Tough Time for...Neoclassical Economics?

The New York Times reports "Tough Times for Big Economies" ; across a variety of economic systems, it seems that large, unregulated market economies are unstable in ways that traditional economists seem to argue that they never should be.

On a practical level, economic advisers who would normally shun nearly all forms of government intervention, are facing the fact that they are going to have to make serious, structural investments across many sectors of the economy. The American government is planning to spend in the region of 700 Billion Dollars to buy out failed credit and investment firms. The Chinese government has just announced a plan to invest over 500 Billion dollars in their economy. Further, it seems that many other big governments are going to have to increase spending and regulation in their economic systems.

On a theoretical level, facts are not supporting models of micro and macro economic behavior. American Economists, most of whom believe in some variant of the Chicago School, are now reconciling an investment that supersedes every argument they have made about deregulation in the last 60 years. How can one argue that health care, welfare, or rent control are inherently flawed and at the same time support a bailout that trumps gross private spending those sectors?

Modern teaching in economics argues that in order to avoid the dreaded "dead weight loss", deregulation should be applied indiscriminately to all aspects of modern economic life. Their take on International Relations for example, relies on the assumption that free trade, the market mechanism of ir, can bring nothing but good. Read the standard text of all introductory economics classes, Mankiw's "Principles of Economics", and you will find a 150 page argument that free trade is an absolute necessity in economic life. Not only does Mankiw suggest that free trade is unavoidable, which may be true in a globalizing society, he also predefines it as good. This is an example of a larger rule that governs the way many economists operate: if an economic model is mathematically satisfying, it must also be normative enlightening.

Its going to be interesting if the prevalent economists in our financial, government and academic institutions continue to have such esteem for the free market on a micro economic level even as they spend in unprecedented levels on the economy writ large.