The big question is what lessons the emerging students—and the disgraced teacher—should learn from recent events. How far should the balance between governments and markets shift? … Provocative as it may sound in today’s febrile and dangerous climate, freer and more flexible markets will still do more for the world economy than the heavy hand of government.
Some people never learn as the Economist in Dreamland demonstrates. I subscribe to the Economist as a comics book, and apparently am in the distinguished company of Dani Rodrik who reads it because “even a broken clock is right twice” …
EE right wingers, Ayn Nonsensians and their ilk are in the same boat, in denial that there could be anything amiss with the Perfect System. Er … what about the recent events? That’s just the result of the “heavy hand of Government distorting markets” … Ok, let me concede that they may have at least one valid point: namely that when the Government does intervene, it does so to save the butts of the Atlases who got us into the mess in the first place, a textbook illustration of moral harzard.
The odd honest mainstream economists have recognized this, none more stridently than the indefatigable Nouriel Roubini who called it “the transformation of the USA into the USSRA (United Socialist State Republic of America)” – socialism for the Rich, that is. Even Roubini is wrong on this though – the EE has always employed this tactic, regardless of what they preach, see for instance George Monbiot.
The more moderate crowd has now rediscovered the virtues of the theories of Hyman Minsky, see for example, Martin Wolf’s Financial Times columns.
Minsky was right. A long period of rapid growth, low inflation, low interest rates and macroeconomic stability bred complacency and increased willingness to take risk. Stability led to instability. Innovation – securitisation, off-balance-sheet financing and the rest – has, as always, proved a big part of the story.
This was part of Minsky’s Financial Instability Hypothesis, in sharp contrast to the mainstream economist’s dreamland Efficient market Hypothesis. Minsky, a staunch Keynesian maintained that there was “nothing wrong with economics that a good depression couldn’t cure”.
Minsky undoubtedly got many things right about how finance behaves, but is it true that finance is the only trouble spot? Not according to the Marxists, who of course are not even given a hearing because they’re supposedly famous for “predicting five out of the last three recessions”. Well, anyway, here is Financial Crisis 101 and here is a more elaborate analysis both out and out Marxist. Judge for yourselves! (Do you detect something in common with what you read on Roubini these days?)
