Ford Library

Sorman, Guy. Economics does not lie : a defense of the free market in a time of crisis. Encounter Books, 2009.

Curiously, the Nobel Committee has awarded prizes to economists with theories supporting contradictory approaches for understanding and managing national economies ranging from Keynesian to free market. Guy Sorman’s Economics Does Not Lie gives a unique perspective to why this enigmatic phenomenon has occurred.

Traditionally, economics is thought of as a social science. Sorman argues economics has become more of a science with the aid of algorithms, mathematical models, and computers to interpret data. Subsequently, these tools for improving models for economic policy analysis should prove one approach is correct, and provide guidance during recessions. If economics is a science, it teaches us that markets provide the most efficient economy according to Sorman. Despite the America’s current economic problems, our land of opportunity still provides a standard of living envied throughout the world.

Using cultural economics, Sorman delves into many layers of analysis to investigate why other first world economies including China, South Korea, India, Japan, Russia, and Western European countries lag behind the U.S. In addition to markets, Sorman credits the quality of institutions (universities, research centers, government, and private) in the United States, investors and entrepreneurs, and their partnerships.

A role of economists is to provide economic analysis of recessions such as the one created by the current financial crisis and strategies for restoring economic prosperity. Contradictory approaches provide different perspectives to the basic questions of what caused the recession and what to do about it.

One version of the current recession prevalent in the media and advocated by Keynesians is that Wall Street and the real estate industry were greedy, and a government stimulus is necessary to restore the economy.

Friedrich Hayek’s critique of the Keynesian model of government intervention to stimulate the economy is that it is based on utopian conditions. This model assumes individuals are fully informed to make rational choices to maximize utility and firms have the ability to maximize profits. Hayek cast doubts on a centralized state’s ability to set pricing, since perfect knowledge of investors’ desires is required. Also, no computer could manage an unlimited amount of data which is not even available to the state.

Hayek goes as far to say that central banking destabilizes the economy. In the recent recession, government intervention led to inflation, overbuilding, a housing bubble, and then, economic indicators became unrealistic. Wall Street banks invested too heavily in risky loans rather than diversifying, accumulating toxic assets leading to tremendous losses. In addition to the destabilized housing market, the financial crisis had a ripple effect on travel, retail, the automobile and oil industries, and led to a significant number of lost jobs.

In the 1930s, Austrian School economist Joseph Schumpeter coined the term “creative destruction” to describe the phenomenon in free market capitalist societies where economic growth is driven by technological change making innovation and destruction equally important. In the free market model where economic disruptions are created by technological change, economic indicators are not necessarily predictive of how the economy is performing, but are instead just points in the business cycle. In this scenario, government intervention is not necessary since markets are self-correcting.

Guest Reviewer Randy Mayes is a Duke Alumnus, author, science writer and science policy analyst, and a Fellow at the Institute for Ethics and Emerging Technologies.

© Reviewer: Randall Mayes & Ford Library – Fuqua School of Business.
All rights reserved.

Tags: Economics

This entry was posted by Carlton Brown on Tuesday, October 6th, 2009 at 4:05 pm and is filed under Book Reviews. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.