In response to the economic crisis of 2008 and the Covid-19 pandemic that began in 2020, the world’s governments and central banks have massively used the tools at their disposal to counter the negative events caused by these events. Quantitative easing has been implemented, public debt has increased and prudential regulation has been resorted to, which can be characterized as excessive and, in principle, ineffective, if judged by its complexity and potential to stimulate innovation in the financial sector, writes Lucian Tailor. on his blog.

The sector is a complex system that uses competition as a procedure to identify means to circumvent (adapt to) any regulations. It is even possible that this regulation, along with other policies of governments and central banks, made “the task of preventing further crises” more difficult because they “caused … further erosion of both domestic discipline and the market (White, 2014, p. 10).

The bankruptcy of Silicon Valley Bank and other troubled banks in early 2023 seems to confirm this approach

The bankruptcy of Silicon Valley Bank and other troubled banks in early 2023 seems to confirm this approach, although economists and politicians on the left have been quick to pin the problem on insufficient regulation. Naturally, the general question arose: to what extent did these extraordinary interventions affect, and could they continue to affect, the market nature of capitalist economies? Or, in other words, to what extent has government intervention affected and will continue to affect the role of markets in the allocation of resources?

I believe that it is necessary to adequately answer such a question, especially since, most likely, these interventions arose in response to previous interventions of a smaller scale, but which made it difficult to prevent the crisis of 2008, due to the deterioration of market discipline. However, what seems to distinguish the post-crisis interventions from earlier interventions is not so much their unparalleled scale as the accompanying forceful reversal of the mistaken view that the tradition of learned rules is to blame for such crises and for the strengthening of economic inequality, and yet it continues to play too great a role in the formation of social order in relation to pure reason.

Those who believe that society is the result of human design believe that we must participate in the creation of new morals and new rules/laws that will form a social order capable of providing “social justice” (or “economic justice” or “distributive justice”. justice”). Since the term has been given various meanings, it is useful to clarify that the sense in which it is used here is that it “precisely describes the targeting of specific outcomes for individuals or groups that is impossible in spontaneous order” (Hayek, 1993, T 1, p. 121.

There are countless economists who have made important contributions to the development of the mainstream theory that support higher taxation of high incomes and taxation of wealth

At its imaginary peak, “social justice” may mean (as it does for many theorists) an equal distribution of means to satisfy needs, but it does not necessarily mean that, so the reference to greater social justice would not be an oxymoron. .

There are, for example, countless economists who have made important contributions to the development of the general theory, who argue for increased taxation of high incomes and taxation of wealth to achieve greater “social justice” in capitalism, suggesting that the market still plays too large a role ( Blanchard and Rodrik, ed., 2021; see also Piketty, 2020).

More recently, Joseph Stiglitz (2023), a Nobel laureate for his contribution to the understanding of information asymmetry (part of the prevailing theory), argued that high incomes should be taxed at 70 percent and very large wealth accumulated over time at 2-3 percent.

This proposal comes from a follower of the “third way” (centrist) political philosophy, which, while taking “social justice” as an important goal, nevertheless rejects the excessive redistribution of income and the excessive use of economic interventions by governments in the market as a means to an end (see, among others, Hale, Leggett and Martell, 2004).

This example reminds us that we need clear principles to understand the balance between market and government, whether interventions are overused, whether and to what extent they affect the market nature of the economy, and, speaking of how interventions can be the cause, not the remedy, of economic inequality. Professor Stiglitz (2001) said that “economics can never be separated from social and political problems”. Right.

But this does not even remotely mean that any social and political obligations that governments undertake on the basis of certain economic theories are necessarily compatible with the principles that operate in the economy. Finally, we should also mention the ideas of some Romanian economists, according to which the level of the share of budget revenues in GDP, which was on average only 27 percent in the period 1995-2020 (we deliberately omitted the inflationary years 2021 and 2022), as in the USA, Switzerland or Japan , is insufficient and that Romania should aim to reach the EU average of 38-40 percent of GDP by increasing taxation.

Formulating the answer to the above question, I proceed from the strongest possible basis, namely, from the fact that economic principles operate in the economy. I chose not to use the expression “economic laws operate in the economy” because the economy is an extremely complex system where, for very good reasons (see Hayek, 1964, pp. 40-42), the identification of an economic law is impossible.

The principles at work in economics are independent of human experience and “are necessarily valid for all time” (Mises, 1957, p. 203), so any explanation I can formulate is based on a theory that I have reason to believe. to believe that it is so. fine. Scarcity of resources, supply and demand, ignorance and uncertainty, human nature are the basic principles operating in the economy from which human actions cannot escape. In my opinion, a theory is good if it takes into account all these principles, which objectively exist regardless of the era.

We cannot say, for example, falling into the trap of historicism, that Adam Smith’s explanation of the invisible hand, formulated successively in 1759 and 1776, was good for the nineteenth century, but is no longer good for our time. It is, of course, better for our age than some of the more recent theories, but which, in order to arrive at explanations which, opportunistically, seem to better correspond to some facts, have neglected or violated important principles at work in economics. Explanations of a complex structure like the economy that take into account all these principles are by definition impossible to test numerically.

Read the full article on Lucian Croitoru’s blog

N.Ed: Lucian Croitoru is the chief adviser on monetary policy to the head of the National Bank of Romania