Robert Kuttner shops for a less dismal science.
Everything for Sale: The Virtues and Limits of Markets
By Robert Kuttner
Knopf; 410 pages; $27.50
When Robert Kuttner's last book, The End of Laissez Faire, was published in 1991, it set a new standard in writing about economics for the general reader. It was so bad, and bad in so many ways, that it demanded a kind of respect. To mention only its most salient defect, here was a book announcing the failure of market economics at a time when anybody with the slightest curiosity about the world was transfixed by the sudden collapse of the main alternative to it: socialist central planning. Kuttner didn't so much as blink. He briefly noted the interesting events in Eastern Europe and observed, in passing, that they confirmed his thesis. Then, with no more time for distractions, he resumed his trudge through various learned sources (mainly works by John Kenneth Galbraith), denouncing "free markets" this way and that.
Give the man his due: Few writers have the dedication and single-mindedness to work so hard and see so little. But are these qualities now on the wane? Kuttner's new book, Everything for Sale, suggests they might be.
Note the subtitle, "The Virtues and Limits of Markets." Is there something to be said for markets after all? Not too much, it turns out. Of the book's 400-odd pages, at most 20 are about the virtues. And when Kuttner recognizes them, it's usually with reluctance. "Consumption is doubtless pleasurable," he concedes, doubtfully, "and nobody minds a high material standard of living." No indeed. Even in areas where Kuttner thinks markets are all right, he's sensitive to the drawbacks. Supermarkets work well on the whole, he reckons, but what a burden on the economy that there should be so many different kinds of breakfast cereal: "At my local supermarket, I counted more than 150 brands." Kuttner is also stern about cat food--although, in this case, he provides no data on the number of brands.
Nonetheless, Kuttner does appear to be inching to the right. He admits as much in his introduction: "In exploring different real-world markets, I come away with increased respect for the power of markets and the complexity of the story, yet with renewed conviction that the good society requires a mixed economy." Kuttner tirelessly proclaims his devotion to the "mixed economy," as though this sets him apart. But almost all economists take the case for a mixed economy for granted. Where Kuttner breaks with them is in judging the parts that government and market should have in the mix.
Kuttner's essential argument has been the same for many years. Faith in the virtues of markets rests on a theory whose assumptions are not just untenable but patently absurd: People are rational and perfectly informed, firms are too small to move prices single-handedly and seek only to maximize profits, and so on--an error that, for some reason, economists have failed to spot. It follows that markets do not work as well as they're supposed to, and that governments must play a large and active role in the economy. The properly functioning market economy exists only in the pages of economics textbooks. In the real world, a heavy dose of government is needed.
What is wrong with this? To begin with, the purported contrast between the blinkered maxims of economic theory and the penetrating insights of Kuttner's common sense is a fraud. Economists spend much of their time working out the implications of "market failure" caused by departures from the assumptions of the standard laissez-faire model. The textbooks are laden with theoretical opportunities for efficiency-promoting interventions by government: taxes, public spending, tariffs, regulation--you name it.
Just as Kuttner misrepresents what most economists think, so he exaggerates what governments in the real world can achieve. In theory, governments may be selfless, competent, and adequately informed. In practice, they aren't.
In much of his book, Kuttner implicitly weighs imperfect markets against perfect governments, thus evading the issue. He does not entirely ignore the branch of economics (public-choice theory) that is most concerned with analyzing government failure. He caricatures it briefly, calls it "banal" and "tautological," and cites its influence on mainstream economics as further evidence of the corruption of the academy. Be that as it may, the real choice is not between imperfect markets and perfect governments, but between markets that fail and governments that fail.
Kuttner would say that a good deal of his book is addressed to this question. Certainly, many pages are devoted to case studies of various kinds of regulation and deregulation: telecommunications, airlines, finance, health and safety, and more. As the cases pile up, a pattern recurs: The standard method of study, as Kuttner writes, "usually finds that the cost of regulation outweighs the benefit." Does Kuttner therefore revise his view that more regulation is usually better than less? Not at all. These findings only strengthen his conviction that economics is bunk. Again and again, he deems the beneficial effects of heavy regulation to be self-evident. Studies that come to the opposite conclusion only demonstrate the bankruptcy of "ghoulish" techniques such as cost-benefit analysis and provide more proof in general of the poverty of economics.
The core of the book, then, is Kuttner's prejudice against economics. He is not an economics writer; he is an anti-economics writer. That would be all right if he could offer some other coherent way to think about these issues, or even if his critique were arresting or persuasive. But he offers no alternative apart from his own privileged sense of what is obvious, and his attacks on economic method are mostly ill-informed or self-contradictory.
When he attempts to lampoon what he sees as a silly orthodoxy, he often just gets it wrong. Satirizing the efficiency of financial markets, he writes: "The market, again by definition, had to be right. If loans to ski resorts, fast-food chains, and the Bolivian government paid a slightly higher return than loans to a local small business or housing complex, then they had to be the more deserving use of capital." As any semiconscious economics student could tell you, a higher rate would not signal that the loan in question is more deserving than another, but rather, the opposite: that investors are being compensated for extra risk, leaving the marginal lender indifferent among the alternatives.
No doubt, to Kuttner, that account is just as stupid as the one he mocks. But if he expects to have any credibility, he should understand the difference between the two versions. Kuttner plainly sees himself as a heretic. But a heretic comprehends the ideas he is attacking. Someone who writes book after book to refute what he doesn't understand is just a crank.
Clive Crook is deputy editor of the Economist.