Friday, March 27, 2009

Harper's Keizer, Right vs. Left vs. Center : All Are Irrelevant

Harper's, Garret Keizer:

The mega-irony of the Republican Party: that of all people conservatives ought to have been the first to grasp the dangers of unregulated markets. If big government is susceptible to the abuses of "sinful" human beings, how much more susceptible is a corporate system that is bigger than any government? The right wing of the party ought to have seen this better than the center, and the religious right ought to have seen it best of all. That they failed to see it bespeaks a spiritual bankruptcy beside which the financial plight of an auto industry is as a gnat unto a camel.

A market is certainly much larger than the government but with that comes certain advantages over government as well.

Government, large or small as it may be, is run by greedy politicians and bureaucrats, and relies on their limited knowledge and preferences to make decisions and allocate resources. They are accountable primarily only to the constraints of elections, and the political environment ( their relationships with other politicians and bureaucrats etc.)

Markets are much larger and consist of millions of greedy individuals. Both markets and governments consist of greedy individuals armed with imperfect information. The difference is that with markets, decisions regarding the allocation of resources are based on the knowledge and preferences of millions of individuals, who are all accountable to one another via the checks and balances of the price system. Markets draw from a much larger pool of knowledge and are subject to much greater constraints than governments.

It would seem then that the institution with the larger pool of knowledge and a greater extent of checks and balances would be the one that is less dangerous.

Confusing the issue with republican vs. democrat vs. religious right vs. center etc. is not an effective framework for ' grasping the danger' of one institutional arrangement vs another.

What we have seen recently is chaos introduced by public private partnerships and a mixed economy, making it difficult to identify the 'dangers' of both government and corporate arrangements. By upsetting the checks and balances of the price system, ( primarily via the federal reserve’s longstanding policy of centrally planned interest rates) and the creation of public private partnerships like the government sponsored enterprises such as Fannie and Freddie, incentive structures favoring greater risk and unaccountability have arisen that would not occur in the context of a free market. The result being a housing bubble, bust, and over leveraged and bankrupt financial institutions.

The question now becomes what is the least dangerous response to this situation, and which institutional arrangement will be best equipped with the knowledge and incentives to bring about recovery? Are more distortionary interventions and public/private partnerships i.e. more government, the solution when they have played such a pivotal role in getting us where we are today? Markets have worked well in allocating resources and bringing about prosperity over the past few decades. Is the solution to our current problem to limit their role and ability to do this in the future?

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