Ordinary Economics

As Emily mentioned earlier and Steve at TAE mentions today, I have a working paper with Pete Boettke on the recent financial crisis. The paper will be included in Steve Kates' edited volume The Meltdown of the World Economy: Alternative Perspectives on the Global Financial Crisis, published by Edward Elgar. It is also a part of the Mercatus Center Financial Markets Working Group.

Here's the punchline:

The financial fiasco that has followed the bursting of the housing bubble is not a consequence of market instability, but the inability of government to engage in apt intervention. Politicians presume they have the necessary knowledge to effectively tackle the problems that, ironically, they brought about. In reality, they do not possess this knowledge. They cannot possess this knowledge. This knowledge is dispersed throughout society, with each market participant holding information of a particular time and place that is often unknown to others and, in some respects, impossible to articulate. Even if politicians were capable of collecting the necessary knowledge—and, to reiterate, they are not—that knowledge would be outdated before it could be used. We live in a dynamic world where things are constantly in flux. And, to the dismay of politicians, the instantaneous collection of knowledge by one entity—which would be required for apt intervention—is beyond the realm of possibility. Breaking down the institutional structures of an economy to engage in apt intervention when it is impossible to aptly accomplish what is intended ends predictably in catastrophe.

Since we at TPS revel in shameless self-promotion, I'll throw up a link and suggest you read the whole article.