Tuesday, March 17, 2009

Green Stimulus and Free Markets

Green stimulus spending accelerates the proliferation of Green, buoys the economy, makes industry more competitive and lays a foundation that will benefit future generations. Free market purists disagree and refute the notion of an economic stimulus altogether, although they concede that spending stimulates the economy, they point out that demand-driven consumer spending is the engine that grows economies, not government spending for future needs. In its simplist essence supporters of the free market are concerned that government is making decisions about capital allotment that are better made by the free market.

An article entitled 'The Abracadabra Stimulus Plan' by Anthony B. Bradley reflects the fears of free market advocates. Bradley says, "economic crises arouse an emotional panic that tempts us to believe that centrally planning the economy is the medicine for economic recovery and the best safeguard against future volatility." He questions the wisdom of government spending and oversight and indicates that government cannot "save the economy by controlling the decisions of the millions of human beings who participate in it every day."

Bradley mirrors concerns about the stimulus' unproven programs and massive cost. "[A]s long as consumers feel insecure about their futures the economy will remain sluggish" Bradely says. "Arrogance leads politicians to think that they can fix the economy by waving the wand of government spending. But magic economic spells do not work."

Free market advocates subscribe to the view that when the forces of supply and demand are left to interact freely, a price level that enables the most efficient allocation and use of scarce resources will be determined and the welfare of society will be maximized. The problem is that in practice this theoretical view does not always prevail and to the extent that the welfare of society is not maximized, government involvement is required.

In his article, Bradley quotes 'Principles of Economics' a 1911 book by Harvard economist and past president of the American Economic Association, Frank Taussig: “We must accept the consumer as the final judge." However, during periods of great volatility Keynesian economics suggests that governments should play a more activist role. "In 1936, John Maynard Keynes published The General Theory of Employment, Interest and Money suggesting that the classic model that Taussig supported was a special case and applied only in times of full employment...Keynes advised governments to increase money supply to overcome depression, a recommendation that influenced the New Deal and one that echoes in Obama’s recovery plan."

The Cowles Commission for Research in Economics (1932) was assembled in response to the Great Depression, it related economic theory to mathematics and statistics. Mathematical models are now used to predict future preferences.

As evidenced by the work of Keynes and Cowles and rendered in the modern context by Bernanke, free markets are not sacrosanct. Free markets are indispensable due to their efficiency allocating and using resources, but free markets are not perfect and sometimes require government involvement to enable them to function more effectively.

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