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Wednesday, November 26, 2008

The Puzzling Economy

What is the relation between economic theory and prosperity? It damn perplexes me. But I'm no economist. Still, consider: many of us are convinced that FDR's Keynesian approach helped pull us out of the Great Depression (but NYT luminary Paul Krugman has argued, recently that FDR botched it by not doing enough). And many of us are convinced that Reagan's supply side changes helped usher in the prosperity of the late 80s and 90s. Two radically different policies. So I ask: what's the real connection between economic theory and prosperity? I suspect it is tied very closely to circumstances. Very complicated circumstances.

On the extremes, things get easier to figure out: really bad economic policy is highly correlated with really low levels of prosperity. But somewhere in the middle (say, with regulated markets, like in the U.S.), it's hard to figure out what worked before, and pray tell, what will work again. As Nassim Nicholas Taleb suggests in his eminently readable "The Black Swan, The Impact of the Highly Improbable", maybe our best strategy is just to have smart, open-minded people keep tinkering in hopes that the right recipe will emerge. Trial and error. And when something finally works, we'll take credit for it, ex post facto, as if it was just obvious that X was the way (someone-very-close-to-me tells me that these Latin phrases are distracting and pedantic, like this long parenthetical, Godelian remark).

Anyway, such is the nature of things. We need to keep up the illusion that we're on it. And when the next big innovation comes, the markets will free up, and prosperity will (again) be ours. And a politician will take all of the credit.

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