Frontpage Interview’s guest today is Guy Sorman, a noted French author who writes on economics. He travels constantly to gauge the results of good or bad economic policies. He is the author of the new book, Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis.
FP: Guy Sorman, welcome to Frontpage Interview.
What inspired you to write Economics Does Not Lie?
Sorman: Liberal politicians, media pundits often behave as Know Nothings: they talk and act as if opinions about Economics were as significant as facts. Economists are partly responsible for this ignorance: they are not very good at promoting their own science. I have tried to offer an easy to read summary of what we know and what we do not know about the wealth of nations. We know a lot.
FP: Why are economists not good at promoting their own science?
Sorman: Most of economists are academic scholars. They are not accustomed to public debate. Those you read in the media, like Stiglitz or Krugman, are liberal politicians with an academic past. They use economic vocabulary to promote their anti-capitalist ideological agenda. They get no respect from their colleagues. Milton Friedman had been the exception, a respected scientist able to convey his knowledge.
FP: What made you interested in economics?
Sorman: My parents were poor and unhappy, not in a position to make choices for themselves or for their children. Also, I lived in poor countries like India and China. This led me to economics. I was interested in how to bring people out of poverty and increase their freedom to choose. This is what economics is about for me.
FP: What works and what does not work in a crisis, for poor countries and wealthy countries?
Sorman: In a crisis, the most important is not to forget what we learned from former crises, in order not to repeat the same errors. In the 30s, the crisis had been deepened by protectionism, and cartelization: borders were closed, innovation was made impossible. In the 70s, Jimmy Carter thought that inflation was the way out of the recession: it made it worse.
This time, the same mistakes are being repeated but in a milder form: some protectionism, some future inflation because of high public debt, but nothing to be compared with former crises. Governments have learned from the past.
Poor and wealthy countries are not that different when confronted with a crisis: the basic economic rules are the same in all circumstances and all civilizations. Poor countries suffer more because they depend on the US and European markets: in the current crisis, poor countries happen to be more free market oriented than wealthy countries because they know that free market is the way out of poverty.
FP: What exactly is the “current crisis” that you refer to? Why did it come about?
Sorman: The recession we are in, without any doubt, is the consequence of the mismanagement of the money supply by the US Federal Bank. By keeping interest rates too low, starting in 2003, Alan Greenspan generated a huge quantity of credit. On top of this, China, Russia, Middle East countries, invested their excess dollars in the US. Where would all this money go if not in real estate? Real estate seemed risk-free, with strong government guarantees (Fanny Mae, Fanny Mac). The real estate mania created a bubble: the bubble burst when prices became absurdly high. The bubble burst has bankrupted lenders and investors: all home owners became poorer by 20%. The banks stopped lending: without credit, you cannot consume and worse, you cannot invest.
FP: What is the way out of it?
Sorman: The way out would have been to let bad banks fail; they would have been replaced by new banks. Another, more cautious and slower road has been taken: most big banks have been saved. As a consequence, they first rebuild their reserve: it will take some years before they start lending again at a sufficient rate to rekindle innovation and growth. The way out of the recession will be uphill and slow.
FP: Your thoughts on Obama’s economic policies and plans for health care?
Sorman: Obamanomics slows down the recovery. Big banks have been saved but do not lend .The so called toxic assets (valueless papers) are still with the banks. The stimulus has been useless: it did not create real jobs and deprived the private sector from financial resources which could have been invested in actual innovations and jobs for the future.
The controversies over taxes, global warming and insurance, create a climate of uncertainty -- which is bad for entrepreneurship. Nobody can make rational long term decisions when you do not know what the taxation will be. Obamanomics is neither free market nor socialist. It’s incoherent.
FP: Why did state socialism collapse?
Sorman: Economic prosperity is based on entrepreneurship and innovation: in state socialism, you only have one entrepreneur, which is the state. In a free market society, everyone can become an entrepreneur. As a consequence, a free market is more dynamic than state socialism. The same goes with innovation: the Soviet Union and Communist China always "borrowed" from the West the techniques they used. China still does. People in socialist countries cannot compare their standard of living with others.
With open information, socialism is rejected.
FP: A socialist is ultimately a very stupid person, no? How can anyone in their right mind deny the vital importance of entrepreneurship and innovation? To do so would mean one actually wants destruction and poverty, no? Give us your thoughts on the psychology of a socialist when the empirical realities and evidence about human nature, and about the failure of socialism, totally reject his world-view.
Sorman: There are many roads to socialism.
Many intellectuals dislike the market because entrepreneurs make more money that they do: these intellectuals would prefer a system where they would stand at the top of the pyramid.
The same goes for politicians, trade union leaders, bureaucrats: socialism is best for them, the shortest road to power.
Others dislike an individualistic and competitive society: they would prefer a communitarian life, poor and equal.
Others are ignorant: they do not know how the market works and make no connection between their own situation and the capitalist system (cheap TV yes, but not made in China).
Empirical facts will never be sufficient to convince everybody that socialism is against human nature: not everybody is interested in facts. The truth is never self-evident: it has to be fought for.
FP: What has been the scientific revolution in economics and why is it so little understood by the public?
Sorman: Two major breakthroughs took place in the 1960s and 1980s. First, the monetary revolution led by Milton Friedman and the Chicago school. It has been demonstrated that monetary stability was the cornerstone of long term growth: this lesson has been forgotten by Allan Greenspan around 2003. The loose monetary policy of the U.S. Federal Bank led us to the current crisis: Friedman has been proven right.
Then, it has been demonstrated that development is determined by the quality of the public institutions: a predictable state, a reliable legal system, an independent central bank, open borders, fair competition, non-predatory taxation. Economic growth being determined by these objective factors, prosperity can be achieved in all civilizations: this is occurring in Brazil, India, China, Turkey etc. Millions of people are now leaving poverty behind, by following sound economics. Economics, like medicine, can change the lives of people.
FP: Guy Sorman, thank you for joining Frontpage Interview.