Shark Problem? Add Blood!

"We are still having the free market versus central planning debate"

Will, I thought what was most interesting about Fukuyama's Trust was that it groped toward a way out of this stale see-saw.

Not that it's a perfect book, sure, but in it Fukuyama does perhaps use his Hegel to good effect: once there are enough of us - societal relations already exist - so that work can create surplus, we have entered the stage of recognition, where property can come into being. With property comes the concepts of rights and rationality.

Once we have property and rights, we can begin to trade. To trade more efficiently, we invent money. But the downside of these inventions is theft and injustice. To counter theft and maintain recognition, we create virtue, honesty and trust. To counter injustice, we create honor.

At this point, we still don't have "government" with its formal legal system per se. In Fukuyama's Hegelian account, the market structures work in civil society based on trust. High-trust societies have different structures than low-trust ones, and generate more of stuff we nowadays tend to think is good, and do it faster.

As we see in the current crisis, government can do all it wants, but until trust is restored, it's pointless. Trust is again affirmed to come before government intervention.

Thus as an escape from the polarized debate, perhaps we might run with Fukuyama for a moment. Maybe we should consider what about civil society has been broken/is deranged - and look to that to restore the necessary trust, and thus restart the market?

Or maybe I just need a drink. . .

I, for one, have absolute faith that markets, like populations of bacteria in a petri dish, will "self-equilibrate", but the process gets kinda ugly at the end there. I have some sympathy for arguments that posit that interference can simply prolong the agony or exacerbate things by way of enabling greater overshoot, but I'm not sure how an "apolitical financial market" (whatever that is--an apolitical human endeavor would be a remarkable creature to observe in the wild!) would constitute a fundamental improvement on the process.

Unless, of course, you're actually arguing for a steady state/closed loop economy--a state of affairs that would, arguably, be both an improvement and "apolitical". But I'm thinking that's not what you're getting at.

Will, this post is especially eloquent as I read Amity Shale's amazing history of the Great Depression, "The Forgotten Man". Let's not forget that Hoover, who travelled the world and made a lot of money thanks to international trade and investment opportunities, actually thought Smoot-Hawley would help the economy. And even Mellon was willing to suspend disbelief for a moment or two and support Hoover's higher taxes...these guys simply ignored all the hard lessons we had learned as recently as the 20s (the earlier 20s experience a market crash and we rebounded nicely because Harding/Coolidge let the crash bottom out and do its damage). And they were the folks who should have known better, but put their faith in "the possibility of expert management". Shales book right now is must reading.

I mean the government monopoly over money.

So markets can't be "free" markets unless the federal reserve system is eliminated?

Financial markets can't.

Isn't there a bit of an asymmetry here? Some quantum of government involvement renders financial markets "centrally planned." But by parity of reasoning, the same quantum of deregulation should render financial markets "free." Or?

No, freedom doesn't come in fractional shares. Any deregulation renders a market less regulated, any regulation renders it more. Only a market that is without regulation is "free". However, with respect to the market for money, the central financial market to which Will is referring, it is not a matter of any quantum of government involvement: there is total central planning without even any pretense of freedom. Periodically a group of bureaucrats announces an intended price for money and then goes about adjusting the supply (over which the law gives them monopoly control) to attempt to bring about that price.

CH, this doesn't really address my argument (though it does exemplify the point). Again, the rhetoric here treats government intervention of any degree (whatever the actual degree) as something that converts a "free economy" into a command economy. The same logic would make any relaxation of a command economy into a free economy. There's a whole continuum along which all sorts of useful distinctions can be drawn, so casting the choice as one between "free" and "command" economies is pretty specious.

I'd be curious to know what Will thinks the consensus is among economists about the FRS. My sense is that a robust majority of professional economists believe it's a net structural improvement to the American economy. If that's right, I'm surprised that this post seems so concerned with the failure of (ostensibly) noneconomists to realize how much better off the economy would be without it.

I don't understand this line: "So financial markets remain political down to their very foundations." Do you mean that negative (and sometimes positive) events that happen in financial markets will always be seen as having political implications, in the sense that they will always be seen as something that "something should be done" about?