Does science demonstrate the inefficiency of capitalism?

Photo Ulrik De Wachter

Capitalism drives leftists up the wall. For whatever reason, they loathe it and work for its demise by any means possible. And in recent years, these anti-capitalist ideologues have enlisted the help of science to aid them in there crusade against free markets and individual choice.

In particular, the anti-capitalist types have latched on to a relatively new field of research called behavioral economics, which studies the influence of psychological and emotional factors on economic decision making. By studying behavior the socialists believe they can “scientifically” prove that economic agents often make poor decisions as a result of their feeble, easily confused minds.

If objective scientific research can demonstrate that individuals act irrationally in their economic affairs, there is now justification for Washington bureaucrats to step in and prevent this irrational action from generating negative consequences—bank failures, housing crises, investment scandals and so on.

Such was the purpose of one article authored by Scientific American columnist Gary Stix entitled “The Science of Economic Bubbles and Busts.” Citing the latest research from a slew of economists, psychologists and historians, the author launched an all-out assault on Classical economic theory and several of its central tenets. Unfortunately, the article is full of false assumptions and other fallacies that render its conclusion useless.

The most glaring flaw in the author’s argument is its underlying assumption—that economic instability is an inherent characteristic of capitalism. According to Mr. Stix, individuals on their quest to better their own lives sometimes make bad decisions which induce the cycle of booms and busts that have plagued the global economy for so long. “Markets sometimes become overheated and then come crashing down,” according to the article; no further explanation is required.

Forgive my skepticism, but before concluding that markets just implode for no reason, might it be pertinent to ask what role the federal government plays when the economy falls apart? Most observers would probably agree that that would be a good inquiry, but not Mr. Stix. If he would’ve asked that question, his entire hypothesis would have come crashing down.

For example, what happens when the Federal Reserve artificially lowers interest rates and distorts their function as an important market signal? The answer to this question mutilates the idea that markets just disintegrate for no reason. When the Federal Reserve manipulates interest rates, it promotes malinvestments “which then require a recession to correct,” as economist Robert P. Murphy points out. Ironically, then, it’s the very people who should be preventing recessions that are making them inevitable.

But such questions, unfortunately, probably received little or no consideration before Scientific American took aim at capitalism. In fact, the only reference to monetary policy in the article was the point that “[…] reckless lenders took advantage of low-interest rates to proffer adjustable-rate mortgages on risky, subprime borrowers.” Of course, there was no acknowledgment that the artificially low interest rates were only possible because the Federal Reserve created billions and billions of dollars out of thin air.

The other fatal flaw with the science-supports-socialism hypothesis is its inconsistency. If behavioral research demonstrates that people behave irrationally, doesn’t it apply equally to the people in government who are suppose to prevent the economy from breaking down? There’s simply no reason to suggest that the self-fashioned protectors of the public are any less prone to emotional quirks than the helpless citizens they’re supposedly looking out for. As the renowned economist and author Frederic Bastiat correctly asks:

If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these [government] organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?

Mr. Stix like all other anti-capitalists just ignores this discrepancy, hoping perhaps that nobody will ask why the unproductive stooges in Washington are somehow capable of overcoming the cognitive biases that inflict everyone else.

Additionally, behavioral economics in no way exclusively supports the conclusion reached in the Scientific American article. Other researchers argue, for example, that the paternalistic policies advocated by anti-capitalists may actually “perpetuate and even magnify a given bias and cause other adverse psychological effects.” Like the rest of the data that doesn’t conform to the “correct” conclusion, this information was left completely untouched by Mr. Stix.

Studying the behavior of consumers and investors will likely inform economic policy discussions as time goes on. However, the idea that markets are inherently flawed and science explains why is untenable, politically-driven propaganda.