In what promises to be a trend, here is an article by David Brooks about how the recent economic crisis is going to spell the end of free markets. This time, however, the attacks are from another source.
As mentioned before, many voices are now proclaiming that markets need more regulation because they are not efficient. But there will be a growing number pointing out “Inefficiency”. While they may sound similar these are two very different arguments.
The first says that markets, left to their own devices, will not benefit anyone because market efficiency is a myth. Therefore capitalism will tend to bring about crises, which will then need to be fixed by governments, and so it would be better for governments to regulate markets throughout the whole process, in order to avoid these ups and downs.
As we have mentioned in the past, this is a fallacy and a potential mistake that we can only hope will be avoided. The government has initiated many policies and programs that have affected the market. Interest rates were extremely low, there was excess liquidity, and there was direct government control in many companies. Because of these mistakes, the government now needs to make up for its mistakes, but these should Not be considered permanent solutions.
The second argument is the one mentioned in the article, and it deals with Behavioral Economics. It says that because of personal biases, social contagions and other various ways in which individuals stray from maximizing efficiency, markets lose their theoretical efficiency and therefore we should take more of a psychological approach.
While we agree that people are far from 100% economically efficient and will have many biases, we do not believe these biases affect free markets when taken in aggregate. People have many different biases for many different points of view. And for every swing of opinion in one direction in a market, there are just as many people looking to make a quick profit in the other direction.
The interesting thing about these two arguments against free markets is that they do not agree with each other. As you can see in David Brooks’ article, while his argument will differ from ours, his conclusions are very similar:
government officials are probably going to be even worse perceivers of reality than private business types. Their information feedback mechanism is more limited, and, being deeply politicized, they’re even more likely to filter inconvenient facts.
While Free markets are far from perfect, they are the best option we have, and we should not abandon them.
