Why I still Believe in Markets

To hear the rhetoric coming from the presidential campaign, I guess we can conclude that markets have about had it. The time has come for policymakers to step in and save us from the Capitalists. Or has it?

 

Is the current economic crisis a sign of market failure? To an extent it is. Certainly it has been a very costly failure, and it does involve the core of our financial markets. But a better case can be made that what has failed is a long standing attempt to manipulate the markets to a certain end through policy. For decades now, we have sought to empower more and more people to achieve homeownership, and generally these efforts have been successful. (And this is undeniably a noble goal.) But our mechanism for doing so has involved pooling assets and insulating financial institutions from the risks of their loans. By externalizing the risks associated with marginal or subprime loans, we freed lenders to become ever more aggressive, and eventually they became reckless. Combined with a parallel government policy of maintaining high liquidity of capital and very low interest rates, there was really never a better time to be irresponsible as a consumer.

 

Wait… Irresponsible Consumer? Isn’t the problem with the Capitalists? Some of it is, but mostly the recent events have occurred because consumers have thrown caution to the winds, and thought that they could have it all, if only they could juggle the credit.

 

Well it turns out they couldn’t. But a few companies like Countrywide tried to make a lot of money at the expense of these optimistic but overextended consumers, and more respectable institutions were sucked into the excitement. So certainly these companies have their own lapse of judgment to blame for their circumstances, and I’ll agree with those who say that some of them have not paid the full price for their errors.

 

But how do we approach fixing the problem? Carefully, because we must not overlook the role that bad policy played in setting this scenario up. Do we allow Policy to overtake Markets as the backbone of our economic system?

 

Unlike Policy, which is driven by a few individuals with vague direction from society, markets directly reflect the wishes and desires of millions. Policy, once established, becomes an end to itself, with its own constituency, and is highly resistant to change.

Markets, on the other hand, have a built in mechanism for self correction. Every consumer acts every day with his or her dollars.

 

As recent events remind us, markets can go awry, but in this respect they are no different than policy or regulatory means of decision making. The reason is simple: all modes of decision ultimately rest with human beings, and we frankly don’t always make very good decisions. Look at the decisions that the “average” American has made about their health and diet, their retirements savings and credit card debt, or their means of transportation. On average, we simply aren’t making very good decisions in these areas.

 

Markets reflect these decisions, but so does policy. Look at our national political scene: are voters demanding the information that would lead to reasonable and enlightened choices between our candidates?

 

I suppose one logical conclusion would be that the masses can simply not be trusted, and we must empower a small group to act in their best interests. As this approach has been tried and widely discredited (aside from being morally and philosophically indefensible in my view), what are we to do?

 

I believe that we must retain faith in markets as a highly imperfect, but the most accurate and most flexible instrument for economic decisions.

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2 thoughts on “Why I still Believe in Markets

  1. “Unlike Policy, which is driven by a few individuals with vague direction from society, markets directly reflect the wishes and desires of millions. Policy, once established, becomes an end to itself, with its own constituency, and is highly resistant to change.

    Markets, on the other hand, have a built in mechanism for self correction. Every consumer acts every day with his or her dollars.”

    What about the billions without the money to translate their wishes into ‘effective demand’? Those with more money get more ‘votes’. Consequentially, wealth and luxury goods can exist beside abject poverty, suffering, and death. What about the fact that capitalists invest according to ‘profitability,’ which often runs contrary to the standards of efficiency, freedom, democracy, equality, justice, rights, and human welfare? What about the excess of funding for private luxury goods and the lack of funding for social goods? What about the votes of those who die as victims of imperialism? Lets not forget that consumers are most often workers, too, and factory conditions are important. The primary difficulty with policy is its unresponsiveness to the democratic selfdetermination of the citizenry, primarily because of the laws of the capitalist system and intervention of capitalists in the formation and successive actions of the state. What about the market’s de facto prioritization of egoistic, antisocial behavior, at the expense of moral behavior?

  2. If I read your comments correctly, you consider a market based system to be “immoral”, where I would describe it as “amoral”. I won’t refute that there are inequities in the system. But I think you and I are in agreement when you say “The primary difficulty with policy is its unresponsiveness to the democratic selfdetermination of the citizenry”, although why that is the case seems to be a point on which we disagree. Yes, Bill Gates has more votes than a factory worker. But the aggregate of factory workers has more votes than Bill, which is still more pull than they might exercise in in a Monarchy, Communist or Socialist system. Only a market system responds to what people really want, and it does so more or less in real time. Does this sometimes expose our penchant for poor decisions making? Absolutely. But such foolishness is corrected (albeit sometimes pitilessly) in a market, when it may have been perpetuated further when policymakers lacked the will to “face the music.”

    In short, markets are far from perfect, but their ability to self-correct makes them superior to unresponsive policy. And lest you think I am un unapologetic libertarian, I do think the continuing challenge ahead for markets is how to deal with “negative externalities” of a free market system. How do we account for secondary impacts? That will be the defining economic challenge of this century, but I believe it will be (and should be) structured on a market framework.

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