Mark Thoma, quoting Edmund Phelps, had an excellent post on a central concern. There is a fundamental trade off between social cohesion and progress. Progress always disrupts the status quo and the disruption can be severe. Some analysts attribute the current financial mess to “too much capitalism”, which is just another way of saying “too much progress”. It would be wrong to ignore the fact that progress has contributed to the world’s economic disruption. But it would be equally wrong to give progress too much weight and too much blame.
It will be years and perhaps decades before there is a good understanding of all that went wrong. Economists still argue about the 1930s! We may never know the proportional contribution of the various factors that pushed us into our current mess. I’d say there are three big factors:
- Assorted government actions expanded home ownership beyond a prudent level. We confused home ownership with affordable housing. By pouring too much resource into the mechanisms supporting home ownership, we created an unsustainable imbalance.
- Regulatory reforms, many of which emerged from the S&L crisis, planted new seeds of destruction. Our current economic crisis could not have happened absent those reforms.
- Dirt cheap computing and information access allowed everyone to make decisions and take actions with breathtaking speed. Even if we could have seen the crisis coming, the ponderous mechanisms of government could never get ahead of the super speed of markets.
It seems to me that the common theme in all this is the attempt by government to outfox the markets, i.e the “truck and barter” of ordinary citizens. The lesson to be learned is obvious.