Noah Smith and the Panglossian Fallacy

Over the past few months, I've spent some time pushing back against what I believe are poor arguments made by professional economists who oppose market direction of resources. The "arguments" I want to examine this time aren't really arguments. They're really just bald assertions with nothing to back them up. I suppose this makes my job easy, so I'll try to be brief.

Noah Smith's recent Bloomberg View piece makes the case that Berkeley is, in fact, the #1 economics department in the U.S. Chicago, he claims, has lost its luster and M.I.T. plays second fiddle to Berkeley in its ability to "influence" the profession.

While Smith makes some good points about the intellectual diversity and pioneering work by Berkeley faculty, his derision of Chicago borders on childish. Here's Smith:

... the Chicago school is a term used to refer to free-market fundamentalism and the belief that economic actors are always rational ...

and

The Chicago School was Panglossian in its belief that markets work well; the Berkeley Reformation showed deep, fundamental reasons that they break down.

This is a recurring theme in Noah Smith's writing: he paints his intellectual opponents as idiots or religious zealots who unthinkingly spout discredited theories about markets and government action. While this is true about a lot of non-economists on the internet, it doesn't properly characterize professional economists who favor markets. Further, as usual, Smith offers no evidence to back up his extreme claims.

The term "Panglossian" may be unfamiliar to some readers, but it simply refers to a naive or overly-optimistic view of something. Have Chicago School economists exhibited this trait, or does their view that markets are superior to gov't direction of resources stem largely from careful thought and empirical research? Here are some reasons to think their views are anything but Panglossian.

George Stigler, a professor at Chicago for decades, developed a theory of regulatory capture which accurately describes the actual workings of the relationship between large, incumbent firms and self-interested regulators. Is this Smith's idea of "funadmentalism?" Is this "Panglossian?" Surely not.

Milton Friedman spent a tremendous amount of his time explaining to the public how markets work and precisely why they are superior to gov't intervention in voluntary exchange. He discussed real examples of the imperfection of markets and governments whenever he addressed the public. He was critical of both private and gov't monopolies as "the great danger" facing society. Precisely how does this equate to a naive and overly optimistic view of markets?

Hayek spent some time at Chicago. Anyone who has read even a small amount of his professional academic work knows that he backed up his views with very careful analysis of the working of markets. Fundamentalism? Hardly.

Other academic economists who advocate for free markets long ago exposed the silliness of the view that markets should be criticized on the basis of the results of highly-formalized and unrealistic models. I've discussed Harold Demsetz's piece exposing what he called "the Nirvana Fallacy." Economists with Noah's worldview persist to this day in repeating this nonsense. Many behavioral economists advocate gov't policy "nudges" to "improve" voluntary arrangements with coercive ones. Only recently are other behavioral economists pointing out that regulators are, in fact, human as well and are thus subject to biases and irrationality. Market failure concepts are discussed nearly 6 times as often as government failure in beginning economics texts. The most popular beginner economics texts barely discuss gov't failure at all. If advocates of markets are "fundamentalist," why is it that they provide a balanced look at the gov't and the market while market detractors only muster a few criticisms of gov't in their texts?

Smith, like many other economists, seems to be of the view that economists, with their superior knowledge, can design policies that are superior to market arrangements. He sees many problems with markets that can be solved if only economists are given the reins. In this view, it's not a matter of preferring gov't to markets or vice-versa; it's a matter of management of the economy. Of course, this presumes that the gov't has the right and power to effectively and efficiently set the policies economists consider to be the best. It is thus inherently anti-market and completely ignores the contributions of Hayek to the literature on "the knowledge problem."

Smith and other left-leaning economists simply ignore the critiques of Public Choice, the Bloomington School, Hayek, and many others. In light of this oversight, the terms "fundamentalist" and "Panglossian" might be more fairly applied to them.