Gary Becker and Kevin Murphy:Capitalism has been wounded by the global recession, which unfortunately will get worse before it gets better. As governments continue to determine how many restrictions to place on markets, especially financial markets, the destruction of wealth from the recession should be placed in the context of the enormous creation of wealth and improved well-being during the past three decades. Financial and other reforms must not risk destroying the source of these gains in prosperity.Read the whole thing.Consider the following extraordinary statistics about the performance of the world economy since 1980. World real gross domestic product grew by about 145 per cent from 1980 to 2007, or by an average of roughly 3.4 per cent a year. The so-called capitalist greed that motivated business people and ambitious workers helped hundreds of millions to climb out of grinding poverty. The role of capitalism in creating wealth is seen in the sharp rise in Chinese and Indian incomes after they introduced market-based reforms (China in the late 1970s and India in 1991). Global health, as measured by life expectancy at different ages, has also risen rapidly, especially in lower-income countries...
Government reactions have demonstrated the danger that interventions designed to help can exacerbate the problem. Even though we had well-qualified policymakers, we have gone from error to error since August 2007.
The policies of the Bush and Obama administrations violate the “do no harm” principle. Interventions by the US Treasury in financial markets have added to the uncertainty and slowed market responses that would help stabilise and recapitalise the system. The government has overridden contracts and rewarded many of those whose poor decisions helped create the mess. It proposes to override even more contracts. As a result of the Treasury’s actions, we face further distorted decision-making as government ownership of big financial institutions threatens to substitute political agendas for business judgments in running these companies. While such dramatic measures may be expedient, they are likely to have serious adverse consequences.
These problems are symptomatic of three basic flaws in the current approach to the crisis. They are an overly broad diagnosis of the problem, a misconception that market failures are readily overcome by government solutions and a failure to focus on the long-run costs of current actions.
1 comment:
No doubt the market system is still the best economic system still around.
And no doubt some of the measures introduced will have some negative consequences.
But if one concludes that govt interventions "have added to the uncertainty and slowed market responses that would help stabilise and recapitalise the system" then one has to ask what would have happened had no govt intervention occurred.
If not for these imperfect interventions, the financial system might very well have collapsed. I do not believe that the markets would have stabilized on their own.
Normally, the market is a self correcting system. But a few times each century or so, things get so out of whack that the market cannot correct itself.
It's just like the human body; normally, it's self correcting and in most situation healing occurs naturally. But sometimes something so catastrophic hits that it requires severe medical intervention...intervention that is neither easy nor painless.
Just like the crash that brought on the Great Depression revealed structural problems in our markets, and prompted many needed reforms, so too will this problem.
I believe in a free society, but also in laws and a police force and judicial system. I also believe in free markets, but a regulatory structure that keeps it from derailing itself.
It will be easy to criticize some of the unintended consequences, but one can only do so with an eye on what the alternatives are.
Too much govt can be a dangerous thing, but also too much unregulated markets. The problem really lies in a human nature that tends to seek out short term gain and yes, too much selfishness. Capitalism functions best when people actually care about other people.
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