Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis

• Introduction
• Remarks
• Questions and Answers

JOANNE MYERS: On behalf of the Carnegie Council, I would like to welcome you all and thank you for joining us.

This morning our guest is Guy Sorman. We are delighted to welcome him back to the Carnegie Council. Mr. Sorman is a widely acclaimed author, columnist, and academic, who is known for his original ideas and erudite approach to issues. He will be discussing his latest book, Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis.

History, as we know it, is replete with intellectual battles. In the realm of social sciences, and economics in particular, there have been many debates on a range of topics. Still, it is seemingly unusual that there have been no decisive victories about the superiority of one economic system over another—that is, until the Soviet Union collapsed. When this occurred, economists in the West could finally declare that one economic system, state socialism, had failed, and another, free-market capitalism, was victorious.

But almost 20 years later, some economists are now arguing that this triumph isn't quite as clear as it once was. With a financial crisis that reaches far and wide, some economists are blaming this turbulent time on the failure of capitalism. Others are suggesting that a return to a system with socialist overtones is not only preferable, but unavoidable. Still, many allege that the very essence of the bailout plan put together by the Obama Administration is pointing in that direction.

In Economics Does Not Lie, our guest argues that it would be a fatal mistake to abandon all that we have learned about economic policies of the past. With history as his guide, Guy reminds us that it was free-market capitalization and privatization, not state socialism, which allowed for the reconstruction of Western Europe after World War II, and when the Soviet Union imploded, once again it was market capitalism that opened economies and promoted trade, lifting millions of people out of poverty around the world. In the end, he believes that the way out of this crisis is to continue to trust in a free-market society, an economic system that has repeatedly demonstrated its capacity for success.

Guy Sorman is known for tackling not only economic subjects, but a wide range of philosophical matters. Whether involved in areas such as human rights or economics, he always brings a fresh perspective to the topic at hand. Guy has published over 20 books on contemporary affairs, covering five continents. These books include Empire of Lies, which was discussed at the Carnegie Council earlier, The Genius of India, and The New Wealth of Nations. As a columnist for the New York-based Project Syndicate, his articles have appeared in more than 30 newspapers and magazines around the world. He also writes frequently for the op-ed page of the Wall Street Journal and is a regular columnist for Le Figaro in France and City Journal in the United States, as well as other publications around the world.

In addition to his writing, Mr. Sorman has taught economics at the Paris Institute of Political Science, as well as in places such as China, Russia, and Argentina. In the United States, he was a visiting scholar at the Hoover Institution.

Not limited by his teaching or writing alone, our speaker has also held several public offices, including economic adviser to the French minister for foreign affairs and then to the prime minister of France. In addition, Guy has served as deputy mayor of Boulogne-Billancourt, near Paris, and is now chairman of the city's economic council as well. His global reach extends to South Korea, where he is a global adviser to the president there.

With all that I have shared with you about our speaker, it is easy to understand why Mr. Sorman has received the Légion d'honneur in France, the Southern Cross from Brazil, and the Order of May from Argentina.

Please join me in welcoming our very distinguished guest this morning, Guy Sorman.

GUY SORMAN: Thank you, Joanne. It is the second time I am your guest. The timing is perfect. Last time it was on the very day that my book on China was published in the United States, The Empire of Lies. Today it happens that my book is just being released by Encounter in New York.

This is not a book translated from the French. I published a similar book a year ago in France. But, as you know, many things have happened in one year, so I decided to completely redo the book and add many, many chapters, taking the crisis into consideration. This doesn't mean that I contradict myself. I have added new chapters. I have not replaced old chapters with new chapters. I didn't change my view. But, of course, I have to take the situation into consideration.

This morning, and also the purpose of the book, is to try to convince you that economics is not boring. Economics as a science has a bad reputation. In the 19th century it was called "the dismal science." Over 30 years, I have tried to convince my students that it was not boring. I don't know to what extent I have been successful or not.

It's not boring, because basically—and this may come as a surprise—I would define economics as the science of happiness. What is the purpose of economics, after all? The purpose of economics is to make people live longer, have a better life, and have more choices in their lives. There is a direct relationship—and it has been surveyed—between economic dynamism, economic growth, and happiness. When I say economics is the science of happiness, you have to define happiness. But you can't do that. So in economics and sociology, we usually use two criteria to define happiness.

The first criterion has been defined by Milton Friedman. Milton Friedman says we don't know what happiness is, but we know that when people have more opportunities or more freedom of choice, they tend to be happier. A good economic policy is an economic policy which increases the number of opportunities. In a dynamic economy, you have more choices—more choices for jobs, for the place where you will live, how you will educate your children, and so on. So a good economic policy, by increasing opportunities, by increasing what Milton and Rose Friedman called the freedom of choice, freedom to choose, is building happiness, in a way. This is a Milton Friedman criterion.

Another way to evaluate happiness is to ask people if they are happy. Maybe they don't know. But we have now many, many surveys asking if people feel happy.

Usually—and it's no surprise—you have a direct relationship between the growth of an economy, the dynamism, which is a better criterion, of an economy and happiness. In an economy which is dynamic, people see more opportunities, even if it's a very poor economy. India and China are very poor economies, but people now see more opportunities because—and I'll come back to that later—of a better economic strategy. By seeing more opportunities for themselves and for their children, they do declare that they are happier than they were before.

So the criterion of a good economic policy is happiness. If economists are unable to bring economic dynamism and, as a consequence, more opportunities to the people, economists are wrong.

That's the first observation I would like to make about what economics is about. It's not very often defined as a science for happiness. Usually it's more Buddhism or these kinds of things which are described as a science for happiness. But I do think that economics is as useful as medical doctors to make people live a longer and happier life.

It happened in my lifetime, when I started first studying economics and then teaching economics. I must confess that in the early 1960s, economics was hardly a science; it was more a matter of opinion, a matter of discussion.

As Joanne said, people thought that we had the choice at least between two systems, the Soviet system and the capitalist system. You would argue for hours and hours to say which system is better. When I started teaching economics—it was, I think, in 1970—in the curriculum I had to share my time and devote equal time to the socialist economy and the capitalist economy. The consensus at that time was that both were equivalent, that both had their weaknesses and both had their advantages.

Not only did communism as an economic system disappear, but it happened that we were wrong from the very beginning, because the data were wrong. Many years later, after having the data on the socialist economy, it's evident now that the socialist economy basically never worked. We thought it worked because we didn't have the information. Also the Soviet leaders didn't have the information.

The revolution in economics—and a revolution took place in the 1970s—came from two factors.

First, we now work on data, a huge quantity of data. We have statistics about everything, millions of them, which was not the case in the past. In the past you had a global view of economic systems, and from this global view, you could have very good intuition. Adam Smith, without any data, in the 18th century had remarkable intuition. You could quote many French, English, and German economists in the 18th and 19th centuries. They had intuition. But it was intuition. It was not based on data. It was not really based on observations. It was kind of a philosophical debate: We think that this is best. It looks best. But you can't prove it, and you can't prove why.

So beginning in the 1970s, we started working with hard data, and millions of them. What we needed and what appeared in the 1970s were computers, which allowed us to do something with the data. Without a computer you don't go very far. The real scientific revolution started in the 1970s by bringing together data and computers and by building mathematical models—the very beginning of economics as a science, the construction of economic models in the 1970s.

That begins to be a bit boring and complicated. But it's not, because a model is only a representation of the reality. We use mathematical language for one reason: It's universal. When I use a mathematical model, I can communicate with a Chinese or Japanese or Polish economist. We use the same language. Visually you understand immediately with a model what works and what doesn't work.

Also these models are not theoretical. We conform the model with reality. We know that models work and other models do not work.

So what is the consequence of this modeling, mathematical modeling, of economics? The consequence is that most of the economists today—99 percent of recognized economists—do agree on a number of things. Joanne mentioned the debate, especially in the time of crisis. Of course we don't agree on everything. We have a debate on taxation, regulation, and these kinds of things—cap-and-trade and global warming and how to deal with it. But the debate is within one economic system, which is basically the free-market system.

What do I mean by that? All economists would agree that we have reached in 30 years kind of a consensus, a scientific consensus. On what do we agree? (Then we talk about disagreement.) We agree, for example, on the fact that free trade is a win-win situation. Free trade is good. This was not always perceived like that.

Until the late 1970s, many developing countries, like India, for example, or Brazil, thought that free trade was good for the Europeans, for the United States, but not for them. They tried to build a national economy behind closed borders. It didn't work. Now we can prove, with theoretical models but also with practical experience, that free trade globally is good; it's a win-win situation. That's a consensus.

There is another consensus which is extremely important and quite new: Inflation is bad; monetary stability is good. This is new. When I was a student in France, many people were promoting inflation as a way to build an economy. Many South American countries also used inflation as a way to increase their level of investment. It was all a disaster. It was a disaster economically and socially, because hyperinflation was destroying the poor people, and the most wealthy people were living with U.S. dollars anyway.

So there is a second consensus that monetary stability is good.

There is a consensus that the central banks, and not government, should be in charge of the currency. Central banks are not perfectly rational. Milton Friedman thought that they should be replaced by computers. But central banks are a little bit more rational, if not completely rational, especially in the case of the United States, but they are more rational than governments. There is a consensus on that.

There is a consensus that there is a huge difference between good and bad economic policy, and the difference is growth. Growth, for the reason which I spelled out before—because growth brings happiness—is a criterion of a good economic policy. A good economic policy can be measured by growth.

There are many other elements in this consensus. I won't get into technical detail, but just to say that we agree on many things.

We have confrontations, of course, but the confrontations are within the system. When one says that in a time of crisis, some people think that maybe we should go back to socialism—no, nobody says that. Some economists would say that we need more regulation and that we need more public investment and we need more state intervention.

To quote President Obama himself, he said very clearly that his ambition was not to be the manager of the auto company. State intervention can be justified or not justified, but state intervention, even in a time of crisis, is not a way to replace the free-market economy; it's a way to repair the free-market economy.

I'll come back to the crisis in a while. In a time of crisis, the worst-case scenario is to forget everything we learned about economics. The risk is to overreact. So we try to understand why we are in a crisis and what can be done about it. But mostly in a time of crisis, we must not forget about the consensus. We must not forget about the fact that economics went from a philosophy to a human science—imperfect, but still a science, with rational people discussing rational things.

But also we should not forget the extraordinary human history which happened the last 25 years. In those last 25 years, approximately 1 billion people went out of poverty, in China, in India, in Brazil, in certain parts of Africa—in many countries, all over the world. We had during these 25 years a growth rate, on average, of 5 percent per year.

Five percent a year is huge. If you travel, you can see with your own eyes what 5 percent means. The lives of the people on a daily basis are really transformed. You have running water where you had no water. You have schools where you had no school. You have hospitals. You have buildings. You have cars. You have television. You have telephones. You have all these modern facilities which people really want. This has been obtained in only 25 years, which is a remarkably short time in human history.

Some people say it's a miracle. Why would it be called a miracle? It's a miracle because until, I would say, the late 1980s, nobody thought that it would ever be possible. The dominant ideology among economists until the late 1980s was that development was possible only in Western countries and in some Westernized countries, like Japan, for example, or Taiwan or countries borrowing from the West, like South Korea. But for cultural reasons, India, China, Brazil to a certain extent, and Africa would never grow, and the only solution for these countries was to remain poor and to get some support from the Western world.

Nobody thought that these countries would ever be able to become mature economies. Even the leaders in these countries were convinced that nothing would ever work.

In India, the growth rate was 3 percent a year, but the population growth was 2 percent a year. That means that the economic growth rate was 1 percent. India's economists and leaders were so convinced that they couldn't do better that it was called the Hindu growth rate. You couldn't do better than 1 percent, which was the Hindu growth rate. This was a shared conviction, with many cultural explanations, that these people, for religious reasons or cultural reasons, are not interested in the future; they will never invest; they will never save; they will never become entrepreneurs; and on and on and on.

You can still read this kind of discourse about Africa today or some Muslim countries.

It has been demonstrated in those 25 years that economic growth was possible in any civilization. It has nothing to do with civilization. Economic dynamism is compatible with any culture, because everyone in any culture wants to improve his life and the life of his or her children.

So what makes the difference? The difference is to choose the right economic strategy. As I said, you have good and bad economic strategies. What went wrong in countries like China or Brazil or India was not the civilization; it was the economic choices. The mistake they made was to close their borders. The mistake they made was to expel the bourgeoisie and the entrepreneurs. The mistake they made was to exclude private property and to have collective property in agriculture and to have only monopolies and state-owned companies. This was the reason for poverty. It had nothing to do with tradition.

In the late 1980s, two things happened. On an experimental basis, the Soviet Union disappeared. So the model appeared as non-workable. It was very clearly understood from the very beginning that it didn't work for fundamental economic reasons, because there was no private property, no entrepreneurs, no competition. This is why the system died.

Also there was a scientific revolution, where economists came with models, which were promoted by the IMF [International Monetary Fund] and the World Bank, explaining to leaders in poor countries that if they applied the free-market economic model, opening their borders, allowing foreign investment, and bringing in Western innovation and competition, they would get out of poverty. They were convinced, and it worked.

Today, in spite of the crisis, there are very few countries on earth which have not gotten into economic dynamism—very few. North Korea, of course, is a very special case. Cuba is another very special case. But even if you look at Africa—many people think that it's a desperate situation—this is not the case. There are 13 countries, which a French economist at the IMF called the G-13, in Africa which are on a rising trend of economic dynamism. You have countries like Mali or Benin or Ghana, which until last year had a growth rate roughly around 5 percent.

The same in the Muslim countries. Syria and Egypt, until last year, had a growth rate between 5 and 7 percent.

So the whole world is on this trend. It is on this trend because they all chose the right economic strategy, and this economic strategy works absolutely everywhere.

Now, economics is a human science and, like human beings themselves, economics is extremely imperfect. It's always a surprise to me when I hear well-founded criticism about economics. They say, "Well, this system is not perfect," and, "It can be globally good, but it's bad for certain individuals," and, "What about people who lose their jobs?" I say it's like human nature. You can't have an economic system which would be better than human nature. So it's imperfect by definition. It can't be otherwise.

Also one of the major criticisms against economics as a science is to say, if it is a science, you should be able to make predictions. No economist is able to make predictions. This is really not our job. We don't know how to do that—maybe in the short term, one or two days, like the weatherman, but beyond, we really can't. Why can't we? We can't because the world is so complex that any event can appear anywhere, and economics is a combination of billions of parameters. You cannot control these parameters. You can only organize a system which would bring more opportunity. But you cannot make predictions.

How useful is a science which doesn't make predictions? First of all, many sciences do not make predictions. Your medical doctor is unable to promise you that tomorrow you will be in good health. He can't. If he does that, you should pick another medical doctor. But what your medical doctor can tell you is, if you drink too much, if you smoke too much, you are going for trouble.

Economists are a bit like that. We can say to other economists or government leaders, "I can't promise that you will have a 5 percent growth rate, but if you close your borders," which is like smoking, "if you nationalize your industry," which is like drinking, "probably you will destroy your economy." So we cannot predict what is to be done, but we can predict what is not to be done. This is extremely important. This has been the main reason for the economic growth which I underlined before.

There is an Indian economist at Princeton University. His name is Avinash Dixit. He is consulted by government leaders in very poor countries, where there are very few opportunities. Avinash Dixit usually answers, "If I were you, I wouldn't start from here. This is a worst-case scenario, and there are very few situations where this works."

Without going as far as "we shouldn't start from here," at least we can say, "You shouldn't go in that direction." This is what most of the international economists or people working at the IMF and the World Bank have done in 25 years. These are huge and useless bureaucracies. They employ too many people. But some of them are very good and some of them have proved to be extremely helpful.

I think I should turn to the crisis. If not, I won't have enough time.

Before the crisis, there is one chapter—well, there are many chapters on India, Hungary, Japan, and so on—there is one chapter comparing the United States and Western Europe. There is a big question mark in economics: Why did the United States economy in 1830, approximately—the time when Tocqueville was in the United States—overtake Europe? I mean that starting in 1830, the income per capita in the United States overcame the European income per capita. Europe was never able to catch up with the United States over nearly two centuries. This is a very interesting question.

There are many answers. One has to do with free market and regulation. I have another answer. My explanation is that the United States took over because it is a democratic country. What do I mean by that? In the United States, people all want the same stuff. The entrepreneurs invented marketing and standardization in order to answer the need of the people. It has to do with an egalitarian society. In Europe, which was an aristocratic society, it was not the case. The entrepreneurs were working for the elite. We were very good at building perfect objects for a minority. But the notion of management, mass production, and standardization always was late vis-à-vis the United States.

If you take electricity, television, the movie industry—everything was invented in Europe, but it was marketed in the United States. In Europe we are more interested in perfection, in technical innovation, than in selling to the people. The strength of the United States comes from this democratic background. I think this is why Europe was never able to really catch up with the American economy.

So it's not only a question of structure; it's a question of what the society is about.

Now the crisis.

First of all, a crisis in a free-market economy, like in any economy, is, of course, no surprise for economists. It's no surprise because it's built into the system. Why is it so? It's built into the system because development is based on innovation. If you have no innovation, you have no development. Innovation is the only source of economic development. But you can't know beforehand if an innovation will work or will not work. You don't know. You have to have the experience. You have to learn the product and the market. I invent the iPhone. Will it work? I don't know. I launch the iPhone and I completely transform the cell phone industry. It could have been a failure.

Let's turn to the financial sector. I invent a new kind of security, based on the mortgage. Sometimes it works; sometimes it doesn't. It worked for a certain time, at a certain level. It doesn't work anymore.

So innovations sometimes turn wrong. When an innovation turns wrong, you have a crisis. The crisis is connected with the very notion of innovation. If you don't innovate, you don't have growth. If you do innovate, you run the risk of innovation bringing a crisis. This has always been the case. To have growth without innovation and growth without crisis is by definition impossible. Nobody has ever devised a system based on growth and innovation without a crisis. So crisis is part of the system.

Now you have a more short-term explanation for the crisis. The short-term explanation is nearly always in the 20th-century loose monetary policy. If you look at the crisis in the 1930s, in the 1970s, and today, it's always loose monetary policy and excess of money creation, which brings speculation and the crisis.

The fact that you have greedy entrepreneurs and things like that is only a consequence of a loose monetary policy. Everybody's greedy. If you had no greedy people, you would have no entrepreneurship, no economy, no incentives. Everybody's greedy. The problem is that when you have too much money available in the market, greed can destroy the economy. But greed is only a consequence. It's not the cause of the crisis.

So loose monetary policy was based, probably, on a technical mistake. After 2001, the credit rate went very low, because Mr. Greenspan was fearing a global crisis. But he ignored the fact that many foreign countries, having a huge quantity of U.S. dollars—Saudi Arabia, China, Russia—would all bring back their U.S. dollars to the American market. Therefore, the combination of the inflow from outside and low interest rates created a huge quantity of money in the U.S. market.

You had to employ this money. When you employ this money, sometimes you employ it rightly, sometimes wrongly.

Not to get into more technical detail, if one cause was to be underlined to explain the current crisis, it is, without any debate, like in 1930, the loose monetary policy.

What is to be done in a time of crisis? As I said before, not overreact. Remember what we have learned in 25 years and all the progress which has been made.

This progress is still there. The hospitals and the schools which have been built, they are there. The new communication systems, they are there. The new companies, they are not going to disappear. All the technical progress, all the capital which has been accumulated is still there. The crisis is not destroying what has been gained.

To change the system would be completely absurd, because, really, it would be like collective amnesia. To close the borders, for example, would be completely absurd, because we know that free trade is good.

I must say, thank God, that what must be avoided are major mistakes, the mistakes which have been made in 1930 and in the 1970s. These mistakes are not being repeated.

The first mistake, as everybody knows, in 1930 was to close the borders. The closing of the borders destroyed international commerce and broke down the global economy. This mistake is not being repeated. This is remarkable progress of economics as a science. Even if government leaders are not economists by themselves, they tend to listen to economists. It is remarkable how many times the world leaders have repeated that free trade should be preserved at any cost. This is absolutely remarkable. It's huge progress. This is a reason why this crisis will never resemble the 1930 crisis.

The second mistake, which is not being repeated—or not yet—is what has been committed in the 1970s, which was inflation. That was before Milton Friedman won the battle of ideas. In the 1970s, confronted with a crisis, many governments, from Japan to France to the United States, thought that creating money, the stimulus, would repair the economy and everything would be back on track. It didn't work at all. It only brought hyperinflation and unemployment. This has been called the stagflation crisis.

Today there is kind of a temptation to do that. But if we compare the stimulus which is implemented today with what was implemented in the 1970s, it cannot be compared. Price stability remains the priority. Government leaders know, following economic science, that inflation should be avoided at any cost. The second major mistake has not been committed.

Everything now which is discussed, like bailout, regulation—those are political statements, which are rather neutral vis-à-vis the economy. I'm sorry to say, it doesn't make a big difference whether you regulate or you don't regulate, whether you take over GM [General Motors] or you don't. Those are political statements. They are made for political reasons, which I can understand. But it's so tiny compared to the size of the global economy that it doesn't make a real difference.

This means that the best way for a government in a time of crisis would be to do nothing. But you can't do that. You can't appear on television and say, "Look, I've decided to do absolutely nothing, because I'm sure that the market will rebound and entrepreneurs will adapt and that innovation will continue."

My major reason for optimism right now in the United States and also in Europe is by visiting emerging companies inventing new products. I'm quite sure that we will get out of the crisis not because of stimulus, not because of regulation, but because of new techniques in biotechnology, in nanotechnology, in communication technology. Like it was in the past, it is innovation which will be the real engine of the economy and the real reason why we will get out of this crisis.

The main engine for growth in the United States and the rest of the world is basically universities, labs, research centers. This is the engine of growth. All the rest is about politics. If I may, I'll add for two minutes something about global warming, because it's impossible now to write about economics without mentioning global warming. I dedicated a chapter on global warming to try to put things straightforward and easy to understand.

I tried to make a distinction between what we know and what we don't know about global warming and, based on this distinction, what can be done and what needs not to be done. This chapter is made for rational people only, which is a minority in every society. If you are a believer in global warming, it's a question of faith. There is no debate, of course. You are a believer. But I'm writing and talking to people who are not sure whether we should believe or we shouldn't believe.

So I try to explain what we know.

We know that there is global warming. We know that it happened before. We know that probably—but it's not sure—industries and human activities are playing a role in the global warming. To what extent, we don't know.

Then there is a choice to be made. Does man come first or does nature come first? If you think that birds and trees are more important than men and women, okay. I can't follow you there. But if you think that men and women and humankind are more important than birds and trees, some rational choices can be made.

As we don't know much about global warming, we shouldn't make decisions which would be overreacting and which could destroy the economy. We know that people are happier in a dynamic economy, so we should not destroy this dynamism. But as we don't know for sure and there may be a risk, maybe we could do something.

I disagree with many extreme free-market economists on that. I do explain why the cap and trade system is completely useless, what is proposed these days in Washington. It's useless because we are doing that in Europe. We know it doesn't work. As warming is global, any national decision is irrelevant. But we also know that a very tiny, very modest carbon tax could work. It would be very modest. Why? In order not to destroy the growth, but in order to play like an incentive to very progressively, in the long run, shift to less polluting energy.

So I think, while most rational economists working on the subject consider that a very small, very low carbon tax could work, could once again shift toward new energies, without destroying the dynamism of the economy, today nobody is following this recommendation. But that's not a problem for economists. There is always a time lag, a 10- or 20-year discrepancy, between the moment when a new theory is proposed and the moment when it is applied. If you look back, Milton Friedman's theories about monetary stability were first published in the 1960s, but they were understood only in the 1980s.

So economists tend to be right, but then you need time to convince the people. You have always this 20-year time lag.

I think my time is over, so no conclusion. I hope I convinced you that economics is not that boring. I would be happy to answer questions.

QUESTION:There's a perception of the crisis, from a psychological standpoint. What impact, in your estimation, does the constant focus on the economic crisis of the day by the 24-hour news media have on the public response and perception of what is really happening in the world? What is the impact, as far as you see?

GUY SORMAN: The impact is tremendous. We shouldn't overestimate the size of the crisis, but we shouldn't ignore it either. From a historical perspective, it's a rather small crisis, if you compare the figures with the 1930s, with 30 percent unemployment and this kind of thing. The United States now is reaching 10 percent unemployment. When things are going well in Europe, we have 12 percent unemployment.

I wouldn't deny that there is a crisis. It's rather modest. Also it impacts only the financial sector, which is important, but which is not absolutely decisive.

The psychological dimension is there. It's increased by the media coverage. There is a political dimension out there, because the presidential campaign was based on this overestimation of the crisis. This is fair game.

But you cannot change the world. The world has to do with the media. Psychology is always part of the economy. There is no economic system without a psychological dimension. What Keynes named "the animal spirit" is one of the engines of economic development. The animal spirit right now is down, if you listen to much of the media. But you could change and listen to Fox instead of CNBC. I don't know.

QUESTION: What would you do to develop jobs, demand, and revenues?

GUY SORMAN: As I said, the key is innovation. The basis is innovation. If you have a new product or a new service out there, it will be transformed into an enterprise, and this enterprise will create jobs and revenues. If you start from the top and say, let's create jobs and revenues with state money, what you do is only shift the problem. You deprive the private investor, the private consumer, from part of his money, and you put it in a public investment to create jobs. But you only displace jobs. A stimulus is really a political illusion, which I can understand, because politicians need to do that.

But what's very important in the case of the United States and everywhere else—Europe—is to preserve the capacity for innovation. For example, right now I'm worried by the reduction in the budgets of universities, for example. I think, in a time of crisis, it's extremely important that universities and research centers should be preserved, should be able to hire more and not fewer scientists. I'm worried when I see that Columbia University is not able to recruit people because they don't have enough money or they are not able to bring engineers from abroad because these people don't get a visa. This is bad in a time of crisis. This is a real source of economic dynamism, and the rest will follow.

QUESTION: You briefly mentioned regulation. You say some say there's a need for more regulation. What would be your attitude or position on that?

GUY SORMAN: My position on regulation is very clear and very simple. I think it's shared by most of the people working on the subject. First of all, there is no free market without the rule of law. There is no free market without regulations. The problem starts when you have to make a distinction between the good and bad regulations. Like cholesterol, you have the good kind and the bad kind. A good regulation is a regulation which increases transparency and information of the consumers. A bad regulation is a regulation which stifles innovation.

In the case of finance, it's very clear. Securitization is a very good thing. The distribution of risk in a huge number of people has allowed the financial system in 25 years to finance a lot of investment all over the world, and it has been an element of growth. So any kind of regulation which would destroy securitization would be bad for investment and bad for growth.

On the other hand, I think regulations should help the people to know what they are buying and what kind of risk they are running. Some kinds of securities—so-called toxic assets—were like very efficient medicines which were sold without the explanation that this medicine is good, but it's also very dangerous.

So I'm very much in favor of any kind of regulation which increases transparency and allows people—not the state; people—to make a free and informed choice.

QUESTION: It's hard to disagree with anything that you said, but it may be possible to disagree with some of the things you didn't say.

GUY SORMAN: I like that.

QUESTIONER: The government's role in the various enterprises that you cited, I think there is broad agreement, is generally not a constructive one. But how about some areas where there appears to have been at least some success in Europe, such as health care and pensions, long-term economic security for older people?

Certainly anyone who has had an opportunity to compare the responsiveness of the Social Security Administration to that of their medical insurance carrier would know that there are clearly some things that the government does very well, or at least responsibly.

I would like your comments on that.

GUY SORMAN: Sure. Some governments do things well at certain times. It's very difficult to generalize. For example, I was talking recently—and I wrote about this—with a remarkable economist called Robert Frank at Cornell University. Frank said, "When I go to France, it's marvelous, because when I'm ill, I can go to any medical doctor practically free. It's wonderful. We need that in the United States." What Bob Frank forgets is that I paid for him being cured by a French doctor.

What I mean by that is that these kinds of choices are always tradeoffs. There is no perfect solution.

I would consider that the French health-care system is better than the U.S. diversity of health-care systems, but we pay a very heavy price for it in terms of taxes and unemployment. The health-care system in France, as you know, is paid by the employers and the employees, which means that when you recruit an employee, you have to add approximately 60 percent on top of his salary—60 percent; ten percent is paid by the employee himself and 50 percent by the employer—to finance our social security system. As a consequence, it's very difficult to recruit people, because the wages are very high. So the rate of unemployment is also very high.

So it's a tradeoff between the job market and the health-care system. You have to make this kind of choice. You can't have the best of both. You have to choose. I think you have to make the choice very clear. You also have to take into account the history of each nation. I always say in France that I like the U.S. free-market system. I don't advocate a transfer of the U.S. free-market system to France. It wouldn't work. It's not our culture. I wouldn't advocate the transfer of the French or the British system to the United States. I think it wouldn't work, also for cultural reasons.

So it's always a tradeoff between what you gain and what you lose, taking into consideration the local conditions.

QUESTION: Since you are a charming European, would you analyze what is going on now in the European Union during the crisis, where some parts of countries, like eastern Germany, and some areas that were just added to the Union in Eastern and Central Europe are suffering more than the others, and even the large countries are becoming more nationalistic? How would you apply your model in this situation?

GUY SORMAN: If you allow me, I try not to use the word "model." I think economics is not based really on models. It's based on models confronted with experience.

In the European Union, as you say, there are many different situations, because the starting points were very different. If you take Eastern Europe—Bulgaria, Romania—these countries are coming out of absolute poverty. Thanks to the fact that they are now part of the European Union, with free trade and new investment and subsidies, they are improving very rapidly their situation. But right now, in a time of crisis, of course, the flow of investment in these countries has stopped, and so these countries remain, of course, very much poorer.

But once again, you have to compare it with where they were before they joined Europe.

Are there any nationalistic temptations within European countries? So far it's extremely limited. As you know, we just had the European election, and the purely xenophobic and nationalistic parties did very badly. There are some exceptions, like in the Netherlands, where there is a backlash against immigration, a little bit also in Romania, against the Turks. But globally these elections have been overwhelmingly won, as you maybe know, by, I would say, conservative free-market parties.

So far Europe is resisting the crisis very well. No European government made any irrational decisions. The euro is stable. We don't have any crazy stimulus plans anywhere. We don't have the money for that. Nobody is talking about closing the borders. So Europe is resisting very well.

A crisis is always a test, of course. If Europe can resist a crisis like that, Europe is therefore good.

QUESTION: I would ask you to comment on two factors that you did not talk about and their role in the crisis. One is stabilizers in the government. I would like to ask you to evaluate how important you think they are in preventing this recession from going so deep as the Depression in the 1930s.

The second factor is criminality. It seems to me that there has been some widespread criminality, from Enron to Bernie Madoff, and in other businesses that seem to operate what appears to me, as a layman, to be very much like Ponzi schemes. I wonder if you would comment on how important you think that factor is in creating the recession.

GUY SORMAN: About stabilizers, the fact that they do exist, including in the United States—not to the same extent as in Europe, but you have a lot of stabilizers in the United States. They are very diverse. You have to look state by state, company by company. But it's not like Europe. These stabilizers are a key progress for society. It certainly does explain partly why the crisis is not as severe, not only in economic terms, but also in psychological terms, as it was in the 1930s.

But the stabilizers are not the main reason why the crisis remains rather limited so far. The crisis remains limited so far because only one sector is in crisis, which is the financial sector. Innovation is still on and trade is still on.

But stabilizers do play a significant role. And in each crisis, we learn something. From the former crisis, we learned that, as I said before, inflation is bad, protection is bad, but some kinds of stabilizers are good.

But once again it's a tradeoff. If you have too many stabilizers, people will stay for a very long time living on the dole and not looking for another job. So the United States and Europe are a bit different on that side. It's a question of dimension. The principles are basically the same.

Criminality—Madoff was a criminal before the crisis started. He has been a criminal for 20 years, if I understand it. So, in fact, the crisis revealed that he was a criminal. It's not the crisis which made him a criminal. It suddenly became evident.

The second observation is that, for Madoff to be a criminal, that means that the regulators are really, really very bad. When we talk about regulation, not only do you need smart regulation, but you need smart regulators. You can have the best regulation, but if the regulators are not very smart—we are talking about people there.

So I think that the only regulations which should be devised are regulations which could be applied. To write perfect regulations knowing that the best people will never be attracted by this kind of job is without any consequence.

JOANNE MYERS: I thank you very much. It has been a terrific morning.