The credit bubble and the market

Matthew Parris makes an interesting point:

So amid 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.

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My views on the free market

Jon P writing at the Liberty Cadre, gives a plug to the Magna Carta Plus News blog (thanks Jon!), and he also writes:

One of its contributors is James Hammerton, whom I have come across while perusing a few Libertarian Alliance documents. He is a sort of civil libertarian leftie, opposed to the free market but wants freedom in pretty much everything else…

I suspect he’s probably read my critique of libertarianism, I recall someone in the Libertarian Alliance expressed interest in it some time back. I wrote the essay about a decade or so ago. At the time, I would happily have described myself as a Green, having been in the Edinburgh University Green Society throughout my undergraduate days and then its equivalent at Birmingham University during my PhD. As I recall, I wrote the critique during the early days of my PhD, but note my PhD had nothing to do with it! It was written in my spare time.

Anyway since then my views have changed quite a lot. I wouldn’t describe myself as a Green now. Re-reading the essay has reminded me by just how much my views have changed. Basically I want to see the state shrunk, and I’m generally in favour of free trade, my reading having convinced me that its generally beneficial.

However I don’t believe in cutting the state back to a “nightwatchman” state the way some libertarians do. For example, I support the idea of a citizen’s wage, plus I think action is needed to wean the world economy off oil and onto something both less environmentally harmful and less dependent on unstable middle eastern governments. So whilst I might be opposed to total laissez-faire, I do wish to see much freer markets and a much smaller state than we currently have.

Maybe a followup to my critique, considering it in the light of my current views, is in order….

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