Thursday, February 19, 2009

Markets Working?

Via Reason, Matthew Paris writes in the UK Spectator that far from being evidence of capitalism's failure, the economic crisis is evidence that the market system is in fact working.

The bubble that has just burst was based, worldwide, on financial services. Financial services are a product. It is true they are a product critical to the efficient functioning of the market (so is electricity, so is oil) but that just makes them an unusually important product. From time to time products fail in any market. They may fail through force majeure - droughts, floods, pestilence. They may fail due to inherent flaws - airships, Thalidomide, blue asbestos. Or they may fail through ignorance, trickery or the credulity of human beings - Madoff, the property bubble, the repackaging of sub-prime debt.

The present financial crash has been precipitated by product failure of the third kind. Trade in financial instruments too opaque for even those who traded in them to assess them properly, and bonus incentive schemes that acted against the interests of the companies offering them, fuelled a banking bubble that has now burst.

But ask: what pricked it? Did politicians rumble the trade? Did governments, or international forums or symposiums, provide the sharp instrument? Did academic research and expertise expose the dodgy product? Did statutory regulators apply the pin? No, the free market wised up and pricked this bubble. Politicians and finance ministers (if they had had the power) would have tried to keep it inflated. The market puffed itself up, and then, without intervention - despite intervention - the market let itself down. The speed with which this has happened has been awful, but however inconvenient for many or catastrophic for a few, correction is not a failure of the market, but a success.

Some of the commenters at Reason make the point that you can't just point to the markets ups and downs as evidence of capitalism's superiority. It's a worthwhile point, but I don't think that's quite what Paris was getting at. His point wasn't about the relative superiority or inferiority of any system as a whole, rather, it was about the relative abilities of institutions to recognize and correct economic problems. It wasn't government and it wasn't intellectuals that recognized this bubble, but market forces. And market forces doing what market forces do, the market reaction was to pop the bubble. What did government do? Help create that bubble, prop that bubble up, and after the market attempted to self-correct, continue to try and prop the bubble up.


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