Babies with Candy

If Paul Krugman is, indeed, a brilliant and rigorous thinker, he hides it awfully well. In a Times Magazine article he divides the world into two sort of economists. Freshwater economists believe markets are always perfect and workers choose not to work during recessions. Saltwater economists believe that markets are deeply flawed and require strong government participation to function well. He demonstrates the superior wisdom of the Saltwaters by the existence of bubbles, the fact that workers do not choose to be unemployment during a recession and the greater prestige of their affiliations (Harvard, MIT, Princeton).

Somebody in Krugman's prestigious university should explain him what a logical fallacy is.

It is very easy to argue that markets can mis-price things, or that recessions produce more than creative destruction; It is much more difficult to demonstrate that governments will generally, or even often, price things better or that fiscal policy will generally, or even often, does more good than harm. There is very little basis -- particularly in the context of the current financial crisis -- to believe that government can generally be expected to act more rationally then investors or consumers. On the contrary...

Krugman's beef, above all is with the theory of rational markets:

As I see it, the economics profession went astray because economists... fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets...

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets...

To Krugman, this argues for increased governmental babysitting of the economy.

It is hard to see, as Krugman does, in the failure of our heavily regulated financial markets, proof that ungoverned free markets fail. Or that what our financial markets require is more, not less, heavy handed government meddling.

In the end, it ought be stated, Krugman's line of argument is inherently anti-democratic. In a democratic government, limitations of individual economic decision making will be reflected in governmental decision making. There is no reason to believe that government -- riddled with agency cost, sitting on top of the food chain -- is not itself an institution at particularly high risk of running amok.

The belief that government can somehow stand above the fray, making rational and beneficial decisions, even as irrationality infects the hoi polloi, requires belief in a government that is something other then of and by the governed.