The World Economy Is In Crisis Because No One Has Any Idea How It Really Works

von Hayek, Keynes and Friedman
Von Hayek, Keynes and Friedman
Martin McCauley writes from Frankfurt: The riots in Greece are a direct consequence of the austerity package forced on the government by Brussels and Berlin. Anarchists throw petrol bombs in an attempt to burn down the institutions of the state. After all, they do not believe in government. The people should rule themselves. What is surprising is that there are not more anarchists in Greece. After years of austerity, no government appears to know how to escape from the vice like grip of economics. Does anyone know how to kick start Europe’s economies?
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.
riots in Athens
Riots in Athens
Hayek’s great intellectual opponent was John Maynard Keynes. He concluded that governments should inject money into the economy to increase demand. More money means more economic activity. Quantitative easing or printing money is Keynesian. This is dismissed by Hayek and his followers as sleep walking to financial ruin. 
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.
Extracts from Stirring Trouble Internationally - (A humorous take on news and current affairs) [The World Economy Is In Crisis Because No One Has Any Idea How It Really Works]
Economics (Photo credit: markwainwright)