Asymmetrical Information - Megan McArdle

11.27.12

In Which I Agree With John Quiggin

Markets are prone to crash, sometimes catastrophically

Last week I wrote that the worldwide nature of the recent economic crisis explodes two partisan myths: that Bush's policies caused the financial crisis, and that Obama's policies are responsible for the slow pace of recovery.  John Quiggin responded with a post charmingly titled "In which I agree with Megan McArdle".  Professor Quiggin agrees that this crisis was far too big to be pinned on one political party, and goes on to indict the neoliberal market order:  

There’s plenty of blame to go around for the Global Financial Crisis and the subsequent depression, and the Bush Administration deserves only a small share. Bush’s main contribution was to introduce unfunded tax cuts at a time when the budget should have been in surplus, thereby reducing the fiscal space available for stimulus when the crisis came. But, given the weakness of the stimulus and the ferocity of the political response, it’s not clear that was a binding constraint in any case.  

I think that Professor Quiggin and I are broadly in agreement: this sort of stuff happens in markets.  It even happens in artificial markets, in the laboratories of experimental economists. Predictions are hard, especially about the future, and sometimes markets get caught in positive feedback loops that end badly--very badly.  The "Great Moderation" was a great mistake. You cannot engineer risk out of the system, or incentivize it away; it's baked into the cake.  The best you can do is try to cushion the inevitable.

Where Professor Quiggin and I differ, I would guess, is that I don't think there's obviously a better replacement.  As someone once said, "Life is terrible hard, but the alternatives is worse."  

And the same could be said for market liberalism.  Market liberalism does have its flaws, but they sort of pale in comparison to socialism, communism, and fascism, to name the three most models we've taken for a spin.  (I'm counting social democracy--at least as currently practiced in Western Europe--as a flavor of market liberalism). There's the gross inefficiency, the overproduction of stuff no one wants and the underproduction of things they do, the economic stagnation, the widespread resort to corrupt backchannel systems to correct the inept distribution of goods, the political repression, and the all-too-frequent mass death.  You can of course say that those were anomalies you want the kind of socialism that doesn't have these features, but then we might as well say that we want a market liberalism that doesn't have periodic financial panics.  When all the countries who run into your system seem to have the same problems with it, I think the burden of proof is on you to show that it is possible to have the system without having those problems--and so far, no such proof has been provided.  

Now, you could also say "We need different replacements".  Fine. But what are they?  I confess, I don't think that Occupy's brand of lite-style anarchism is going to fill the bill.  If you want to go seek alternatives, go ahead and godspeed.  But I think I'll wait right here.

So while I agree that this sort of thing is going to happen under any basically capitalist regime, my first instinct is to figure out how to mitigate the damage.  Because the most plausible current alternative seems to be swapping periodic crashes for permanent want.

This post has been updated for clarity