Economic Frustrations

The more I listen to NPR’s “Marketplace”, the more I think it’s meant only to reassure people that SWPLness really is compatible with economics.

Recently, they had a story about how the recent economic troubles are causing people to abandon the Chicago school of thought, in which market manipulations (governmental or otherwise) are considered to be inherently damaging. It seems that a few economists formerly affiliated with that school of thought are now publicly suggesting that government intervention is a necessary good, because bubbles and the like will form if there isn’t someone exercising good judgment.

The problem with this is that it misses two critical points of the Chicagoans. Economies work best when they’re composed of feedback systems composed of smaller feedback systems. Poor judgment cannot be eliminated – how do you deal with poor judgment on the part of the people dedicated to weeding out poor judgment? – it can only be caught at low levels of feedback. Government can’t protect against itself, and because it influences economies from the top down, its harmful effects can’t be screened out.

The second point is that people don’t seem to understand what ‘self-regulating’ means. The famous rabbit-lynx feedback system is self-regulating, but it’s not pleasant for anyone involved. The best way to avoid boom-and-bust cycles such as that one is to have a rich and complex web of interactions, so that weak links in one part don’t cause the entire thing to topple.

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