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Blank-and-Effect: The Economics of Pragmatism

In the latest of a series of new government interventions into the economy, President Bush announced a new plan to bail the financial industry out of hundreds of billions of dollars of bad assets. This follows an $85 billion bailout and effective takeover of the nation’s largest insurance company, as well as a several-hundred billion dollar bailout of the nation’s largest mortgage companies.

These actions represent a resurgence of government intervention on a scale not seen since the Great Depression. The decades-long aftermath of that era taught economists and others many lessons about the danger of economic control and fostered a revival of respect for the free market. It is now clear that our leaders have completely forgotten all such lessons and dispensed with any superficial respect they once held for capitalism.

Politicians are railing against “greed” as the reason behind the financial industry’s problems. Speaking about the government’s seizure of the country’s largest mortgage companies, Treasury Secretary Henry Paulson said the action was necessary because the companies “couldn’t be trusted to carry on by themselves.” Couldn’t be trusted to do what? To run a successful business and make a profit. Apparently, we are supposed to accept the blatant contradiction of a corporate America so “greedy” that it would bankrupt itself if left to its own devices.

The contradictions don’t stop there. Speaking of the new massive bailout plan, President Bush said, “There will be ample opportunity to discuss the origins of this problems[sic]. Now is the time to solve it.”

Translation: go ahead and solve the problem now, then figure out what the problem was later. Or: first achieve the desired effect, then determine its cause. This statement reveals a lack of respect not just for the free market, but for causality as such.

How are we to know, for example, that any given policy will return the economy to long-term health? Paulson and Bush’s answer: who cares? Why waste time figuring out where the problems came from, when we can solve them today? The proposed solution involves hundreds of billions of taxpayer dollars thrown at the problem of the moment, with no end in sight. There is no explanation of how bureaucrats will be able to manage huge companies better than seasoned corporate leaders, nor of how spending hundreds of billions of dollars on failing companies will result in increased prosperity.

But to those steeped in the pragmatist mentality, such explanations are beside the point. To them, cause-and-effect is old-fashioned. What’s needed is a “flexible” approach where different solutions are attempted on a trial-and-error basis. If something sounds good, give it a shot – even if that involves taking over companies and spending billions. Nationalization? Privatization? More regulation? Less? All of these options are being kept on the table as equally likely to work, as the Bush administration proudly declares that it is keeping an “open mind.”

Paulson, according to a colleague, stated that “there are no atheists in foxholes and no ideologues in financial crises”. Paulson and the Bush Administration’s point is that now is not the time to abide by a theoretical approach, but rather a time to simply act to correct the immediate problem. What they fail to recognize is that theirs is a theoretical approach. It is the approach of pragmatism, the theory that what is theoretically true has no impact on what actually works in practice.

We are witnessing an extremely expensive attempt to have one’s cake and eat it too. And as with all such attempts, it has to fail – the only question is how and when the destructive effects will be felt.

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