Ideology and Economics

Ideology is a common thread that runs through almost all policy judgments. It is difficult, if not impossible, to analyze or articulate policy without the application of some broader framework that acts as a preconceived paradigm for how the world works. The ongoing economic crisis is a significant example of just how blind ideology can lead a country astray.

The twentieth century witnessed free market, capitalist principles emerge as the bedrock of American values. The private sphere, fueled by its self-interested, profit driven, rational actors became the great driver of the capitalist economy.  Real successes derived from deregulation and privatization helped nurture this American ideology, as did the collapse of the Soviet Union and the negative impacts of constrained economic freedoms in the Third World.

And as Posner writes, this mentality was not unique to any party.  True, the champions of the free market are generally thought to be the American Right.  But its principles are engrained in the policies of various administrations and thus virtually confine American policy within its parameters. It is the Clinton Administration that, in one of its final acts, legalized credit default swaps after they had been prohibited for nearly a century.  This collective commitment to the infallibility of the market blinded government officials to the potential of market failure and hindered the development of contemporary solutions to an unprecedented economic challenge. Ideology acted almost as intellectual shackles, constraining decision-makers in a realm of thought where the discovery of appropriate solutions was impossible.

Ideology has its uses.  But applying general principles to the particulars of novel problems leaves you inherently short of solving those problems. Good policy formulation needs to be tailored to the specific circumstances that may exist. This does not mean that ideology cannot coexist as a general value from which the particulars of individual policies may depart. We can have a strong collective faith in the free market – in the ability of self-interested players to make rational decisions through profit motive that spur growth and benefit the economy and in the overall power of the individual – and at the same time regulate that free market in order to guard against potential, even if unlikely, catastrophic side-effects. To believe in general, underlying economic principles is not to strictly adhere to them at every conceivable turn at the expense of economic stability.