More importantly crisis needs a third voice than the other two

Comments on Christian Kerr “Crisis needs some more name-calling from the Right”, The Australian, 11/03/2009, http://blogs.theaustralian.news.com.au/houserules/index.php/theaustralian/comments/crisis_needs_some_more_name_calling_from_the_right/

Kerr talked about the need for a voice from the opposite to the Left, namely the Right, to come out to defend capitalism in the current economic crisis under capitalism. That was fair enough, and an interesting point. Any show of fighting would not be interesting and dull if it is one sided without an opponent on the stage.

So far into the crisis there have been a lot of noises from the Left or possibly from some innocent people. Some have been too eager to denounce the sins of capitalism, normally disguised in the names such as neo-liberalism, market fundamentalism, and the like. The article mentioned Rudd, Australian PM, as one of the more vocal voices.

Kerr tried very hard to find some voices from the opposite. Under that attempt, Andrew Alexander came to light. However, Alexander’s argument got lost, impertinent and impotent when he argued that “the primitive urge for the direction and regulation of all economic activity, what the economists call statism, is of course the basis for socialism.” As his opponents from the Left have shown so far Alexander had equally misdirected the point. Arguing for more regulations is not “urge for the direction and regulation of all economic activity”.

Similarly, the Left has been wrong in that the crisis, albeit very serious, does not mean the end or death of:
capitalism itself; or
the market economy; or
free international trade; or
international capital flows; or
economic integration; or
globalization.

Capitalism consists a broad spectrum and the main stream capitalism has never meant that there should be no government regulations for many decades. Yes there have been and still are wide views among economists, some may argue for more regulations and some for less. Only few argue for no regulations.

To be more to the point, there is no question that the chaotic and rotten practices of some of the sub-mortgage lenders of their agents in the US contributed to causes of the current financial and economic crisis. However, were they a true reflection of main stream capitalism? Besides, some of the accounting standards, though with good intentions and some merits, exacerbated the herd behavior under imperfect information.

Imperfect information will always exist, irrespective under which system. The other issues can be rectified by slightly tightening regulations to have every agent to bear the risks of their doing or changing some of the accounting standards to make them both more transparent and be more resilient in market cycles, that is, not pro-cyclic if possible counter-cyclic or at least cyclic neutral.

Both the Left and the Right have been wrong and exaggerate their cases. There need a third voice and this is the main stream silent majority. The main stream should never be distracted by either extreme. No economic system is perfect, and capitalism is no exception. It works well generally, but does have the tendency to cause problems of one sort or another from time to time, such as the great depression and the current financial and economic crisis. However, those problems can be greatly moderated by prudent government regulations.

Since the birth of Keynesian macroeconomics, the world economy had generally behaved reasonably well until the recent financial crisis. We experienced stagnation in the 1970s due to supply side disturbances that presented some challenges to economists. Though they responded and made headway progress in theories by brining the rational expectations revolution, no new macroeconomic policy tools were produced. In that context, economists had still not had that challenge resolved in terms of bring effective supply side policy tools.

The recent crisis, though very serious, was largely attributable to the rogue behavior of some sub-prime mortgages lenders and/or their agents and the undesirable effects of the mark-to-the-market accounting rule. It should not be too difficult to change those.

Having said that, I would boldly say that economist at large as a profession remain under strong siege. They need to produce more effective tools to tackle some macroeconomic problems. On top of the supply side disturbances in the 1970s, now they have got another one onto their hands in the realm of serious monetary ineffectiveness and impotence to stimulate credit flow and finance.

Economists, we need you to stand up to the current challenges. Economists can help the cause of the third voice.