Saturday, May 9, 2009

More 'Crisis of Capitalism' Hyperbole

. Saturday, May 9, 2009

In a recent op-ed, anthropologist David Moberg says that the current economic crisis is proof-positive that the institution of capitalism, and especially the cross-national finance flows that fuel it, need some serious re-thinking:

“Another ideological god has failed,” Financial Times columnist Martin Wolf wrote on March 9, referring to the neoliberalism—deregulation of markets, combined with state support for corporations—that President Ronald Reagan and British Prime Minister Margaret Thatcher first promoted aggressively in the ’80s. “The era of liberalisation contained seeds of its own downfall.”

Former Federal Reserve Chairman Alan Greenspan admitted his fundamental operating assumptions that banks would wisely judge how much risk they could assume had been wrong. Former General Electric Chairman Jack Welch now says that the notion he promoted—that corporations should just focus on shareholder value—is “the dumbest idea in the world.”

The entire contemporary financial system was based on the assumption that financial markets were always efficient and rational. That idea fell off the cliff along with the world economy that it helped to wreck.

The build-up to the conclusion is disingenuous. Greenspan thought that banks would judge risk better than regulators. The banks surely performed badly, but there is little evidence that regulators would have done better. Indeed, the regulators that did exist failed just as badly as the private firms. Additionally, countries with stronger domestic regulators have not necessarily performed better in this crisis than countries with laxer regulatory structures. But this is mostly quibbling.

However the last paragraph cited above is flat wrong. The assumption is absolutely not that markets are always efficient and rational, which is why Alan Greenspan's most famous quote is about "irrational exuberance". On the other side, John Maynard Keynes (of whom Moberg approves) is famous for observing that "markets can remain irrational longer than you can remain solvent". The assumption is that markets are efficient in the long run; indeed, much more efficient than the beliefs of one or a handful of people, including regulators. In the short run there will booms and busts, since information is not perfect and investors are "irrationally exuberant". These bubbles will then crash as investors become "irrationally pessimistic". People still move in packs, and investors are as prone to herd behavior as anyone else.

But in the long run these differences wash out. In the long run, information is perfect, or very near it. In the long run, markets aggregate information better than any other mechanism developed by man. This especially includes regulators. That assumption is what the financial system was based on, and that assumption has not been disproved. This economic downturn, like all economic downturns before it, has not damaged that idea.

Much of the rest of Moberg's essay is remarkable for its blandness: global imbalances certainly contributed to the economic crisis (however, he does not note that these imbalances were primarily caused by illiberal economic policies). He contends that regulatory change is needed, but casts aside proposals by Stiglitz and Rodrick in favor of... "a small tax on financial transactions". He says that we should "us[e] markets, not be used by them". Color me unimpressed. In the end, Moberg's subtitle -- "It is time to rethink capitalism" -- is proved vacuous: Moberg doesn't offer any clear proposals for change, nor any suggestions for what improvements could be made if we did reconsider capitalism.

But of course that's all Moberg can say. He knows that replacing capitalism as the dominant economic paradigm is both impossible and undesirable. Which is why I contend, yet again, that when the chips have fallen and the cards are down, the New Economic Order will look an awful lot like the Old Economic Order.


More 'Crisis of Capitalism' Hyperbole
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