In response to an email query, I will try to explain why I consider the neoclassical (liberal) school of economics to be completely misguided and wrong from the ground up. For its method consists in building theoretical models. These complex graphs where various curves intersect, where equilibrium points are sought and we are told that this is how prices, costs, margins, quantities offered, interest rates and other parameters are determined. It doesn’t work, so the economist gets an excuse for state intervention. At most, he will allow a marginal remark about imperfect markets, lack of information among participants and so on. But that is downright marginal. The conclusion from this is that if the government doesn’t interfere, everything will get to those equilibrium points on the charts, all resources will be ideally used, and we will all get richer.
There is no deviation from the optimal situation. The government intervention is simply clever or stupid.
More realistic Schumpeterian economics assumes that prices, wages, interest, quantity demanded, and other parameters are governed by who has more power, custom, inertia, personal whims, and the like. And, of course, chance also plays a role. Those equilibrium points from the graphs just show the direction that it all moves over time. It’s just that before it can get there, there’s going to be a change, and those graphs are going to change. So it goes on and on.
This also explains why people have always done better in economies with high levels of government intervention (when it should be the other way around). There is no deviation from the optimal situation. The intervention is simply clever or stupid. And until the last generation, there were more smart ones than dumb ones.
