Markets and Faith

Scott writes:

If the past two-plus years have taught us anything, it is that placing unfettered trust in the inherent wisdom of the free market is, at best, a shaky wager that courts potentially disastrous outcomes. I’ve taken that lesson strongly to heart based on my Canadian experience. It is widely acknowledged that tighter banking regulations and a general culture of greater prudence and responsibility has ameliorated the worst of this worldwide meltdown for Canadians.

I’m loathe to comment much on what, exactly, caused the global financial meltdown and panic.  My hunch has always been that the meltdown was the combination of any variety of factors.  Placing the blame solely or even primarily on deregulation in general, as Scott seems to intend here, has always struck me as a gross oversimplification of the meltdown; moreover, even if the particular set of deregulations at issue here really were the sole or overwhelming cause of the meltdown, that’s far from an indictment of deregulation in general (a particularly important question should be whether the loosened regulations were ameliorative or barrier-creating).  And, of course, you can’t consider the crash in a vacuum, particularly given the general prosperity of the 25 years or so prior to the crash.

And, to the extent Scott’s piece is read as an argument that government can be trusted to cure the problems of a free market without eliminating the good of the free market, I would suggest that he is placing far, far too much faith in the ability and benevolence of government policy-makers. 

Still, I think Scott has more of a point than he realizes when he makes reference to the problem of “unfettered trust in the inherent wisdom of the free market.”  Regardless of regulation or deregulation, and really regardless of stated political beliefs, there is a cultural tendency in the US and probably much of the West to act as if markets are a panacea, a moral arbiter, and inherently good and trustworthy. 

They are not.  And they are not for one very simple reason: where they exist, they are us.  All of us, and each and every part of each one of us – the moral parts of each of us and the immoral parts of each of us, the wise parts of each of us and the incredibly idiotic parts of each of us.  This is, in many ways, even why markets are such a critical element of any philosophy of freedom: they provide a daily mirror of who we are as a nation and as humans, allowing us to change and evolve into better, wiser humans. 

But the second that we start “placing unfettered trust in markets,” regardless of how regulated or unregulated those markets are as a matter of policy, we enter the realm of fantasy-land.  We think that whatever the markets decide will be good for us because, after all, in our culture – indeed, in the culture of much of the West, lest we forget the role of Icelandic banks in the global crisis – we tend to think that almost all decisions we make are good and wise decisions.  In short, we are overwhelmingly an arrogant, egotistical lot.  And we are also a remarkably creative lot.  These elements of our culture have produced great accomplishments; indeed, they are virtually the definition of an entrepreneurial spirit, and on the whole, they even seem to serve us quite well.  They also, however, make us quite gullible, allowing us to fool ourselves into thinking that we know far more than we actually know and allowing us to go along with (and come up with) all sorts of convoluted schemes. 

I suspect that it is that gullibility which ultimately underlay much of the financial crisis and market “bubbles” more generally.  But that gullibility can ultimately only be overcome culturally.  Regulation may or may not help in particular circumstances, even as it may or may not prove a hindrance to economic progress in other circumstances, and even as it is likely impossible to know in advance when regulation will help or hurt.  But even where regulation can hypothetically help, it will not be able to change traits of creativity, egotism, and arrogance, and a market will remain in which those traits can be exercised to take advantage of the existing structure of rules. 

What are needed, therefore, are cultural tendencies towards skepticism and humility about the scope of human knowledge, even as aggregated in a particular market.  Markets are useful because they provide us choices and freedoms and allow us to make decisions for which we are each best-suited.  But they are only useful for that purpose if we use them for that purpose rather than treating them as independent and benevolent decisionmakers in and of themselves.

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21 thoughts on “Markets and Faith

  1. Good stuff. I think the emphasis on culture and beliefs is really wise and important. That is usually described from the left as the greed and selfishness of the financial class. That usually starts market vs gov arguments which lead no where. Markets and gov can never exist outside our norms and culture. It seems like the strong market believers fall into the “if the market does it then its good” arguments which is as much about morality and beliefs as it is about econ. Wealth has always seemed to equate good for many americans which just exacerbates the deference to and rationalization of whatever it takes to get rich. I’m guessing none of the worst offenders in the mortgage foreclosure sleaze or in the meltdown will lose friends or be shunned by their peers. And we know they have shills in politics and media to defend their hurt feelings. If the culture of the market is that money justifies all, then the corruption and devastation we have seen should not be a surprise.

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  2. I think many free-market advocates view the market as a grand experiment in motion, much like evolution, and if left alone it could create some very interesting things. Humans, however, are not interested in the apparent randomness of the market (or evolution, for that matter), and will always seek to control the market in order to reduce or eliminate the built-in risk.

    Too much control, and you get a ‘niche’ market, one that works very well under very tightly controlled conditions. But much like the Panda Bear, or the Koala Bear, a niche market can not well survive any disturbing outside influences, because it’s is inflexible (Koalas & Pandas are very limited in their ability to survive thanks to the fact that they have a very specific food source that only grows in a very specific location).

    Government, however, is a sledgehammer, very good at what it does, but imprecise and heavy handed for a lot of tasks. It should be used carefully since anyone under it will not come out doing too well.

    A person at the whims of the market might have a bad outcome, but also might do very well.

    In the end, the hammer is needed to shape the market, but it should be done so very carefully, because it’s very easy to damage that market instead of shaping it.

    Our current government, GOP or Dem, swing with abandon as the electorate cheers them on.

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  3. My father-in-law is a CFO at Deloitte Canada and we end up going to a lot of parties with bigwigs of Canadian finance. I don’t know if it’s cultural, but having spent many eveninngs talking to these guys, they strike me as the sort who would wait for the Walk sign to light up before crossing the street, even if there were no cars anywhere in sight. I think that’s a big part of it.

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    • @Rufus F., Thats very believable. I’ve noticed that between the US and the UK, business people have quite different attitudes to rules. The UK is more how you describe the Canadians as being. The Americans aren’t habitual rule breakers either, but there’s a definite idea here that as long as you obey the bare letter of the law, anything else is fair game.

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  4. I would not call faith in the ability of people to make their own decisions “arrogant and egotistical.” As a matter of fact, to the extent that those decisions need to be made at all, such a belief is quite humble- certainly more so than he who believes that he is wise enough to direct many of his fellow citizens and override their own decisions.

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    • I’d just like to second this.

      We may adopt one of two default rules here. Either the individual is presumed competent to decide for himself on those things that directly influence his life, or else he is presumed not to be competent. Something funny happens, though, when you try to rebut that second presumption, because an individual assumed to be incompetent can’t be said to have the authority to rebut the presumption. Why trust his testimony over that of an (authoritative) expert?

      The presumption that individuals can and should make their own decisions is egalitarian in its overall effects. Other presumptions tend to produce a ruling elite caste that lords it over everyone else.

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    • @James Vonder Haar, I think there is difference between people making their own decisions and Markets. That really doesn’t get to the criticisms of the market. I think its great for people to make their own choices. But markets can act to remove choice, have their own incentives towards profit which may be very different from what individuals actually need and put a group of elites in charge. To use a well worn example people with preexisting conditions would love the choice to pick their own insurance but the market was not exactly busting down the door to give them options. Markets are great for many things but they do not do everything.

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    • @James Vonder Haar, That section of the post was perhaps a bit clumsily worded. My point isn’t that it’s “arrogant and egotistical” to have “faith in the ability of people to make their own decisions,” but rather that culturally we tend to overestimate our own competence in decisionmaking since our knowledge is finite, etc., etc. Implicit in this, of course, is that worse than having a system where people are free to overestimate their own capacity for decisionmaking is a system where authority figures are free to overestimate their capacity for decisionmaking on behalf of others.

      But we should not assume that the comparative (and, I would argue, virtually across-the-board)superiority of individual-level decisionmaking imbues the agregate of that decisionmaking with inherent wisdom.

      Markets are good not because they produce inherently just, moral, or wise results, but instead in no small part because they: 1. Allow us as individuals to acquire information about a service, product, industry, etc.; and 2. Provide a very real mirror onto our agregate values – they are a reflection of us as we are, rather than a reflection of what we wish we were or a perversion of what we are.

      When we find ourselves unhappy with market results -whether because a bubble collapses and destroys the economy or abhorrent behavior becomes rampant – we are able to change our behavior accordingly as we process the new information. But this only works insofar as we recognize that market results, both good and bad, are themselves neither inherently moral nor immoral, wise nor unwise. The debate in the US, however, seems to be between one group who insists that freer markets cannot possibly have been a cause of the economic meltdown, and a group who insists that regulation of markets is all that is necessary to make the market behave well. In reality, though, both sides are simply skirting the issue, deflecting blame from market participants writ large (a group that includes virtually everyone in our culture) and onto some small cabal of alleged evildoers.

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  5. Mark, do you have any opinions as to how/why Canada weathered the recession so well? I have my own of course. The Canadian question really offers something for all the ideologies to point at. The left points at socialized medicine, a culture of greater government control and trust in government as well as a governmental system that contains fewer checks and balances. The right points at decades now of fiscal prudence running surpluses, paying down the debt and reforming liberal golden age programs into solvency.

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      • @Dave, Well no, the banks in Canada are a strictly regulated oligarchy and were derided as being hidebound, ossified and only producing small consistent profits as compared to the money fountains on Wall Street. Also the banks in Canada typically have to service their own debt and have stringent lending standards. If you’re poor and can’t afford a moderate down payment your odds are pretty crappy for getting a loan. Up until a couple years ago those things were all considered bad.

        That said Canada did experience a small real estate bubble and crash.

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