Nobel laureate Professor Joseph Stiglitz has been doing the rounds, trying to convince us that we need a new economic model. The old one has clearly failed, he says. It assumed that markets would always balance supply and demand – but you only need to look at the high unemployment in the US and UK labour markets to see that this just isn't so. And it assumes that economic agents are rational in their behaviour and expectations – though the irrational bubbles (and busts) in countless markets have long refuted that. He says that maybe we should revisit Keynes, who did not believe that markets automatically balanced, and who pointed to people's natural 'animal spirits' as explaining the over-reactions that produce bubbles and busts.
And there you see what the real argument is about. The call for a new model is a proxy for a good old-fashioned left-right barney. Keynes regarded markets as very imperfect, and advocated confident government action to improve them. Milton Friedman and other monetarists accepted much of Keynes's model, but showed (at least to their own satisfaction) that many parts of it did not fit the observed facts. Where markets failed, as with the Great Depression, government was likely to be the cause, not the cure. Get government out of markets, and they generally look after themselves just fine, thanks.
I believe Professor Stiglitz is tilting at a straw man. Advocates of free markets have never believed them perfect. Markets are not static, like the textbook picture of supply and demand curves magically balancing at a particular price. As Mises and Hayek observed, markets are in constant motion: perhaps they are always tending towards balance, but with millions of buyers and sellers in millions of markets all competing for the same resources and getting in each other's way, they never quite achieve the textbook bliss. Nor are economic agents rational in the way the textbooks would have it, always demanding more of whatever is cheap. They are not computers, but human beings. There is a limit to the amount of anything they want. They value non-economic goods (such as honour) as much as economic ones, and will often give up the latter for the former. Economics is driven by those highly personal, emotional, wants and values: it is never going to be a matter of rational calculation.
It is perfectly possible to believe that markets do not clear perfectly and automatically, and that economic agents do not behave rationally, and yet conclude that markets work better if the government stays out of them. Sure there is market failure, but there is also government failure too. At least markets work through the wisdom and information of the whole population; government reflects the decisions of a small, distant, and inevitably self-interested class of politicians and civil servants. Sure we act as irrational human beings, and make mistakes in our planning that lead to losses and imbalances. But would we really trust that same small, distant (and, to be honest, rather slow) coterie to be able to plan our future better than we, ducking and weaving through a world that constantly changes, could do for ourselves?