Coming up with economic policy is a difficult, unforgiving task. To make the best of it, it helps to work with an accurate model of how the economy works. If you use a misleading model and act on it, you can’t reasonably expect good outcomes: in that scenario, we end up, as JM Keynes warned in the 1930s, with “madmen in authority”, acting according to the precepts of “some defunct economist”.
But that’s exactly where we are. One of the most deeply held and frequently heard propositions about capitalism is that it revolves around private companies and individuals taking risks. When, earlier this year, the US government arranged a rescue package for Silicon Valley Bank, for instance, among the many objections to it was the claim that the rescue contravened capitalism’s risk norms.
