Tuesday, October 14, 2008

Even Harvard libertarians

... live in a fool's paradise unrelated to real life. Hell, Harvard libertarians are probably even more immune to empirical contradiction. Jeffrey Miron would prefer a world-wide, deep, decade-long depression if that's what it takes to cling to his precious, simplifying, too-simple theory of economics.

Markets are self-stabilizing within certain bounds. (Define these predictively, and you'll win a Nobel Prize someday.) Outside these bounds, their players panic and make what individually are rational decisions. But these decisions collectively lead to positive feedback and more panic, a self-perpetuating loop that brings free-fall. Everyone winds up hurt. Everyone winds up in a cash economy with drastically reduced productive activity. Many people wind up as Okies.

Intervening in the markets in a centralized way when required can cut short the fall. What comes after a massive debt overhang collapses still hurts, but it hurts less. The social price is that some of the guilty escape market punishment along with the innocent. That's a regrettable price because it encourages them to try some other scheme, but it beats punishing everyone. And we can surely find some fine-grained mechanisms to find the guilty and hold them to account.

Or you can just accept the extremes of an unregulated business cycle and the depressions that wipe out a third of the economy every decade or two. You pick.

No comments: