Posted: 1/17/2015
Trigger
Just read “Economics and Its Critics” an opinion piece by Werner Sinn published on the Project Syndicate website. Prof. Sinn is one of the most best known and prominent economists in Germany.
The whole article is filled with dubious statements I would ascribe to a dismal economist. Most prominently, he criticizes a number of market failures when in fact we are dealing with government failures of various kind.
Who is Werner Sinn:
Director of one of Germany’s best economic research institutes (Ifo Institut in Munich)
A member of the advisory council of the German ministry of economics.
An often quoted, interviewed economist in the German media
Economists Are Misunderstood And Met With Ignorance
According to Sinn: “But much current criticism of the [economics] profession is based on misunderstanding and ignorance.”
How To Defend Economists
In Prof Sinn’s words (emphasis added):
“[Economists are] Like sniffer dogs, they search the economy for such defects [of the invisible Hand or perfect competition] and ponder how they can be corrected through intelligent state intervention.”
[Since when are governments intelligent or more intelligent than free markets?]
“In this respect, economists are like doctors, who have to know what a healthy body looks like before they can diagnose disease and prescribe treatment. A good doctor does not intervene arbitrarily in the body’s processes, but only in cases where there is objective proof of a disease and an effective treatment can be prescribed.”
[This flawed analogy or metaphor used here by Prof. Sinn has left me speechless. As an economist myself, I would never get the idea to compare myself to a doctor or diagnose whether the economy is sick or healthy.]
“Environmental regulation addresses a particularly striking example of market failure.”
[This nonsense has been taught to generations of students of economics! Many times it is government failure that lead to very harmful environmental consequences of economic activity.]
“Another malady that economists sometimes diagnose might be called “Keynes disease.” If demand is too weak, it can lead to a sharp drop in employment (because wages and prices are rigid in the short term). The disease can be cured with injections of public, debt-financed stimulus – like giving a cardiac patient doses of nitroglycerin to keep his heart going.”
[No comment necessary anymore. Just awful!]
“Contrary to what many think, there is no fundamental bias against this [Keynesian] medicine in mainstream economics today.”
[Prof. Sinn names exactly the fundamental problem of economics today that mainstream believes in long debunked Keynesian therapies to use his language.]
“Competition among providers of complementary goods or services is harmful, and can be even worse than a monopoly. (That is why train drivers and pilots, for example, should be forced into monopoly unions that represent all of the other employees of their respective companies.)”
[I am not sure what Sinn is trying to say here. However, he wants to force train drivers and pilots into some kind of monopoly unions? Again, a statist, paternalistic economist is coming out here.]
“The market failures that initially give rise to public-sector intervention tend to recur internationally, which means that competition between states is usually not efficient, either. Examples include competition between welfare states to deter economic migrants, the race to the bottom in taxation, and regulatory rivalry in the banking and insurance sectors. Competition, contrary to what many on the right believe, is not always good.”
[There is a lot to be said about this nonsense too, but I am afraid, for the sake of brevity … First, all these cited examples are not related to competition based on market economies, these are distortions brought about by failed government policies, e.g. outlandish welfare states or overtaxation and so on.]
“By ensuring that policies respond to flaws in the rules of the game, not to individuals’ fallibility or irrationality, this “methodological individualism” saves us from dictatorial paternalism.”
[I don’t know in which world Prof. Sinn is living, but governmental paternalism or statism has spread and expanded tremendously in basically all Western democracies.]
“Banks that grant risky loans on too little equity illustrate the analytical value of homo economicus particularly clearly. Their profits are privatized, but any losses exceeding their equity are dumped on their creditors, or, even better for them, on the taxpayers. This asymmetry turns banking into a casino: The house always wins. Banks choose particularly risky investment projects, which may be profitable but are economically damaging.”
[Perhaps, Prof. Sinn is naive or willfully blind or is he a Marxist. Were it not for decades of bank bailouts by governments (in particular in the U.S.); governments pushing affordable housing policies; too cozy relationships between high finance and government; ridiculously low government (via central banks) enforced interest rates; and a government mandated deposit insurance, the markets and bank customers would punish imprudent banks.]
“The problem is not caused by human irrationality; on the contrary, it arises precisely because bankers are acting rationally. As we know from environmental regulation, preaching common sense or ethics to bankers will not help; but changing bankers’ incentives – by, say, requiring higher equity-asset ratios – would work wonders.”
[Prof. Sinn is absolutely right that bankers acted rationally because of decades old implicit bailout guarantee by governments also called too big to fail. Especially, the U.S. government since the 1930s has imposed strict regulations and oversight of the financial sector, but this did not prevent the savings and loans debacle in the 1980s or the financial crisis of 2008. To think that more government control like higher equity-asset rations is baloney and wishful thinking. Has Prof. Sinn forgotten that the Basel III Accords (an agreement between state governments) exempted government bonds and mortgage debt.]
