Ronald Coase, that wise Nobel laureate in economics, points out that economists are liable to succumb to a ?fatal vanity?. This is that they have found a magic formula to achieve growth. The last fatal vanity was the belief that markets are self-regulating. Brilliant mathematicians produced models which demonstrated this. This was an illusion. As Mervyn King has ruefully admitted, you cannot construct a model of the economy which adequately reflects its behaviour. This is quite a confession from a central banker. If this is so, then why does the Bank of England set the base rate in this country? If the Monetary Policy Committee is honest it will admit that it is only engaged in guesswork.
Economics is called a science but it is not. It is very seductive to believe that as the laws of physics explain how the universe functions so the laws which govern human society and activity must also be discoverable. Karl Marx made a bold attempt to do this. However his economic theories have been revealed to be fatally flawed. He advocated the elimination of the market, property, the profit motive, money and private entrepreneurship. The Bolsheviks tried that in Soviet Russia between 1918 and 1921 and Mao Zedong did the same in China between 1966 and 1976. In both cases, the result was disaster. So the market economy or capitalism has outperformed any other economic theory. It is the only game in town.
A major problem with capitalism is that the most brilliant economic brains disagree radically on how to run a market economy. Take, for instance, Friedrich von Hayek, a Nobel Prize winner. He advocates the abolition of all central banks. The markets should set interest rates. He does not think that governments should intervene to manage an economy. That should be left to the markets. Banks and businesses should be allowed to fail. Social Darwinism should be given free rein. The key reason why governments cannot manage an economy successfully is because it is impossible to collect all the information necessary to reach a rational decision. He predicted the failure of central planning in the Soviet Union because of the lack of information in his book, The Road to Serfdom, in 1944. He was later proved right.
Then take Milton Friedman, another Nobel laureate. He teaches that the control of the money supply is the secret of success. Monetarism ruled for a while.
Ronald Coase underlines two basic facts about the market economy. There has to be the acknowledgement of ignorance and the tolerance of uncertainty. If you consider these two verities it means that all economic decisions are stabs in the dark. No one knows for certain which policy will work and which will not. This is small comfort for the demonstrators in Athens. They want certainty. They want someone to tell them how to escape from the mess they are in. Coase would reply: ?Sorry, no one knows?. No wonder economics is called the dismal science. No, omit the word ?science?. Its record proves that it is not.
?End?
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