Thursday, February 07, 2008

Caution: Here Comes the Wolf Cry: "Market Failure"

With my ear stuck closely to the ground, I can hear the drumbeat mounting against deregulation and the free market. Liberals and even moderate conservatives are seizing the public's fears and running towards increased surveillance of the financial industry and more government intervention rather than less.


[Artwork by Kelly Lollis, her photo from]

But blaming these troubled times on "market failure" is nonsense.

Can you blame a river for flowing over a dam when the rains have swollen its volume? Can you blame the ocean for destroying lives when an earthquake causes it to vibrate in uncontrollable tsunamis? Can you blame the wind for destroying people's homes and towns in a tornado?

Can you blame a hurricane for destroying New Orleans when the city managers didn't maintain the levies to modern standards? You can blame the managers for corruption or mismanagement; but you can't fault the hurricane.

Can you blame thieves, high-profile bankers, high-rolling speculators, smalltime quick-buck gamblers, and little guys with nothing to lose, for stealing money just laying there on an unattended roulette table? Of course you can find fault with them for lack of judgment and/or morality; but you can't blame the credit crisis on them, because the money shouldn't have been on the table in the first place.

The market is such a natural phenomenon. It is one of nature's forces. It is a constant flux and reflux, a balancing of tensions among three elements: sellers of goods and services, buyers of these, and the stock of money used in the transactions.

These three elements are interdependent. When one shifts, the other two must and will react. When the shift is violent or voluminous, the reaction is likewise.

We cannot judge the cause of this violent shift until we know all the elements. For all intents and purposes, we might as well be light-years away in the science of economics from being able to measure these elements. The truth is that no one really knows what caused this crisis, even though we all can conjecture about a few contributing factors.

Given this lack of scientific sophistication, our legislators should be very wary of attempting to influence market phenomena. That is why I have been critical of government or quasi-government (central bank) intervention, its efforts to control the flow of credit, and its probable role in our current crisis. Some well-known economists like Anna Schwartz are of the same opinion.

If at some point the government and central bank were to get out of the credit creation and regulation businesses, then and only then could economic scientists begin to observe and interpret the fluctuations of the market and find the true cause of a crisis such as this one.

As long as the government continues to intervene in various aspects of market phenomena, we will find it very difficult to observe action and reaction. "We" are part of the equation.

So it's not "market failure" that critics should address, but rather "intervention failure." Our only hope is to reduce all government distortion of market phenomena to the point where economic scientists can do their work.

Dream on, Sybil, dream on.

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