Subscriber Content Preview | Request a free trialSearch  
  Go

The Deal Economy 2013

Home    |    Event    |    Blog    |    Awards
Print  |  Share  |  Discuss  |  Reprint

Peter Temin on natural economics

by Robert Teitelman  |  Published May 16, 2011 at 2:47 PM
Peter Temin125x100.jpgThe Straddler has posted a fascinating conversation with MIT's economic historian Peter Temin conducted back in February (hat tip: The Baseline Scenario). Temin argues that macroeconomics has embraced a metaphor of a "natural" market that stems from the belief in a maximally efficient, general-equilibrium model. Any deviation from that ideal is described as unnatural, and thus an efficiency-destroying "distortion." Temin:

"In my opinion macroeconomics has lost its way. The kind of models that many people use -- general equilibrium models -- start from an assumption of perfect competition, omniscient consumers, and various like things that give rise to the an efficient economy. As far as I know, there has never been an economy that looked like that -- it's an intellectual construct. But many people claim that the outcomes of that economy are natural outcomes. When you say 'natural,' you already have an emotionally laden term. Deviations from the 'natural' -- say, like minimum wage laws, or unions, or governments that give food stamps, or earned income tax credits -- are interference with the natural order and are therefore 'unnatural.' "
There's a wonderful recent example that comes immediately to mind: Alan Greenspan's now-notorious recantation of "mistakes" in the Financial Times in late March, in which he decried "regulatory inconsistencies [stemming from Dodd-Frank] whose consequences cannot be readily anticipated." Greenspan went on to add, "The act may create the largest regulatory-induced market distortion since America's ill-fated imposition of wage-and-price controls in 1971." And in fact, Greenspan argued that the financial system was so complex and dynamic that no one -- neither regulator nor trader this side of the Godhead Himself -- could comprehend what was going on. This, in fact, is a classic articulation of the argument from nature that Temin picks up on, and that resembles a kind of radical environmentalism for money: Because it's beyond our ken, we shouldn't mess with it and create distortions.
 
The biggest problem here, which I touched on with the Greenspan column and that Temin points out far more elegantly, is that a free and perfect market is as much a myth as the state of nature: Markets are created, regulated and manned by homo sapiens. As Temin says: "In work Frank Levy and I did, we talked about a period we called the Treaty of Detroit (1945-1970s), where you had a lot of government intervention, and then this later period we nicknamed The Washington Consensus (1970s-present), where there was minimal government intervention. At first our tendency was to say that the later period was natural competition and the earlier period was unnatural government intervention. But then we had to say, no, the government is involved in all of these things, it's just that government policy is different in one period than in another period. It's not that one is natural and one is unnatural. It's that one does something, and the other does something else."
 
Temin's deeper argument then is that "general equilibrium tends to lend support" to those who favor minimal government. And the success of this point of view over the past three decades has created a feedback loop. "As people have gotten richer, conservative people have funded organizations which generate economic research promoting their political views," he writes.
 
Temin goes on to offer considerable more detail on how this affects economic matters. But this is larger than just economics. The argument about nature has a long pedigree historically, going back at least to the Enlightenment and reaching a kind of feverish apotheosis in the Romantic period. It's been with us ever since, with such phenomenon as "the noble savage" that extends from Rousseau to Margaret Mead to the Playboy Philosophy. And we have the current mania for "organic," which is so prone to distortion, but which is based on the notion that "natural" is "healthier" and morally better. The theme also pops up in healthcare, where "natural healing" or alternative medicine has long had a following because it is, well, natural (see the history of Christian Science). Indeed, biological advances that used the body's own immune system to battle diseases like cancer were long promoted as a way to avoid the side effects of chemically based therapeutics, without real clinical efficacy. The reality is that the side effects of so-called immune products from the interferons to the interleukins to a hundred other complex and intricately designed (by evolution or God, depending on your point of view) molecules could be just as devastating and just as baffling as organic compounds cobbled together by chemists or discovered on the bark of some tree in the Amazon.
 
The truth is "natural" can kill you or save you, feed you or starve you, offer darkest evil or moral uplift, represent a social good or a social disaster. Indeed, the quest for the truly "natural" is a road into ambiguity and relativism. Nature becomes whatever we claim it to be. Are the animals in the farmyard any less "natural" than the birds in the trees and the denizens of the woods? Are the only truly "natural" situations those where an ecosystem returns to a general equilibrium uncontaminated by man? We are, obviously, part of nature, bipedal animals with a unique self-consciousness and talent for abstraction. What does it mean to banish us from evolution?
 
What's interesting here to see is how this powerful and deeply rooted metaphor has been adopted by conservative, hardheaded, empirically minded, economic technicians who would probably resist the company of nature freaks, environmentalists, alternative medicine gurus and health-food apostles. But it's a metaphor with great power within this culture with a protean fungibility, even if it is one that, when it falls into the hands of economists and free marketers, has a tendency to run roughshod over all other claims, even those also held up as natural. And as we know, the perfectly free market is an aggressive force that eventually will overstep its bounds and, quite naturally, implode. - Robert Teitelman

Share:
Tags: Alan Greenspan | Dodd-Frank Act | Margaret Mead | MIT | Peter Temin | Rousseau | The Baseline Scenario | The Straddler
blog comments powered by Disqus

Meet the journalists

Robert Teitelman

Editor in chief

Bob Teitelman, editor in chief and a member of the company’s executive committee, is responsible for editorial operations of print and electronic products. Contact



Movers & Shakers

Launch Movers and shakers slideshow

Barnes & Thornburg LLP said Rebekah Prince joined the firm's corporate department as a partner in Los Angeles. For other updates launch today's Movers & shakers slideshow.

Video

Serial acquirer Zayo goes public after rolling up fiber rivals

Dan Caruso, the networker's chairman and CEO, talks consolidation, overseas expansion and PE exits with The Deal′s Chris Nolter on the floor of the New York Stock Exchange. More video

Sectors