Wednesday, June 24, 2009

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politicians were capable of collecting the necessary knowledge—and, to reiterate, they are not—that knowledge would be outdated before it could be used.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.


Will Luther said...

I just noticed that the footnotes in the paper are not included in the pdf on the Mercatus site so you will be unable to follow up on the references. If you would like the full version with footnotes, email me and I'll send you a copy.

Unknown said...

Congrats, Will. I look forward to reading the paper :)

Suzie said...

This post has me thinking about the free market stance and Christianity. I wonder if you guys ever feel like the Pope. The Pope stands on the opposite side of progression hoping to steer the population away from moral destruction. Free market economists try to steer the reigns away from big government and market restrictions. Both of you know you will most likely never obtain your full desire, but you serve as a constant reminder that the path that society is moving down is in many cases not the most optimal. The Pope may sway one more individual to practice abstinence, whereas you may sway one less regulation from being enacted. Overall both achievements are just small steps in the process of a larger mission.

Justin M Ross said...

One of my favorite lines from The Invisible Heart is when the economics teacher refers to his young free market student as being "more Catholic than the Pope."

I suspect it is far more frustrating to be free market than be the Pope. People seem to acknowledge that we could stand to be a little more like the Pope, even if we don't agree with everything. Free market folk spend their time trying to convince people that socialism's problems aren't capitalism's fault, which is like if the Pope had to convince people that teen pregnancy isn't the fault of Abstinence.