osewalrus (osewalrus) wrote,

Worshiping The Gods of the Market Place - Free Market Economists And Cognitive Disonance

This OpenLeft piece summarizes this article which studied whether a strong belief in laissez faire economics (BLFs) impacts the objectivity of analysis of the causes of the financial crisis of 2008. Cognitive dissonance theory predicts that when real-world events “disconfirm” deeply-held beliefs this creates psychological discomfort in persons and they will respond by means of distortion and denial. The author, Adam Kessler, concluded that BLFs showed signs of cognitive dissonance when analyzing the causes and "lessons learned" from the 2008 financial crisis.

Specifically, the study author submitted a survey to two groups of economists. The first were signatories to a letter from the CATO Institute harshly criticizing the proposed stimulus package back in 2009 on fundamentalist free market grounds. The second were an equal sized group randomly selected from the membership of the American Economics Association. The survey asked economists to rank 10 possible causes of the 2008 Financial Crisis. Among the possibilities was "The Community Reinvestment Act of 1977." Among BLFs, 46% ranked this reason as one of the top 3 most significant causes of the 2008 Financial Crisis, whereas only 12% of the control population identified CRA as a in the top 3. This is significant because not only is CRA not considered a likely cause among the control group, a majority of the control consider the CRA hypothesis disproved by conventional economic analysis.

In other words, the CRA hypothesis is not only not shared by non-BLF economists, it is widely regarded as false. But nearly half of BLF economists not only consider it plausible, but likely. The author explains this by observing that all explanations except the CRA hypothesis are contrary to principles of laissez faire economics and require admission that at least in some cases government intervention is needed to ensure functioning markets. The author concludes that the 46% of BLF economists experience cognitive dissonance when analyzing the causes of the 2008 Financial Crises and that they prefer embrace the one theory that conforms with BLF doctrine and reject traditional tools of economic analysis.

I have often noted the difference between Libertarians who believe in real economics and those who worship The Gods of the Marketplace. It is the later that suffer cognitive dissonance. One can be a Libertarian and accept that free markets occasionally fail and produce disastrous results. For example, David Friedman argues in his book Future Imperfect that while he concedes that adherence to free market principles and refusal to regulate certain technologies or behaviors may produce disastrous results, he believes it is much more likely that government regulation will reach disastrous results (for varying definitions of disaster). So he proposes adherence to free market principles as the path most likely to avoid disastrous results. I certainly disagree, but there is sufficient evidence to support his argument that I would not phrase this as an example of cognitive dissonance.

Similarly, someone who argues for Libertarian principles on non-economic grounds is either right or wrong based on the persuasiveness of these non-economic arguments. I may think the person who argues that his taxes should not subsidize public roads because he thinks it is morally wrong for the government to extort money from citizens may be -- in my opinion -- utterly wrong, but I cannot prove it any more than I can prove that there is value in preserving historic buildings despite the economic inefficiency and expense. OTOH, the neighbor who tells me that we could overcome the collective action problem and develop a highway system up to modern standards without taxes is, IMO, repeating a religious doctrine no different from creationism.

The 54% of the CATO letter signers who accept that markets fail sometimes but that free market fundamentalism is still a better approach are at least still practicing economics, even if I disagree with them. But the 46% who would prefer to believe that conventional economics would lie rather than that the Free Market would fall from Heaven left even the dismal science long ago to worship the Gods of the Marketplace.

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