A far stronger case could be made that the crash was because markets aren't free enough, since those taking risks knew governments would back them up.
It's an interesting and very complex topic, but this article is little more than nakedly partisan mud-flinging. The crash proves nothing, except that modern economics is beyond the ken of modern man.
I agree that this proves nothing. I agree that the US financial system or market in general was never free in a sense that would appease a libertarian but..
Your sentiments are interestingly similar to what a lot of Marxists/Communists had to say (not too many left though) when that 'failed':
That is, point to the Soviet Union & say: 'That was never true communism. So it failed. If it was truly a Marxist regime, this never would have happened.'
As I said, I wouldn't personally take this as a 'proof' of anything. But what seems inevitable is that this is causing a swing (in public opinion) away from deregulation of financial markets. I think it's very likely that there'll be a wholesale swing against the suite of things associated with 'libertarianism.' That's a shame in a way. Whether or not financial regulatory policies are optimal or not, has very little to do with the moral theories of libertarianism for example.
Anyway, there seems to be a big shift in the sway these ideas hold.
The government is currently creating a great deal of moral hazard by bailing out irresponsible lenders and decreasing the amount of perceived risk in the market place. Libertarians are generally opposed to this. When the next crash comes because of this moral hazard, I'm am sure the public will still blame libertarians for it. I still won't think it a fair accusation.
I fail to see how it is analogous to the blind Marxists who deny that every Marxist society was really Marxist. Our economy is evidently mixed. Our government controls the money supply and has an explicitly activist macroeconomic policy. Our financial markets are the most regulated markets in any industry except medicine. The two largest mortgage entities in the United States were formerly government agencies. There are plausible reasons why libertarians can deny that the credit crisis is due to markets that were too free.
A facile comparison based solely on the structure and not the content of the arguments of the libertarians and the Marxists is not fair.
I think the analogy is a little deeper the just a veneer. At least that is the accusation made here.
For one thing, the concept of 'communism' according to Marx is a stateless, classless society. Since communist states were 'states' & ruled by parties which were very similar to a ruling 'class,' I thnk we can call this grounds for appeal.
The problem is underlying. Any political theory that needs to be implemented completely, can't be judged based on its components. This means that unless you have a perfect specimen, you can't draw conclusions about its validity from reality.
To the communist in question, abolishing individual ownership, collective production, land reform, command economy, etc. might fail, but that doesn't disprove communism. It doesn't even disprove those strategies. They are only expected to succeed within a perfectly Marxist state. The fact that a state would have been better off not implementing any of those policies, is no deterrent.
To the libertarian in question, deregulated financial markets, corporate autonomy, free markets, etc. etc. might fail, but that doesn't disprove libertarianism. It doesn't even disprove those strategies. They are only expected to succeed within a perfectly libertarian system.
The question is: would the US/Iceland/UK have been better off under more regulated financial markets? If your answer is 'yes, but...if only they were even more regulated & trade was unrestricted &..,' then the analogy is about as strong as these sorts of analogies can get.
For one thing, the concept of 'communism' according to Marx is a stateless, classless society. Since communist states were 'states' & ruled by parties which were very similar to a ruling 'class,' I thnk we can call this grounds for appeal.
The big difference: the USSR was a "communist" country in that it was ruled by the Communist Party, its leaders went around proclaiming it was a communist country, and most outside communist-sympathising observers would have said at the time that it was communist.
The US has never been a libertarian country, in that the Libertarian party has never been in power, its leaders have never gone around proclaiming it to be a libertarian country, and foreign libertarian-sympathising observers (e.g. me) would never have said it was libertarian.
The question is: would the US/Iceland/UK have been better off under more regulated financial markets?
Actually I think the question is: would the US/Iceland/UK have been better off under differently regulated financial markets? And the answer is almost certainly yes, which leads to the question of precisely what kind of regulation is most sensible. Simply saying "we need more regulation" is a terrible idea, since many possible new regulations are likely to be useless or counterproductive.
The existence of some facets of the financial system that were not controlled by the state hardly implies that more state control would have stopped the current crisis. Nor does it imply that less state control would have stopped it. However, I have yet to hear a single new regulation that did not require 20/20 foresight that we could have pursued to avert the credit collapse that we have recently suffered.
Our economy is very mixed. Large portions of private money, semi-private money, and government money were sloshing about in the financial sector prior to the credit crisis. Blaming "libertarianism" or "government" for it is silly. Deeper analysis and more careful thought is needed in dissecting the lessons from recent events in the market. Causal links must be proposed and evaluated.
Also, I personally don't claim that libertarianism can only work in an unadulterated form. I think rather free markets work pretty damn well now, and that most of them would work better without tinkering from central planners. I don't think you could design an economic order without macroeconomic fluctuations, free or planned. I also don't think any regulator will be smart enough to design an optimal regulation scheme, or that one necessarily exists for a dynamic economy.
My personal opinion isn't interesting really. Neither is the author of this article's.
What is interesting is public opinion. That seems to have swung away from deregulation. It is (rightly or wrongly) being blamed for this. In many circles (more so outside The States, I think), non-intervention is tolerated because it works, supposedly. A lot of people have accepted that while it is unfair, unsavoury, & generally unpleasant, but it works. Now it doesn't always work.
I suppose you're right. However, public opinion has been largely formed by the opinions of the regulators. I have never known a regulator to want less power, so libertarians are fighting a lost cause. That's ok, we're used to it.
As far as the rest of the world goes, European economic courses focus on the evils of the market and Marxist models of class struggle, so they're pretty much a lost cause too.
public opinion has been largely formed by the opinions of the regulators. I have never known a regulator to want less power, so libertarians are fighting a lost cause.
I don't think that's fair. I think the public's opinion is being reflected from the sentiment in the public debate around the world. Politicians, central bankers, academics, big name investors, etc. The specifics of interventions (proposed laws for bailouts) have been supported by public figures usually on the libertarian side of the policy (eg Rupert Murdoch). It's true, they've still stuck to their respective positions: John McCain is still more of a libertarian then Obama, Hugo Chavez hasn't moved much, etc. Die hards are still dies hards. But, the whole debate has shifted left.
This is very likely to bring with it other changes. I complain about people looking at the political spectrum simplistically just like anyone else. Left on A shouldn't mean left on B. But in reality, these things seem to be associated.
Any political theory that needs to be implemented completely, can't be judged based on its components.
You can construct lots of internally consistent ideologies that would be perfectly stable in a vacuum. The difficult part is making one that can survive when put into competition with other ideologies and still be benevolent. Any survival of the fittest type selection will tend to favor nasty traits such as xenophobia.
You know that iceland is not a large country in the very least. It's population aprox ~300'000. It's like saying like a small bank that was popular in the town of victoria, canada failed recently.
This knee jerk hysteria is exactly the same as the reaction to 9/11... A major shock to the system freaks people out because the work isn't conforming to (comfort-oriented) expectations and so they instantly look to someone who looks good who promises them a return to mindlessness.
The abrogation of responsibility by the many for their own lives and the arrogation of authority/magical-ability/etc. by the few (and the selling of that to increase power/profit at the expense of everyone else) is exactly the underlying mechanism that created the emergent, systemic failures.
An example people might want to look at is the examples in traffic management whereby busy, dangerous intersections have been redone so that there's less separation and therefore more required of all of the participants to pay attention.
I particularly like that example but there are plenty of other good examples from the driving and traffic world if you look around.
"The abrogation of responsibility by the many for their own lives and the arrogation of authority/magical-ability/etc. by the few (and the selling of that to increase power/profit at the expense of everyone else) is exactly the underlying mechanism that created the emergent, systemic failures."
Do you not see how this leads directly to an argument against libertarianism?
Many individuals (and firms) made decisions that turned out not to be rational and did not suit their interests. In turn, this led to a collapse that has negatively impacted even those who did not make poor decisions. Arguably, this collapse could have been much worse without decidedly non-libertarian intervention.
In short, human beings, in aggregate, are not good enough decision makers for strong libertarianism to be a viable way to structure our affairs.
The abrogation of responsibility by the many for their own lives and
the arrogation of authority/magical-ability/etc. by the few[...]
That's a collective abrogation of responsibility by the public at large, not one by individuals within it. The constituent members of the public do not have (or feel they have) the responsibility or power to effect any sort of macroscopic change to the economy. In that sense, it's not surprising that the public nominates someone to have that power and responsibility.
That's a collective abrogation of responsibility by the public at large, not one by individuals within it.
Ptui! How, exactly, do you think such "collective" behavior comes about? By the collective, emergent behavior of the individuals!
The constituent members of the public do not have (or feel they have) the responsibility or power to effect any sort of macroscopic change to the economy.
That's the point... The masses of individuals give it up and few take advantage by taking it up and extending their own power by manipulating people with FUDGE (Fear, Uncertainty, Doubt, Guilt, and (the hope for self-) Enrichment).
Doesn't anyone else find it odd that the "educational" system in the US doesn't actually teach anything about how the political system really works? I.e., it's all the pablum puking pap of the simplistic notion of checks and balances and what not but doesn't actually get into how it's been gerrymandered over the centuries, how people manipulate the (non-) voters in so very many ways, and especially not how to approach, think, and act to responsibly and effectively participate? Sigh.
In that sense, it's not surprising that the public nominates someone to have that power and responsibility.
Indeed. What's surprising is that people believe they are more free and that the overwhelmingly vast numbers of the so-called "thinkers" buy into the he-said, she-said games rather than going at the underlying issues. The simplest example for this group would be the debate of Creationism "versus" Evolution.
I wasn't entirely aware I was conveying sentiments ;) As far as economics goes, my creed tends toward mysterianism (though you correctly deduce I have a soft spot for libertarianism).
I don't think we will make much progress in the field until we make and analyse many actual experiments. Even then I doubt that economics can be usefully understood. It is simply too complex.
I think the best chance of real progress (i.e. something other than rhetoric) is in simulation, or even better, massively multiplayer games. Eve Online is an interesting step in this direction.
From the little I know about these kind of experiments, they're a good start and useful groundwork, but in my opinion too simple to reveal much about the real thing as a whole. I don't think real insight will be gained until we start to model and analyse large(ish) complex, dynamic systems. I'd be interested to hear if anyone knows of any such attempts.
There has been some analysis of eBay, MMORPGs and related online markets. I know of one study that compared eBay's rules that encourage late bidding to Amazon's rules that manage to get people to bid early. (Amazon extends the deadline after late bids so that at least 20 minutes remain for other bidders to react. This removes the advantages of late bidding.)
Check "The Origin of Wealth" One of the conclusions is precisely that economy is a very complex dynamic system and advance techniques and models need to be built to understand it. Also, our capacity to make predictions is very limited. Free markets can be efficient but sometimes they are not the best mechanism.
> a wholesale swing against the suite of things associated with 'libertarianism.'
I don't think the pendulum can swing any further that way without going over the top. People are probably much more cynical about government now than in most of modern American history. I don't think people will swing towards more statism and there's a good chance they'll swing towards libertarianism, even if only out of disgust with the current ruling elites rather than a philosophical libertarianism.
I think your last sentence is most telling. Neither the free agents trading in the market nor the regulators would have continued as they did if they knew what would happen. The answer is to understand and then set up more diverse, failure tolerant economies.
Rather than trying to dictate/engineer a "fault tolerant" economy, I suggest thinking more along the lines of "what simple mechanisms can be put in place in how the system functions so that participants in the markets/economies can make better decisions?"
Two things that I think are critical:
* true transparency (e.g., look at the CDS fiasco ("look, it's insurance but it's not!" and the complete lack of reporting)
* rate limiters (e.g., look at how much the recent volatility is due to the frantic rushing around, the reaction to all of that franticness, etc. For the physics enthusiasts in the crowd think of the propagation of supernovae through a given volume of a galaxy)
I really don't know. The stock market is somewhat balanced by bonds (and short selling?) in that they are alternative positions for people to go into in order to profit from changing conditions - but there doesn't seem to have been much of a way for the market position itself relative to credit becoming more expensive. I guess at the really abstract level you want independent agents to balance each other such that the sum of their positions resistant to change rather than reinforcing each other so they can all fail at once.
The same way you do it with computers: avoid central control.
Central control is fragile, non scaleable (and promotes corruption when human beings are involved).
Self-fulfilling rumours which trigger bank runs can be a distributed phenomena, no one person needs to engineer it. It just needs to start somehow.
More importantly, it is possible that most people are wrong on some particular question about a market. If so, a sudden discovery of the truth by the mainstream might lead to a desertion of this market.
Self-fulfilling rumours which trigger bank runs can be a distributed phenomena
If we were to get rid of the physical token of our monetary value, it would be impossible for a run in one bank to negatively effect all of them. After all, an electronic 'withdrawal' has to go somewhere.
It's an interesting and very complex topic, but this article is little more than nakedly partisan mud-flinging. The crash proves nothing, except that modern economics is beyond the ken of modern man.