extreme. This argument is common fare for the ideological recalcitrant.
As many have stated there are many degrees of legislative controls clearly more controls are required including government controls (but that is a separate question.)
‘Time and tide stop for no man’ one could add knowledge. Citing 1901 et al reasoning is of tenuous value as the context is very different today. We need a new Paradigm way of looking at the way we live…May your Gods (if you have them) be merciful if we don’t. To paraphrase one of the Kennedy's "think not of why we can't do better but think why not then do it because we must." (for all our sakes)

Geoff, I think it’s great that you’re challenging the pseudo-science and the narrow ways things are done on this planet with its attendant imbalances. Of course what you say is right, but the way I see it, there’s an even deeper underlying problem – an imbalance in man’s thinking and actions seemingly right at its core. It’s as though a template has been set at the beginning of man’s evolution that most people have unconsciously followed ever since. Basically, that winning is equated with taking the path of least resistance. In that sense, aren’t we all guilty? Not only the greedy or laissez faire capitalists but also the commentators?

You criticise Keating. One question: what do you think about his recent comment that debtor countries should spend less while the surplus countries spend more in order to bring the global financial system into better balance? I got the feeling that Keating had a smart side to him that would have liked to do something useful on the human and social side of the ledger, but that his actions in Government were shaped and steered by the stronger forces around him.

The only way we’re going to save the planet is to first attack the psychological basis of man’s thinking and actions. I’d suggest this can only now happen via a series of shocks to the system as crossing certain thresholds of behaviour is equated with pain or loss. This seems to have been acknowledged by Bernie Madoff, when he reportedly said that he always knew the day of reckoning was coming.

RobP, have a look at my Fears and Desires post on my weblog site:
http://betternature.wordpress.com/2009/03/12/book-extract-fears-and-desires/

No doubt Keating has some redeeming human values, but I think he was a clever fool in deregulating everything. He bragged he was a quick study of briefs. Without a deeper understanding, that made him a sitting duck for Treasury's ideologues, and he became their tool.

I think his recent proposal is very much at the level of symptoms rather than the disease.

Fatfingers-
You do at least address the main arguments, which most of the criticisers do not. The answer to your response about unrealistic assumptions is in the next paragraph, beginning "Nor is the neoclassical theory even remotely a useful first approximation." For the neoclassical theory to be useful, it has to bear some resemblance to the real world. But when you put in more realistic assumptions, the predicted behaviour changes radically, from a general equilibrium to a system full of internal instabilities. Therefore the highly restrictive neoclassical assumptions give you no guidance at all to the behaviour of a more realistic theory.

If there are economies of scale (increasing returns to scale in the profession), then the largest firm can undercut rivals and grow until it takes over most of the market (a familiar real-world situation). You then do not have proper competition, and Adam Smith's argument will not apply. So a lack of economies of scale is essential to deducing the neoclassical general equilibrium, which is the result upon which rests the neoliberal belief that unfettered markets yield the optimal outcome. So the "skerrick of evidence" is that the theoretical argument falls apart in the presence of economies of scale.

"Free markets tend" - neither did I say they settle, I only said what you said, that they tend (according to the theory). "The self-correcting nature of supply and demand and prices" is precisely what I AM disputing, because you only get that result with wildly unrealistic assumptions - or perhaps in a village produce market, where information is cheap and fairly complete, the future doesn't need to be predicted, and no economies of scale are operating. Even there, fashion and irrationality could throw the market off.

Examinator
“That this argument pretended to have any specific solutions. It was simply making the point that neo-liberalism had demonstateble failed to deliver better results that the previous “managed” approached.”

Yes that is true, however the neo-liberal ie monetarist approach was still an approach based on governmental ‘economic management’, namely, continuing increase in the money supply, as well as the whole backdrop of inflationary institutions and policies. The tiredest furphy of all is that the failure of these policies is a failure of ‘unfetttered markets’. The current crisis and governments’ response to it demonstrates the cluelessness of all their pretensions to understand either the cause or the cure.

*But no-one has refuted the arguments that show that both the boom and the bust are the result of government policies to lower interest rates.*

Geoff Davies
"You may believe unfettered markets are innately good, but the evidence I cite (and the crashing sounds all around us) are against you."

You haven't cited any evidence of any unfettered markets.

The crashing sounds are the sounds of failed government pretensions to economic management based on endlessly inflating the money supply.

“There are a million ways to organise market economies.”

If, and as, the economy is ‘organised’ by government, a) it is not an ‘unfettered’ market so stop blaming unfetteredmarkets, b) the purpose and effect of government intervention is to change the price level from being what it otherwise would be, c) the same calculational chaos that afflicts the economic decisions of socialist governments in which private capital is abolished, *necessarily* affects the decisions of partial government control of capital. They can’t calculate economically, because their very actions are intended to abnegate the only means of economic calculation – via the price mechanism. And d) these interventions have major unintended disastrous economic consequences, which is what we are witnessing.

Mises has it in a nutshell:
'Many socialist authors emphasize that the recurrence of economic crises and business depressions is a phenomenon inherent in the capitalist mode of production. On the other hand, a socialist system is safe against this evil…..[However T]he cyclical fluctuations of

business are not an occurrence originating in the sphere of the unhampered market, but a product of *government interference with business conditions designed to lower the rate of interest below the height at which the free market would have fixed it* (emphasis added – that’s the part everybody doesn’t seem to get).

‘It is essential to realize that what makes the economic crisis emerge is the democratic process of the market. The consumers disapprove of the employment of the factors of production as effected by the entrepreneurs…. The entrepreneurs, misled by the illusions of the artificially lowered gross market rate of interest, have failed to invest in those lines in which the most urgent needs of the public would have been satisfied in the best possible way. As soon as the credit expansion comes to an end, these faults become manifest. The attitudes of the consumer force the businessmen to adjust their activities anew to the best possible want-satisfaction. It is this process of liquidation of the faults committed in the boom and of readjustment to the wishes of the consumers which is called the depression.

But in a socialist economy it is only the government’s value judgments that count, and the people are deprived of any means of making their own value judgments prevail. A dictator does not bother about whether or not the masses approve of his decision concerning how much to devote for current consumption and how much for additional investment. If the dictator invests more and thus curtails the means available for current consumption, the people must eat less and hold their tongues. No crisis emerges because the subjects have no opportunity to utter their dissatisfaction. Where there is no business at all, business can be neither good nor bad. There may be starvation and famine, but no depression in the sense in which this term is used in dealing with the problems of a market economy. Where the individuals are not free to choose, they cannot protest against the methods applied by those directing the course of production activities.’
Mises, Human Action, 1949, p.563

Wing ah Hume,
Once again, you drag the debate back to a "Socialist under every bed" debate; despite the fact that no one is advocating socialism.

"The usual terminology of political language is stupid. What is 'left' and what is 'right'? Why should Hitler be 'right' and Stalin, his temporary friend, be 'left'? Who is 'reactionary' and who is 'progressive'? Reaction against an unwise policy is not to be condemned. And progress towards chaos is not to be commended. Nothing should find acceptance just because it is new, radical, and fashionable."
Mises.

Your dream of an unfettered market is simply economic anarchy ("chaos"). Governments did not 'give' banks the right to create credit out of thin air; this was something they invented for themselves (Google Lombard).
Governments have been trying -half heartedly, unsuccessfully- to control, or at least moderate the banks' excesses ever since.
What happens when you remove restrictions on banks? Interest rates (under Keating) went through the roof.

"Mises argued that money is demanded for its usefulness in purchasing other goods, rather than for its own sake and that any unsound credit expansion causes business cycles." Wikipedia.

So what is it that Bill Gates, Warren Buffet, et. al., want to purchase?
Tasmania?
Yes, unsound credit expansion does cause business cycles.
That's why the wilful creation of credit must be controlled (if not eliminated).

In my mind Grim is right. To me arguing by extremes at either end is like planning in absolutes WOT. Likewise taking ANY philosophy economic or other as holey writ is equally preposterously myopic and unhelpful.
As a matter of choice I think the term “wantonly irresponsible credit should be outlawed at all levels”.
To me caveat emptor is a cop out not a justification however it is a clear indication the morality of the people involved.

Wing I think you missed my context.
• Capitalism is a good TOOL. You wouldn’t let a hammer control/dictate the nature of society neither should capitalism. Likewise ideology is also a tool you can beat a person to death with it but that’s not what it’s for. Socialism be damned as an absolute it doesn’t work either on mass numbers.
• I’m simply calling for equity (fairness) in behaviour NOT Equality, as in all the same.
• Uncontrolled capitalism is a term on a sliding scale not an absolute.
• As has been discussed the derivatives market was as near to an unregulated market as you can get and look what happened.
• Again the biggest loses’ corporate crashes, frauds and disproportionate exec salaries have taken place under the neoliberal reign. Clearly it’s broken, we need a new paradigm.
• It’s the manipulative distortions I abhor should be regulated away.
• It’s the collateral damage I object to

Fatfingers-
Sorry, I hit OO’s quota yesterday, and they made me wait. :-) Continuing:

Regarding the evidence "that neoliberalism is superior", you apparently go for the usual special pleading, that the post-war success was due to something, anything, other than government management of economies. I think the burden is on the profession to demonstrate (rather than just assert) that factors like "WWII, technological and societal change, decolonisation, etc" can explain the success. And if you appeal to WWII, that's when economies were even more tightly managed, and that's when economies finally pulled out of the depression. For three decades neoliberals have taken as an unquestionable fact that unfettered markets are superior, but you have to perform complicated historical contortions even to begin to pretend there's any support for the claim. The evidence, on its face, goes exactly the other way, and very clearly.

Finally, I am a scientist of some international standing with four decades' experience studying a complicated system (the Earth). I do real science. The neoclassical stream of economics seems never to have understood that theories must be tested against observations of reality before you can claim to be doing science. It's not enough to do elegant mathematics. So that's why a geophysicist is writing articles (and books) about economics - to teach the profession how to make economics into a science. In its present form it's no better than the medieval ecclesiastics who debated how many angels could dance on the head of a pin.

I'm not the only one developing a more scientific approach. Eric Beinhocker, in The Origin of Wealth (Harvard Business School Press, 2006) summarises a large amount of work on what he calls "complexity economics".

Wing-
Underlying everything you say is still the presumption that unfettered markets are self-regulating and produce optimum results. That's precisely what I'm challenging, because it has no basis in theory, and the evidence is consistent with that conclusion.

Shameful Neo-Liberalism in Iraq

Comparative calm achieved through dollar deals between American Generals and Saddam's Sunni Shaiks

US military reputation thus ruined by the truthfulness of `The Surge'.

More ruination as Sunni Shaiks threaten to again sool out their insurgents if Baath Party is refused promised seats in new Iraqi Parliament.

Western media much to blame owing to deliberately holding back above knowledge to our public.

If this is the way to achieve peace in the Middle East, surely we must be losing?

Cheers, BB, WA.

So many points to answer, but I'll try.

The canard "unfettered markets" kept being brought up. If anyone can point to a truly unfettered market, I'll be happy to talk about it, but I don't know if any exist. We can only discuss relatively free and relatively unfree markets.

Citing Steven Keen is not a good sign - appeals to the fringe are not strong arguments. It's analogous to relying on climate change denialists and ignoring the majority.

I think you're wrong about markets not being self-correcting. They self-evidently have very strong feedback loops. The corrections may be disruptive or damaging, but they occur. In addition, misguided attempts to avoid or reduce these corrections typically just postpone and worsen them. The current financial crisis can certainly be classified as such - lax monetary policy at the beginning of the century (an attempt to cushion a correction) helped inflate the debt bubble that has burst with such bad effects in the last year.

Regarding economies of scale, here you demonstrate the perils of a little knowledge. Economies of scale are not the only determinants of company size. There are countervailing forces - diseconomies of scale, agency problems, diminishing marginal returns, some factors don't even scale, etc. So your argument is totally wrong-headed.

"that's when economies finally pulled out of the depression"

Another ignorant comment. Australia and England, by avoiding applying Keynesian policies, escaped the Great Depression much faster than the US! Furthermore, war economies did not bring prosperity. I suggest you go here and educate yourself: http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

I made the obvious point that the past 50 years of economic history can't be explained in one-dimensional terms. You claim it's "special pleading". That's simply laughable.

To be continued.

You are half-right in saying that economics is a pseudo-science. All social sciences are. That's because we're dealing with human beings and their interactions, for which there are no simple laws to discover, no universally applicable rules. Imagine an physicist attempting to discover patterns and make predictions about molecules that can remember their past and make guess about their future, that make guesses about other molecules. That adapt their behaviour to their environment, that seek to change their environment. That communicate and manipulate, that seek to control other molecules, that behave rationally most of the time but not always.

That's precisely why economists seek to isolate one variable at a time through "elegant mathematics" and simplified models - to introduce some scientific rigour into the process of studying a chaotic system. The results won't be exactly what happens in real life, but it will be a start, and any approximation will be much better than nothing.

Empirically, social science usually does not have the luxury of randomised double-blind trials. It has to make do with case studies, statistical analyses, and the like. These have shown, conclusively, time and time again, that relatively free markets bring greater prosperity and better social outcomes than relatively unfree markets. The body of evidence showing this is positively gargantuan - I'm astonished that you haven't bothered to access this diverse and comprehensive collection before pronouncing yourself the scientific saviour of economics. That you have a demonstrably patchy and inferior grasp of the basic historical facts, not to mention an abysmal understanding of economic theory, only serves to highlight your arrogance in this respect.

What about all this "too big to fail" bs? Capitalist theory does not model how todays multinationals work nor the amount of power they have. Economic theory is predicated on numerous small firms with full information and small entry costs. Now how is that anything like todays world?

Pseudoscience is not the word for it. Religion would be more likely. Or just straight up dishonest, designed to encourage and facilitate the exploitation and domination of the weak and powerless by the wealthy and unscrupulous.

fatfingers is spot on.

There's no sensible alternative to free markets. In fact our present situation in a result of not having a free market. We instead have some debauched type of crony capitalism that benefit the financial elite. This elite class throws scraps to the entitlement class whilst squeezing the middle class.

Thus we have three types of people:

- the financial and ruling elite
- the productive middle class
- the entitlement class

The flaw in democracy occurs when the majority realize that they can vote for the public purse. This is driven by left wing thinkers and right wing Ponzi schemers who are actually one and the same. Unfortunately most people spend their time/energy in pointless left/right wing debates and totally miss the obvious. In the end and as evolution dictates wars decide which ideas survive and in time the cycle will repeat for basically everything that is new is old. Stated another way not much happens that has not happened before - history is your friend.

I can't believe folks are still supporting the neo-lib ideas even when they have clearly crashed and burned.
Fact is, even the pure theory is against them.
The Utility in an economy is maximised when profits are minimised. This is a mathematical identity because excess profits are a form of taxation on the flow of monies and goods.
The so called "good decade" of Howard was *not* good for the economy as a whole. We have stripped our country of manufacturing, crippled our farming areas (Melbourne is even stealing water from one of the countries food baskets: more food imports form Asia!)
The Neo-Lib approach has been shown to be what it is: Pure selfish greed. Private profit, public liability is the motto.
To the knockers of the article: there are well tried and tested alternatives that are currently working in developed countries nearby. We can learn a lot from Malasia, Singapore and even more from Denmark.
If the so-called economic managers cannot see how a farm is run and scale it up (with a good dose of history as a BS detector) like our fore-fathers did then they don't deserve the job.
Our economy is beset by limitations imposed by greed. I wonder just how bad it has to get before we get "governance" again. I suspect we need a new political party that is not special interest.

The free market is belief rather than reality. Adam Smith, the great economist, wrote the Wealth of Nations (WON) which developed basic market theory. In there is much wisdom containing the failings of the market and the necessity for government regulation.

WON about capitalist conspiracies:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.”

WON about excessive profits and complaining about paying wages:

Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.

WON on capitalist propaganda:

They [general public] have commonly neither inclination nor fitness to enter into combinations; and the clamour and sophistry of merchants and manufacturers easily persuade them that the private interest of a part, and of a subordinate part of the society, is the general interest of the whole.

All posts seem to be arguing as if money was a commodity. Your talk of money markets is an absurdity because money is a system not a commodity. So illusionary markets are created buying and selling something that doesn't exist and wonder why playing with the money systems stuffs things up.

Wealth comes from one source only; activity in the real economy. Neo-liberalism has not created wealth. It has only transferred wealth from one place to another to the benefit of a few and the great loss of many. Wealth, true wealth remains where it has always been, in the real economy.

If the aim of neo-liberalism is to transfer wealth from the many to the few then it has been a great success.

In the crisis that exists in the world today nothing has changed much in the real economy. Real assets, reserves and potentials have changed very little in the last 12 months. So why has it all fallen in a hole? It is because the money people have just conducted the latest rape of the real economy that has left it battered bruised and traumatised.

The system is very simple. The real economy recovers and builds up to the benefit of the many. In come the money people who rape the real economy and send it back into the gutter.
Next just sit back until the real economy pulls itself out of the gutter and then rape it again.

There is only one way to end this cycle. Understand that money is only a system that exists for the good of the real economy. Then design a system that exists only for the good of the real economy. Finally make it bullet proof against the rapists who know only greed.

For neo-liberalism read greed, greed, greed, and more greed.

Davly, spot on. There will be a new site coming on line within the next couple of weeks:
stableproductivemoney.wordpress.com. Keep an eye out for it.

Fatfingers, I've read quite a lot of mainstream economics. I know about the so-called counter-arguments you raise. As a scientist I'm not impressed. You have not read my arguments in any detail, yet you dismiss them and call me names. I have cited specific evidence, you have made only vague allusions to "gargantuan" amounts of evidence. When I mention sophisticated mathematics, I'm not referring to econometrics, I'm referring to a large body of neoclassical theory based on patently absurd assumptions. It is possible to do real science on complicated systems. My day job is the inside of the Earth, about which our knowledge is quite incomplete. The key is to keep a clear view of what you DON'T know. On social systems, that are much more complicated than the Earth, complexity economics is building a scientific approach. Living systems do have a typical "character", even though their detailed behaviour can't be predicted minute-by-minute. That permits a scientific, if necessarily humble, approach to understanding.

Most critics here just keep repeating that unfettered markets are best. I agree our present system is manipulated, although it HAS been privatised and deregulated a lot over the past three decades. But I'm saying something more basic: the theoretical basis for the central claim about free markets is nonsense, at least for large modern markets, as distinct from a village produce market. Most of the critics here haven't engaged with that central point. At least fatfingers has had a go.

Geoff Davies
"Underlying everything you say is still the presumption that unfettered markets are self-regulating and produce optimum results."

No it's not. I don't make that presumption. I agree with you about neo-liberal aka neoclassical theory. But that does not dispose of the arguments in favour of free markets, nor justify the conclusion that government intervention is warranted.

All that is necessary is to show that governments cannot produce better results. Beside that, their interventions produce worse results, which is what both theory and evidence repeatedly confirm. There is no presumption of extra competence for governments to draw on.

By the way, I notice you do not provide any evidence of unfettered markets, and let's be frank, that's because there are none in evidence. In particular, by lowering interest rates, governments control the quintessential steering mechanism of financial markets - the price mechanism. The effects then flow from the financial markets, to the capital markets, to the structure of production. It is erroneous to blame the unintended negative consequences on ‘unfettered markets’. The cause is government interventions increasing the supply of money and money substitutes.

As to self-regulation, capitalism is not just a system of profit, it is a system of profit *and loss* and that acts as a negative feedback mechanism – no need to assume equilibrium, perfect knowledge, optimal results, or any of that crapola. By contrast, government has every incentive to inflate, and none to desist from inflating.

(examinator:
Derivative contracts are derivates *of* the underlying contracts and are to hedge against risk in them. Thus the greater the risk in the underlying bubble, the greater will be the derivatives bubble. It is mistaken to speak of the derivatives markets as being 'near' free markets, as if they are divorced from the underlying inflated supply of money, and the inflated risks therein.)

(Grim: Mises said the *terminology* of left and right is meaningless, and he’s right. I’m not using it.

(But the *facts* of social co-operation can either be based on consent, or on coercion, however called. There is no third way. The idea that government can

fix the problem by fiddling with subsidiary details, while still having the original power to inflate the currency that is causing the entire problem, is confused and mistaken.

(I have googled and wikipedia’d ‘lombard’. Struck out. Any link?

(Those theories that I have seen that say banks created the bubble of money substitutes not because, but despite government policies, all have in common that, like Steve Keen, they assume as a background fact the entire apparatus of government instruments to promote inflation. They do not question that assumption or background, but only confine themselves to suggesting a remedy based on more governmental fiddling with entirely subsidiary phenomena.)

All
In the absence of government's explicit and implicit support for inflating banks, they would go broke for the simple reason that people would withdraw their deposits if they thought they might lose them.

The idea that ‘greed’ affects private but not governmental actions is simplistic and erroneous. What is enabling the greed to take on gargantuan proportions is government’s control of the money supply, because it favours endless inflation, and grants to banks the privilege of creating money substitutes unbacked by money in specie – cash.

In the absence of such policies, the greed of the lending banks would be checked by the countervailing greed of the depositors. What prevents that happening is government.

No-one has refuted this argument.

Those calling for government to fix the problem never explain where government is going to get the super-competence from, and where are they going to get the voters, officers or politicians unaffected by greed.

By the way, Geoff Davies, what about logic, geometry and mathematics? They do not fit the definition of science you have given. Do you think they can be called science and if not why not?

Have you actually read the Austrian theory of the business cycle?

Fatfingers
There are universal propositions applicable to human action regardless of historical category, and which cannot be denied without self-contradiction. Mises derives the entire body of economics from these axioms. For example:
- man acts
- in acting man prefers A to B

You are so right Ozandy, because it was long ago that Adam Smith, father of the free-market warned about being very conscious of the difference between need and greed.

In fact, Smith did write about a warning sign, regarding when Laisez-faire had been taken too far - would like someone to verify it?

Regards,BB,WA.

Geoff Davies said
"the theoretical basis for the central claim about free markets is nonsense, at least for large modern markets, as distinct from a village produce market. Most of the critics here haven't engaged with that central point. At least fatfingers has had a go."

Geoff you seem to think that knowing the hard sciences qualifies you for determining what type of economic system works best. I think you are wrong and history has proved this as it was science that the Soviets relied upon for its economic guidance.

Being of the hard science you should know that all systems tend towards maximum randomness, ie. entropy. You should also know that chaotic systems are by definition impossible to predict and only an evolutionary learning process stand some chance in trying to determine possible scenarios with probabilities but nothing more.

Of course all discussion about which systems are best are futile as any system and I mean ANY system will be corrupted by humans and beyond recognition including our present system.

What we do know from history is this:

- Our system worked for many years after the great depression with minimal inflation and real progress in all areas

- Left leaning systems collapsed

- Or system is presently breaking down not because it’s unworkable but because it has been corrupted mainly by left leaning thinking and right wing Ponzi schemers.

Free markets can look after those who can’t look after themselves. In fact free markets provide the best means of looking after those who cant look after themselves - again history proves this.

What Free markets don’t do is look after those that don’t want to help themselves. And to those people I would say go to hell.

Dr Davies, if you were aware of diseconomies of scale, etc, why did you explicitly state "The assumptions on which the neoclassical theory is built [include] there should be no economies of scale"?

Unless you count 'armchair economist' as name-calling, I haven't done any such thing. I've pointed out ignorance and arrogance, that's all.

Your "specific evidence" is nothing of the sort. You brought up the broadest of indicators over very large time scales and declared 'neoliberalism' (whatever that is) to be inferior to "Keynesian intervention". This was a display of ignorance - the first Keynesian intervention was the latter part of the New Deal, an abysmal failure. Compare it to the performance of the UK and Australia, who balanced budgets instead. Keynesianism brought about stagflation in the 1970s. Japan's Keynesian intervention of the 1990s was a horrible mistake, leading to weak growth even today.

History has given us comparative studies (though imperfect and indicative only). Contrast East and West Germany, North and South Korea. Look at the explosion in growth in China when they loosened controls and liberalised a bit. Look at Vietnam's surge after Doi Moi.

If you want careful statistical studies on the benefits of free trade, you can start here: http://go.worldbank.org/ZOI6DW46K0 - the evidence is overwhelming that it is better than managed trade.

Your central claim about unrealistic assumptions is wrong, partly because you think some assumptions are made when they are not, and partly because the assumptions you correctly identify don't qualitatively change the results compared to real economies.

Fatfingers-
There are diseconomies of scale, but economies of scale dominate. That's why many major industries are dominated globally by a handful of giant corporations, in plain violation of neoclassical predictions. If free(er) markets are superior then the evidence I cite should show it, and it doesn't. And let's not get distracted by the semantics of whether the post-war regimes were 'Keynsian'. East Germany, North Korea - FF I'm not advocating socialism or communism, as I've already made clear. Your assertions at the end are just incorrect, which you would see if you took the trouble to read a full account of my work.

GovernmentsAreTheProblem-
I'm not talking old-fashioned 'hard science'. I'm talking modern complexity - find out about it and then debate. It's consistent with living systems and very different from old clockwork physics. Complex and living systems are far from equilibrium and tend LOCALLY to high levels of order (lower entropy).

Wing Ah Ling-
You interpret me correctly - logic, geometry and mathematics are not in themselves science. They are marvellous abstract constuctions, and very useful tools in science. However science is the process of creating theories (stories if you like) that are useful guides to how the real world behaves. It is a two-stage process. First, conceive a promising story (hypothesis). This is a creative process, not a logical one. Second, deduce implications and compare with observations of reality. Maths is very useful for deducing implications, but you also have to COMPARE WITH REALITY. That's the part neoclassical economics neglected. Good science can often be done with very little mathematics. Sometimes sophisticated mathematics is appropriate and useful, but the presence of sophisticated maths doesn't make it science, unless there are also rigorous comparisons with reality.

All three-
These kinds of criticisms of my necessarily brief article are not well-informed enough to be worth pursuing further.

And if government is innately wicked then there's not much more to be said. But most of us don't accept that.

The problem is not that government is "wicked", it's that you cannot just baldly assume, as you have done, that the problem cannot have anything to do with government's direct and indirect control of the money supply.

Obviously if you make an irrebutable presumption that the problem is not enough government regulation, you're just arguing in a circle.

The problem is not that my argument is not 'well-informed' it's that your argument has been refuted.

The point is this:
1. We already know that total government control of the economy doesn't work.

2. The issue is whether the current economic crisis has been caused by not enough government regulation, or not enough market regulation.

3. Government already takes up fifty percent of what western societies produce, and has an entire arsenal of instruments and institutions of 'monetary policy', which all have in common a uniform tendency that they promote inflation - the sneak tax.

4. Any remedy by way of further government intervention, is to *increase* the tendency to approach a final state that we already know is unworkable because it ends in economic chaos, not to mention fascism. So what makes you assume it's not the source of the problem?

5. Those asserting the problem is unfettered markets have a number of major problems to explain:
firstly to reach their conclusion they must assume that the entire arsenal of inflationary institutions and policies, and lowering interest rates, has nothing to do with the inflated demand for money and money substitutes that characterises the boom, which necessarily leads to the bust.

secondly, if the original problem is the ignorance or immorality of individuals in general, *government cannot be argued to be an improvement, because government is constituted by these same individuals.* You need to deal with this point, Geoff. There is simply no ground for assuming that government has the knowledge or the selflesness it would need to have to justify the expectation that it can be any improvement on the problem.

thirdly, the knowledge set available to markets is astronomically greater than the knowledge set available to any central planning authority. Notwithstanding all their pretensions to knowledge based on complicated mathematical models, central planners have no more access to knowledge of the market’s optimal or equilibrium points than Joe Blow has.

6. Under market regulation of the money supply, loss and bankruptcy serve to take resources out of the hands of entrepreneurs who do not satisfy the needs and wants that the broad mass of the people consider most urgent; while the much-reviled 'profit' is the direct result of the behaviour of the broad mass of the people, by their everyday dollar-votes in buying or abstaining from buying, in demonstrating their preferences as to what goods and services satisfy the wants and needs that the consumers themselves consider most urgent.

These effective feedback mechanisms are absent from government regulation. As such regulation is specifically intended to change the outcomes that would result from profit and loss, it has no means of economic calculation, and must fall back to preferences based on political favouritism, and rules and regulations. That's it. Partial government control has no way of supplying the economic competence that total government control lacks; except by reference to the remaining markets.

7. On the other hand, those asserting the problem is government face only the mere bald assumption that the problem cannot be government, without addressing both the reasons and the evidnce to show that it is indeed government manipulation of the money supply that is causing both the boom and the bust.

I challenge you to show the intellectual honesty either to admit, or to refute these point for point without evasion.

Wing Ah Ling-
I'm not going to answer this in detail because you clearly haven't even read what I've written in the article and in my previous comments, let alone attempted to find out my views in more detail.

Government management of markets is not total government control of the economy. I'm not an advocate of centralised communism. READ my previous comments.

Quote from my article: "Markets are clearly powerful, and they do have the considerable merit of distributing the processing of economic information, as Hayek pointed out." (Refers to your point 5/three.)

You seem to be stuck on inflation and money supply. I have much to say about the money supply, and I think it may be possible for it to be privately supplied, but not in our present fractional reserve, interest bearing (and yes, centralised) monetary system. It's just not the topic I addressed in this article.

No more debate with you, you don't even read what I've written here.

Wing, sorry, should have said look up Lombard (banking) in Wikipedia.
You may also be interested in the reference:

"How Venice Rigged the First, And Worst, Global Financial Collapse"
http://www.schillerinstitute.org/fid_91-96/954_Gallagher_Venice_rig.html

Although admittedly the source (schiller institute) is suspect. The historical similarities between then -1340s- and now are striking; particularly concerning the Australian wheat to Iraq controversy.

Dear Grim,

You stated “Although admittedly the source (schiller institute) is suspect.” I looked up the institute and found the info below. I agree the source is suspect.

http://en.wikipedia.org/wiki/Schiller_Institute

The Schiller Institute is an international political and economic thinktank, one of the primary organizations of the LaRouche movement, with headquarters in Germany and the United States, and supporters in Australia, Canada, Russia, and South America, among others, according to its website.

The Institute's stated aim is to apply the ideas of the philosopher Friedrich Schiller to what it calls the "contemporary world crisis." It was founded at a conference in Wiesbaden, Germany, in 1984 by Helga Zepp LaRouche, the German-born wife of American political activist Lyndon LaRouche. The American branch of the Institute publishes a quarterly magazine, Fidelio, which it describes as a "Journal of Poetry, Science, and Statecraft." The German branch publishes a similar magazine called Ibykus, named after Schiller's poem "The Cranes of Ibykus."

The Institute has been described by the London Metropolitan Police as a "political cult with sinister and dangerous connections."

Dr Davies, you seem to be under the misapprehension that neoclassical (or classical - you appear confused on this distinction) economics predicts no big companies for some reason. Competitive markets - that is, ones where barriers to entry are not inflated by government intervention - do work against monopolies and the like, but they don't guarantee an economy of sole traders or small business.

"If free(er) markets are superior then the evidence I cite should show it, and it doesn't."

The 'evidence' you cite is not useful in any sense. You keep trying to claim that only one variable changed over 50 years (the introduction of 'neoliberal' policies, which you refuse to define). This is preposterous, and is quite unscientific. This is not a good start for someone claiming that they are able to introduce scientific rigour into economics.

I've provided substantial evidence that freer markets give better societal outcomes, but you're not willing to engage with it. I bet you never followed the links!

You don't provide a "full account of your work" here, so you can't expect me or anyone else on this forum to counter it fully. To say we simply don't understand you might be true, but it appears weak and defensive, like you don't actually have the arguments to back up your assertions. Feel free to send me a copy of your book. Drop in to my blog ( www.jarrahjob.net ) and post a comment. It asks for your email address (not visible to anyone else), and I'll email you with my home address. That is, if you have the cojones ;-)

You also hide from the central objection to your thesis (ie that we can "manage" the economy), which is that governments do not have the requisite information to do so appropriately. You claim neoclassical theory assumes perfect information (not true, by the way), but then ignore the established problems with government information-gathering and processing, simply assuming that someone (technocrats, scientists, fringe economists, maybe even you?) can simply guide and control markets and always improve outcomes. History is emphatically against you in this.

Yes, thankyou David f, for confirming that which I had already stated. I still find the article interesting, and the comparisons between the 1340's economic meltdown and now to be notable.
All history, no matter how well regarded the author, must be viewed with an eye to the author's prejudices and bias in mind. American historians in general always have a slightly different flavour to English or Australian authors, for instance.
This thread has certainly shown a certain amount of cherrypicking, as both sides have demonstrated some historical evidence for their opposing views.
In truth, it is difficult to say whether one policy was more successful than another would have been, since it is impossible to run 2 timelines; although the more divergent, the easier it becomes. It is easy, for instance, to compare statist policies of Soviet Russia and laissez faire policies of the USA; however we are looking at a far more subtle difference, between the economic rationalism of the last 30 or 40 years, and the more conservative monetary policies of earlier decades.
I for one, have fond memories of the earlier times. I believe the standard of living of working class Aussies was much higher in those times, and I think economic rationalism (first proposed by Gough, by the way) has overseen the egregious expansion of the gap between rich and poor, and continual erosion of living standards of workers.
Allowing banks to vary interest rates during the life of a contract was not only immoral, it was stupid, as was most of the -ideologically driven- deregulation and privatisation.

Dear Grim,

You are correct in writing of the prejudices of the historian. I think the first time I became aware of that was reading a book by a Mexican historian. As a schoolboy in the US I was taught about the heroic effort of the Texans in their revolt against Mexico resulting in their independence in 1835. From the Mexican I learned that Mexico outlawed slavery in 1829, and much of the impetus for the revolt was by settlers from the US who wanted to keep slaves. The dirty dogs did the same bit later in the Civil War. I now forget the Alamo and would like to see Texas returned to Mexico. If this had already been done w would not have had Dubya.

As an oldie, can't see what was the matter with Keynesism, except the world was running short of greedy billionares.

So along came the simple silly greedy phrase - Get Big or Get Out! even bush bank managers caught up in it>

Hence the present result worldwide

Grim

My cousin had a wife whose family once lived next to a guy called Wing Ah Ling, and it is true that sometimes people have inadvertently confused us, owing to the similarity of our accents (I was raised in Shanghai before my now-famous trek by dromedary across the Taklamakan desert.)

However, I maintain the point is at all times whether the particular argument can be refuted; that is all. Personality is irrelevant, and strictly speaking off-topic.

Now. The general issue is that Geoff Davies argues that the current economic crisis shows the failure of 'neo-liberal' economic theory (which he doesn't define), and asserts that government can 'manage' the economy better (but doesn't say how).

This in turn leads to the prior issue whether the current economic crisis is a result of monetary policy, and in particular government manipulating the price of money which then affects the financial and capital markets, thus causing the surpluses and shortages which are the boom and bust; or whether the crisis was the result of 'unfettered markets'.

(Geoff, the problem is not that I 'haven't read' your article, it's that you have not been able to come up with a sensible reply to the criticisms I make that show
(a) that monetary policy, not free market ideology is what caused the economic crisis, see: http://mises.org/story/3128
and
(b) there is no evidence or reason to think that central planning of the economy or any part of it could do any better.)

Grim, I quote from the article you cited:
"Nor was the Papacy, the world leadership of the Church, fighting against the debt-looting of the international banks then as it is today; in fact, at that time it was allied with, aiding, and abetting them."

Thus the article you cite does not support the proposition that these bubbles are caused by the unhampered operations of free markets governed by the contracts of the parties. It shows clearly that the reason for the financial crises was not free markets as the author confusedly argues, but on the contrary, because the state 1. enforced a monopoly, ie illegalised free trade and competition in critical industries, and then 2. hocked up the entire population to pay off debts the state had contracted to the banks, by, in effect, pledging the state's monopolies to the banks.

The facts are staring you in the face. How people can keep giving the state a 'get out of jail free' card is a mystery. Can't you see that the root cause of the racket is the state, because the state is a monopoly to start with, and it then extends the exploitative powers that it originally claims by force, to the banks, in their common interest to screw the little guy?

Thus article you cite is instead authority for the proposition that these bubbles and the consequential busts are caused by the authorities overriding free trade in favour of state monopolies and legal privileges to the banks as against the little guy, because without such interference, open competition would send the state-based monopolist scammers broke?

If such controls over the money supply are so anti-social, exploitative and destructive, why do the authorities do it? Because they have an interest in inflation, because they get a cut of the loot. I don't know what was the Vatican's particular interest in 1340, but certainly the western states are implicated up to their necks in the financial crises of the 19th, 20th and 21st centuries.

Thus the problem is not free markets, it is monetary policy.

The irony is that those motivated to protect the little guy, by their mere unfounded assumption that the problem can't be government, are the main vector of the shafting of the little guy: http://mises.org/story/3335

No-one has addressed, let alone refuted these arguments.

Q.E.D.

Looks like the OP has taken his ball and gone home. I guess he doesn't have the stomach to defend his views even against those arguing in good faith, as I and others have done here.

Geoff, by withdrawing from the field before addressing all the opposing points, you've conceded the battle. Better luck next time.

Fatfingers, I sent a hard serve at neoclassical free market theory. But Wing keeps yelling at me that I'm not scoring enough goals, you reckon I should be hitting sixes, and Mr. Grumpy about Governments wants me to bet on the quinella. So yeah, the game wasn't much fun and I went home. ;-)

Geoff Davies

Your hard serve at neo-classical free market theory was good and well taken.

But it doesn't justify either your major premise that the current economic crisis originates in unfettered markets rather than monetary policy, nor the minor premise that "we" ie the state could produce a better result.

"Economic affairs cannot be kept running by magistrates and police." Mises

Ultimately you have merely re-run fallacies that were refuted long ago by the Austrian school: mises.org

Your assumption that the defence of free markets depends on all that neoclassical rubbish about perfect knowledge, perfect competition, equilibrium etc is invalid.

Also your theory of what makes economics a science is the same as that of the neoclassicals, and is why both you and they fell into error.

Hint: there is no underlying constant quantity for the mathematics to measure.

Measurement of prices cannot avoid dealing with the problem (a) of the underlying subjective value judgments of the human agents inherent in the decisions, and (b) that such measurements are of economic *history* which it is erroneous to confuse with economic theory. This error of the neoclassical school inheres in your own empirical approach. So not only the economics is wrong, the underlying epistemology is wrong.

Only when and if you have refuted their arguments will you be in a position to make intelligent comment

It is clearly impossible to refute any of your arguments to your satisfaction, Wing ah Hume, as you blithely ignore any argument which does not match your paradigm.

"Grim, I quote from the article you cited:
"Nor was the Papacy, the world leadership of the Church, fighting against the debt-looting of the international banks then as it is today; in fact, at that time it was allied with, aiding, and abetting them."

"Thus the article you cite does not support the proposition that these bubbles are caused by the unhampered operations of free markets governed by the contracts of the parties. It shows clearly that the reason for the financial crises was not free markets as the author confusedly argues, but on the contrary, because the state 1. enforced a monopoly, ie illegalised free trade and competition in critical industries, and then 2. hocked up the entire population to pay off debts the state had contracted to the banks, by, in effect, pledging the state's monopolies to the banks."

This is an amazing example of taking quotes out of context. In the VERY SAME PARAGRAPH the article states:

"The critical difference between 1345 and 1995, was that in the Fourteenth century there were as yet NO NATIONS (italics in original). No governments had the national sovereignty to control the banks and the creation of credit; or, to force these banks into bankruptcy in an orderly way, and replace fictitious bank credit and money with national credit. Nor was the Papacy, the world leadership of the Church, fighting against the debt-looting of the international banks then as it is today..."

From this, you manage to claim that no one has refuted your arguments?
People have given up arguing with you, because your mind is made up, and nothing in the world will change it.

AND FURTHERMORE...
All those attacking Geoff Davies for the use of the term "Neoliberalism" are urged to go back to the link in the very first paragraph: "debunking of neoliberalism", an article written by Kevin Rudd.
What amazed me was the breathtaking hypocrisy of Rudd's essay. He spends several pages criticising neoliberalism since the early 1980's, then in the same essay praising the Hawke/Keating government (of the early 1980's).
To all intents and purposes, economic rationalism IS neoliberalism.
If Hawke, Keating and Howard didn't manage to take Australia as far down the same road as Thatcher and Reagan, it was largely due to opposition and mediation by the Australian Democrats.

Grim
Yes I acknowledge your last point is correct and I was wrong: I mis-read it.

Nevertheless I reject argumentation by mind-reading. It just diverts the discussion into personality, which goes nowhere. I could just as easily say it's you whose mind is already made up, and then where does the argument go? "Tis!" "Tisn't!" "Tis" etc.

The article is unclear because of the author's obvious bias. For example 'usury' is not an economic term: it simply means excessive from the point of view of the speaker. He uses the term "seizing and looting" to denote bank actions in relation to a king's property in that king's kingdom. So it's not clear whether they were contractual or consensual transactions or not. If they were consensual, then they're not "looting". And if they were not consensual, then that is not an argument against free trade. So he displays a fundamental bias on the critical issues which clouds everything he says.

Most of the article is about various banking shenanigans to do with governments, which does not establish an argument against a free market in money, banking, or anything else.

What I am looking for is evidence that the bubble was the result of a free market in money and banking, and not from governmental or public intervention or policy of some kind. Considering the temptation for kings and governments to get their fingers in the till if they can, considering how intertwined was government power, government monopolies over trade, government monopoly over tax, and banking, it would seem highly dubious to assume that government was not involved in the banking activities that produced the bubble. But maybe it wasn't.

The evidence I'm looking for is, if the people paying for the service are free to pay for it and have the benefit, or not pay for it and not have the benefit, then it's a free market situation. But if they are compelled to pay for the service by force or law, whether they want it or not, then it's not a free market situation.

It's obvious the historian is *trying* to demonstrate that the problem was 'endogenous', as Steve Keen would say, to the banks. But is he succeeding?

For example: "Venetian finance which, by dominating and controlling a huge international “bubble” of currency speculation from 1275 through 1350, rigged the great collapse of the 1340’s."?

And? What was the role of the government of Venice, and what the role of the banks? He doesn't say.

For example "Venice deliberately ensnared...".

What's that mean? Who is "Venice" supposed to denote? Was it coercive, or not? What part of the term denotes governmental as opposed to private control? He doesn't say.

Is that the best evidence that the bubble arose free of the enabling influence of government policy?

Thus as to evidence, we have the biased assertions of a non-economist historian who does not distinguish the critical factual issues. He not only fails to prove beyond reasonable doubt, he fails on the balance of probabilities too. His argument is of the same kind that the recent crisis is caused by “unregulated capitalism”, which is nowhere in evidence.

What do you say is the evidence he is providing that the bubble arose without the enabling influence of government monopoly powers affecting money or banking?

As to the reasoning, it’s easy to see how a bubble can arise where government is protecting the banks from redeeming deposits on demand.

Not so easy to see what stops the banks from going broke in a free market situation from the depositors withdrawing their deposits.

What do you say was stopping that from happening in the Venice history, and in the recent crisis?

What justifies government having a power to inflate the currency?

The Roaring Twenties gave everyone a free go, you free-marketeers, and it took Maynard Keynes to repair it.

Out went Keynes in the early 1980s, the lessons of 1929 now forgotten as economic freedom again took a hold, the end of the Cold War adding successful politics to the proven economics.

Yet right now, even after years of a rapidly rising China and our subsequent lucky change to quarry economics we are still in a mess with the rest of the world.

Zounds like it could be the free-market once again.

Can anyone explain any different?

Cheers, BB, WA.

Well, you folks are still at it.

Wing Ah Ling, if you read anything other than your mises bible site you might see some of the evidence you keep demanding. Here are a couple of detailed accounts of how Wall Street went astray. Everyone agrees the US Govt and the Fed refused to intervene, and the clever fools led themselves, and us, to destruction. There's your unfettered market.

http://www.wired.com/print/techbiz/it/magazine/17-03/wp_quant

http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=1

Actually, I'm posting these for anyone else who's interested. I don't really expect Wing to evaluate the evidence the way most of us would.

Geoff

Unfortunately your personal arguments don't supply what your substantial argument lacks.

At least my personal insults are *in addition to* not *in substitition of* substantial argument on point.

Your argument to date can be summarised:
- assume what is in issue ('unfettered markets' caused the recession)
- ignore the entire apparatus of monetary policy as if irrelevant to the discussion
- ignore or misrepresent the arguments showing the connection between monetary policy to lower the price of money, and favour housing loans, and the increased demand for money and housing loans
- appeal to absent authority (assume government can fix it)
Then when refuted:
- personal argument.

All these are mere fallacies. You haven't got to square one yet.

I don't know why you are hostile to Mises when you obviously don't understand the theory. How do you know if you read it you might not find parts you agree with?

Your citations are merely confirming what Mises says in two ways:
1. mathematical economics is built on a fallacy. Prices are not positive data in the same way that measurements of atoms, or stones, or planets are. This is because subjective human valuation is of the essence of ever single price datum. Not only that, but every single price involves unique, non-comparable empirical data as to parties, qualities of goods, and place in the value scale of the parties. It is fallacious to use such positive statistical and aggregative measures. It's not junk mathematics. It's junk economics.
2. You have simply assumed what is in issue - pure circular argument. You assert that the markets are 'unfettered', as if they are in a separate universe, unconnected to monetary policy.You don't seem to be asking yourself "Would *I* voluntarily buy any of that debt piled on uncertainty with my hard-earned money?" and "If so, why?".
Ask yourself Geoff. Try.

The article answers the critical question. "Everyone was pinning their hopes on house prices continuing to rise,"

Now why ever might that be, Geoff? A house is just a house. Its value as shelter does not keep on rising.

I'll answer the question for you if you really can't get it, but see if you can answer it first:
- can you think of four things monetary policy was doing as the reason why everyone was pinning their hopes on house prices continuing to rise?
- can you tell me what would stop those financiers going broke in an unfettered market by the depositors of money in specie withdrawing their deposits?

What you seem to be suggesting is that the entire apparatus of monetary meddling by government should be just baldly assumed to be innocent of any economic effect, and we should then add in another assumption that government has a god-like power to solve the mathematical complexities of the financial markets by *more* central planning!

Grim
This is the second time I have refuted you on the same argument and each time you just slink off silently, only to pop up again somewhere else running the same fallacies.

Both
Please explain how you arrive at your irrefutable assumption that government policy to manipulate the money supply has got nothing to do with the supply of money.

Of course, if monetary policy really is as completely ineffectual as your argument requires us to believe, why not just agree to abolish it?

What justifies a government power to inflate the currency? Please answer

Wing: I do apologise for not sitting on the edge of my chair, waiting breathlessly for you to sing exactly the same song (ad infinitum). What you call 'slinking off', I would describe as 'having a life'.
You have never 'refuted' anything. You have expressed an opinion which only you find inarguable, and which the majority of economists, commentators, politicians, and moral philosophers disagree with; based solely on your rather selective interpretation of Mises and -parts of- the Austrian School.
I'm not aware of having defended any Government monetary policy. Please define 'Government'. As I recall, successive govs., in this country have divorced themselves from the inflation fight, since the time of Fraser. They quite rightly deduced that expressions such as 'we all need to tighten our belts', 'life wasn't meant to be easy', -Fraser, and 'this is the recession we had to have' -Keating, were not instant keys to political popularity. The politicians therefore dumped the business of controlling inflation on the fed, but gave it just one tool to work with.
The ability to control interest rates.
Where we differ, you and I, is that I believe the banks and the speculators are the true criminals in the current crisis. We need to stop treating money as a commodity, which can be bought and sold and manipulated, and bring it back to being simply the means of exchange of real goods.
As such, it is not part of the free market. It should be treated as infrastructure, just as power, water and other necessities are/should be -which also rightfully belong to all the people, and should never have been privatised.