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Lies, Damned Lies, and Economics
There is a science of economics. Unfortunately, many economists don't practice it.


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Stephen Spruiell

Shortly after he was elected, President Obama said, “The truth is that promoting science . . . is about ensuring that facts and evidence are never twisted or obscured by politics or ideology.” Obama’s remark was a veiled shot at his predecessor and at Republicans in general. Democrats often use the term “anti-science” as a rhetorical weapon against people who have ethical reasons for opposing embryonic-stem-cell research or who voice prudential concerns about energy rationing. When it comes to economics, however, many Democrats brazenly ignore scientific evidence that calls into question the wisdom of their preferred policies. They get away with it because most people don’t think of economics as a “science” the way they do biology or astronomy. In his new book, Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis, French economist Guy Sorman says it’s time for that to change.

Economics Does Not Lie is not as argumentative as its subtitle might lead you to think. It has the feel of a book that was embarked upon before the crisis hit, as if Sorman set out to write a sober-minded survey of economics as a science and got caught in a raging storm. The book doesn’t read like a polemical counterattack on capitalism’s crisis-minded critics, but it does serve as a defense of free markets because that is the direction in which the science of economics as explicated by Sorman points. No other system has proven as effective at reducing poverty and delivering growth as “free-market capitalism, informed by classical liberal economic theory,” and reports of the death of this system are greatly exaggerated.

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Step by step, Sorman takes us through the major discoveries that led to this conclusion: the work of Edward Prescott and others demonstrating that excessive taxation slows economic growth; of Avner Greif on the importance of courts and other institutions that enable markets to function; of Friedman and Lucas on the pernicious effects of inflation; and of Jagdish Baghwati on the benefits of trade. Always Sorman’s focus is on work that is based on empirical observations and testable hypotheses — economics as a science.

The scope of the book is global, as it must be, for some of the strongest scientific evidence in favor of free-market capitalism is to be found in developing countries. The governments of India, China, Brazil, and other countries have reduced crushing poverty by opening their borders to foreign investment and relinquishing control over the economy. Sorman adds value to this familiar discussion by elevating less familiar economists like Xavier Sala-i-Martin — whose work has drawn important connections between commercial globalization and poverty reduction — and distinguishing them from well-known figures like Jeffrey Sachs, who is often seen alongside U2’s Bono arguing that what Africa really needs is more foreign aid. Of Sala-i-Martin and Sachs, both of whom teach at Columbia, Sorman writes, “In competing to attract students, donors, and other professors, universities seek not only pure researchers but also scholars who attract media attention.”

Sorman addresses the financial crisis in the developed world simply and clearly by explaining how steady growth and cyclical downturns are interconnected:

Economic cycles are the result of innovation. Innovations — whether technical, financial, or managerial — generate growth, but not all innovations are successful. . . . It would be nice to escape economic cycles, but there is no way to have growth without innovation, innovation without risk, or risk without economic cycles. Cycles and downturns are thus not the enemies of economic progress; the enemy of human development is bad economic policies.

Later in the book, Sorman explores the logic of speculative bubbles, citing the work of Princeton’s Jose Scheinkman. Sorman writes that bubbles begin with “something real, some discovery or innovation.” In the case of the housing bubble, the innovation was securitization, or the ability to package bundles of individual debts into bonds that would provide reliable rates of return. Government policies such as easy credit and subsidies for homeowners inflated the bubble, as did the rational expectations of participants who “bet that they could beat the market, at least for one more day.”



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