Resolved: The Economic Downturn Is Not A Market Failure
Matthew Parris has an interesting argument in The Spectator that is worth quoting at length:
[A]mid all the doom-mongering and recanting, I have an assertion to make. The market has not failed. The present collapse is evidence that the market is working. Confidence bubbles are an inherent feature of a free market system. Panics — confidence vacuums — are an inherent feature too. The test of the theory of market capitalism is whether the system provides from within itself the means to prick both.
It does. The first — a confidence bubble — has been pricked. We are now sucking ourselves the other way: into a confidence vacuum. In time this too will be pricked. The market will steady.
The bubble that has just burst was based, worldwide, on financial services. Financial services are a product. It is true they are a product critical to the efficient functioning of the market (so is electricity, so is oil) but that just makes them an unusually important product. From time to time products fail in any market. They may fail through force majeure — droughts, floods, pestilence. They may fail due to inherent flaws — airships, Thalidomide, blue asbestos. Or they may fail through ignorance, trickery or the credulity of human beings — Madoff, the property bubble, the repackaging of sub-prime debt.
The present financial crash has been precipitated by product failure of the third kind. Trade in financial instruments too opaque for even those who traded in them to assess them properly, and bonus incentive schemes that acted against the interests of the companies offering them, fuelled a banking bubble that has now burst.
But ask: what pricked it? Did politicians rumble the trade? Did governments, or international forums or symposiums, provide the sharp instrument? Did academic research and expertise expose the dodgy product? Did statutory regulators apply the pin? No, the free market wised up and pricked this bubble. Politicians and finance ministers (if they had had the power) would have tried to keep it inflated. The market puffed itself up, and then, without intervention — despite intervention — the market let itself down. The speed with which this has happened has been awful, but however inconvenient for many or catastrophic for a few, correction is not a failure of the market, but a success.
The Austrians among us would go further and argue that the bubble was itself created by the distortions in the market that are the inevitable result of government fiscal and monetary policy or, in the case of the various regulations that made it easier for people to buy houses they couldn’t afford, government social policy. The market, they would argue, did they best that it could to absorb these distortions but, over time, it was inevitable that the distortions — the “bubble” as some might call it — would become far too big to sustain itself.
And so, the bubble pops.
Parris is also correct when he notes that not only didn’t politicians have no role in popping the financial bubble, they did everything they could to sustain it and, even today, are implementing policies that are ultimately aimed at re-inflating the housing bubble that started this disaster.
For many reasons, blaming the current crisis on free-market capitalism is absurd, not the least of them being the fact that we have no such system in existence anywhere in the world at this time.
What nobody seems to consider, though, is the possibility that the crisis we’re living through today is itself a sign that, in the end, the free market works.
H/T: Hit & Run