Consider two propositions:

• The first is that markets are smart, to the extent that they cannot be tricked into anything unless one carefully hides most or all of the contrary evidence.
• The second is that, left unregulated, markets produce some best possible outcomes.

These aren't at all the same proposition. On the one hand, something can be hard to deceive, yet work at purposes contrary to those that one favors. On the other hand, a mechanism can be vulnerable to some sorts of disruption but, in the absence of that disruption, perform some task well. I'm not saying that the propositions are contrary; they could be simultaneously true; none-the-less, they're plainly not identical.

The run-up to the latest economic crisis seems to have been founded in no small part by a confusion of these two distinct propositions. The Bush Administration represented itself — and may well have considered itself — free market, in-so-far as it expected considerable resilience on the part of the market in the face of remarkable levels of state borrowing and considerable other interventions (compassionately conservative or kleptocratic). And Alan Greenspan, who surely considered himself a believer in laissez faire, is these days explaining his optimistic proclamations from before the crisis as stemming from a failure to reälize that investors would not recognize that a boom could not last forever, to which lack of recognition he also attributes the crisis, as if irrational exuberance were simply a Keynesian animal spirit, rather than a product of things such as lending regulations and Federal Reserve interest rate policy.

Meanwhile, many of the Keynesians, socialists, and pragmatic technocrats (long-standing or born-again) are arguing that the fact that the market could be fooled shows that markets aren't clever and that thus various sorts of interventions are needed, as if any defense of free markets must hang upon a belief that markets are simply too clever to be fooled. Left unaddressed is whether the confusion were endogenous or brought on by state intervention, whether those prior interventions that may have been the cause of the confusion produce actual benefits worth the costs of that confusion, and whether more intervention would produce a more clever system or a less clever system.

In fact, there are various long-established free-market schools of thought that attribute economic crises to a propensity of state intervention to fool economic participants. For example, it is difficult to distinguish to what extent interest rates reflect the supply and demand of private savings for future consumption, and to what extent they are an artefact of central bank intervention for other purposes. In the face of Federal Reserve manipulation of interest rates, the market will not be sufficiently smart to see what the price of loanable funds should be, and therefore will almost certainly build too much or too little for the future.

As most or all of you have read or heard by now, the economic news for the the last quarter of 2008 was quite bad

and the news from the stock market has grown worse

Now the New York Times frets

Of course, if they believed the naïve Keynesian rhetoric that has come back into political fashion, then the claim would be that Obama's aggressive spending plans were insufficiently ambitious.

I'm wondering whether it's merely the so-far unpassed budget that is under threat. As I noted earlier, the stimulus bill is an enormous blow to the economy, and was passed only as a result of some combination of willful blindness, knavish exploitation of a crisis in which politicians did not actually believe, and desire to worsen things on the expectation that even greater expansion of state power could be achieved. In the case of all three of these motivations, one could expect some politicians to now regret what they have done in passing the bill; what seemed like a bearable amount of plunder may now seem like a grave miscalculation. I don't think that it's politically possible that the legislature would overtly repeal the stimulus bill, let alone that the Obama Administration would openly reverse itself. But subsequent legislation might implicitly pare some of the programmes, and a formula might even be found for the Administration to suspend some programmes without legislative action.

Of course, the Administration and the Democrats in Congress know that, if they repealed a significant share of the stimulus bill even obliquely, then their opponents would pounce on how this repeal demonstrated that it were not a stimulus bill. So those who supported the bill may have a tiger by the tail.