It wasn’t just the market …

My point is simple: A lot of global growth during the boom came in countries where the government owned or influenced the domestic banking sector and thus influenced the domestic allocation of credit. And policies that kept exchange rates lower than they otherwise would also indirectly encouraged private investment in those countries export sectors as well as discouraging investment in the export sectors of other countries. Governments were playing a significant role in the allocation of capital even before there was any talk of nationalizing the financial sector of key G-7 countries. Those who attribute the growth of the past several years solely to the market miss the large role the state played in many of the world’s fast growing economies. Conversely, those who attribute all the excesses of the past few years to the market miss the role that governments played in financing many of those excesses …

via Brad Setser: Follow the Money » Blog Archive » It wasn’t just the market ….

A lot of economic writing is oversimplified (and some is overly complicated). Brad Setser is right: almost all national economies are some kind of hybrid of market-driven and government-driven system. The great insight of Austrian economics is that governments cannot perform effective economic calculation. It’s not because governments are evil, corrupt, or inept (although all may be true). The simple truth is that the knowledge regarding what increases well being is very dispersed and policy makers can never access the knowledge. Government policies are crude things with unpredictable impacts. The same could be said of the aggregation of independent decisions we call “the market”, and the hazard of unintended consequences exists in market-driven economies as well. The crucial difference is that markets are self-correcting, while governments seldom are.


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