various blog gleenings

warning! economic discussion in progress

This was rather unsurprising. There were several economic theories that the present situation can be viewed as a dust buster for. For instance, a totally hands off laissez-faire economics/government relationship, the approach seemingly taken by Alan Greenspan, doesn't work. We already knew that from the experience of the 19th century. This approach virtually guarantees both speculative bubbles and market failures through monopolies or other significant problems (such as the allocation of public goods).

The type of approach detailed in the efficient markets theory is similar. Essentially the result of such a theory is that government allocation is inefficient and that the markets for "futures" or derivatives, etc is best left to the actual market. The assumption inherent is that the market left to its own devices will create corrections on its own. That in fact, is mostly true, as we might see through the long-term trends of regression to mean values on various issues. For some reason this is viewed as a basis for finding the theory invalid, but to my mind it indicates its validity, ie there probably is a mean value that indicates market efficiency over time for a given issue.

In any case, what is seriously lacking in such an approach is the understanding of what the actual role of government in even a libertarian economy is. Referee. Arbiter. The enforcer of established rules. And what we find over the past several years is that government regulators, far from having nothing to do, simply failed to do what they were supposed to be doing. And, not surprisingly given the profitable incentives of a speculative bubble, the in-game referees, rating agencies for example, failed to do their jobs. I can conceive that a logical reason for this market failure then is not that the market inefficiently distributed the future allocation of resources (through the pricing mechanisms), but that through the cracks of regulation and self-enforcement, it failed to actually be a market on what it thought it was a market for. In many markets today it is possible to describe a significant transparency problem between producers and consumers of that given product, such as insurance or mortgages. But what is amusing (in a tragic sense) is that this same transparency problem afflicted the people who presumed themselves to be on the producer end of the equation. They no longer knew what they were buying in the speculative fiction of mortgage derivatives. Because "they" were engineering products with the semi-deliberate intention of evading regulatory standards, these products became both overly complex and easily hyped. An unregulated (perhaps even unregulatable) product distributed in a black market sense is pretty obviously going to function irregularly in a market sense. And of course, it did.

I'm not at all sure that means there was a failure in the EMH system, but rather the market swung wildly off into a market for something that nobody knew what it was for. When we buy a car, we have a certain expectation of value. The same for buying even some intangible assets, such as mortgage hedge bets or derivatives. But in this case, I don't see that people were entirely sure what they were buying. I agree in this sense with the analogy for the dot-com bubble. Most people didn't have a clue what the companies were doing back then, only that they could get rich buying XYZ.com (or pets.com as the case may be), even though they had no idea what that company was doing to get rich. I generally make the rule that people should have at least a basic understanding of the product they're investing in. For some reason there wasn't time to tell a computer to tell us why XYZ derivative was making "obscene" returns (in the particular case, because real estate was still going up and up and up for no apparent reason, the moment it stopped it was too late to sell! sell! sell!). There was only time to listen to that computer program's instruction to buy! buy! buy!. That's generally a recipe for disaster if one is accustomed to the annoying questions of why or how. And a market in effect depends on enough people asking those questions to flood through the transparency problems. It won't operate efficiently without those from either an internal faction or an outside regulatory body. So my retort to that would probably be what I usually say at times like these: "that wasn't a/the free market system". There were conditions of a functional market that went unmet.


history

There are legitimate problems with the nature of a Taliban government. There are also legitimate problems with our installed government. I'm not sure either is preferable, but if those are the only two options given to the populace of Afghanistan, I'm guessing they'll pick what they think is the lesser of two evils. And as a hint, it won't be a foreign installed government. We haven't quite figured out from over 100 years of tinkering with installing democracy rather than fostering it that imposing "self-rule" tends to depend on certain conditions already existing in the country itself (namely things like respect for rule of law for example). An unresponsive dictatorship isn't like to spawn many democratic traditions among its people. Consequently, those same people aren't likely to behave themselves in the semi-anarchic state of democratic self-rule. Such a state depends on the quality of the populace obeying rules because they are, in effect, agreeable and create an equitable society. Order from chaos in other words.

There are of course many ways to establish order from chaos and democracy is merely the means of Western traditions and practices. It can be the practice of others, but quite simply it won't work unless there are underlying traditions that value individual freedom. What value is individual freedom to a people who are being murdered and killed by each other or by outside forces? Even in our own moments of crisis, we have often suspended certain liberties because it is "in the greater good". Subsequently, I am not surprised that these countries with histories of violent politics turn to the strongman who wins those violent contests and struggles for power.

One unmentioned element in the flourishing opium trade is our reluctance to open the world markets for wheat and other food stuff crops. We (and to some extent the Taliban) told farmers to grow such things instead of poppies. Then, rather than let our government buy it for the purpose of shipping it for foreign aid to nearby African nations, our own farmers basically forced us to buy American. The crops rotted or sold at low prices. Farmers faced with losing their farms turned back to what they knew: opium production. And of course, again, our drug policies make such a crop more valuable (by making the production illegal). Turning our troops, or those of our allies, against opium drug lords is nice, in that it fights corruption, but we would do better to ask why this sort of corruption attains so much power and influence in the first place (because we make the actual products more valuable on the international market). That other forms of corruption run rampant in a country which more or less has to base its economy on illicit goods should never be surprising. We've seen this in Columbia for decades.