It has become somewhat popular to suggest that our current world financial problems vindicate heterodox economic theories --- in particular post Keynesian theories of financial instability. I hope readers do not get me wrong with this post --- I am an advocate within the economics profession of methodological pluralism and for a diverse and vibrant intellectual and policy discourse. In short, while I deny that I am a heterodox economist, I do think the heterodox movement is worth supporting.
But I also think that there are right and wrong answers to complex questions. Minksy, for example, once argued that the right "institutional structures" are required for markets to work effectively, but he also argued that we needed "apt intervention." I can agree he was on the right track with the first statement, but I would argue he was overconfident in the second because he didn't fully grasp the epistemic and incentive issues involved with the task of intervention let alone comprehensive planning of financial markets. Fundamentally, the Keynesian assumption that the state is in a better position to assess the marginal efficiency of capital investments is flawed precisely for the Smithian/Hayekian reasons I have pointed to on this blog multiple times in the past.
The post Keynesians in my mind often pay lip service to the epistemic issues that Hayek raised, but not really. And they are often completely innocent of the public choice incentive issues in public policy, though they often rail against the political process under monopoly capitalism. Here is the problem -- we should demand behavioral symmetry between politics and economics. The same epistemic and incentive assumptions we make for actors in the market should be the same we make for those in politics. If political actors are omniscient, then economic actors should be omniscient; if market actors are plagued by uncertainty, then political actors should also be seen to be ensnared in uncertainty. If political actors are viewed as paid off by rich businessmen under monopoly capitalism, then political actors should also be viewed as up for sale under social democracy; if political actors are instead self-less saint like characters in social democracy, then they should be viewed that way under monopoly capitalism. Behavioral symmetry doesn't mean outcome similarity. Outcomes are a function of differences in the institutional structures.
This is a fundamental Buchanan point, but also one that Hayek stressed in works such as The Constitution of Liberty. There is a difference between play within a given set of rules, and changing the rules of the game. Between policy and politics is how Buchanan put it. Post Keyensianism doesn't have this distinction. Depsite the talk about "institutional structures" the emphasis is on "apt intervention" and the core assumption as Keynes argues that if the right people were in power then the sort of cautions Hayek raised in The Road to Serfdom.
So back to the current crisis. The current financial fiasco is not a consequence of market instability, but because of the inability of government to engage in "apt intervention" due to knowledge and incentive issues, and that in reality it is nowhere as dangerous as in the hands of politicians who presume they have that knowledge to effectively tackle the problem that they in fact do not. Since they don't have the knowledge required but must act as if they do, they will instead respond to political incentives of the election cycle and their ideological whim. When you breakdown the "institutional structures" of an economy to engage in "apt intervention" when you cannot "aptly" accomplish what you plan to do, then don't be surprised when things go crazy.
This isn't libertarian, this is economics. The epistemic turn in economics that Hayek forged, and the public choice turn in political economy that Buchanan forged, provide us with the appropriate tools to understand the dynamics of interventionism and why the instability introduced through failed intervention tends to be met by every increasing attempts at "apt intervention". Rather than policy, we need politics --- changes in the rules that are consistent with the "generality principle."