Wednesday, January 2, 2008

Free Market Economics

I was reading bits and pieces in The Economist magazine today, and noticing that a lot of smart folks seem to think we may be on the verge of some kind of big economic trouble, based on sub-prime mortgages, lack of liquidity, "the credit crunch" and other things that I may not understand too well. They were talking about how much real trouble banks may be in, and the sub-text was, Remember the Great Depression?

So I was thinking about that, and thinking about how the idea of the Free Market has become a kind of gospel over the past generation or so, and how much good free markets do indeed do. But if banks and other major institutions start losing credibility, if value starts disappearing and panic sets in, as used to be common in the earlier days of a market-based economy, will government be able to intervene, will people want that, and what will happen?

And it occurred to me that a useful analogy might be medical care. A free market economy is sort of like a healthy young person. Most of the time, even if she gets sick, a healthy young person doesn't need any help from a doctor (the government) to get better. You get a cold, you're best off staying away from interventions by doctors and even OTC medicines are a waste of time and money. Like the market, your body is a self-healing, self-correcting mechanism. The flu? Still not much a doctor can do, and though you might feel bad for a while, you will inevitably recover. Just like the economy. The free market lays some low and rewards others, and it all works out for the best.

But this hands-off, laissez-faire approach, while sensible in most situations, isn't an article of faith that should be followed in every circumstance. The same person who can ride out colds and headaches and stomach flu and even pneumonia isn't going to be as lucky with a burst appendix or an aneurysm. The same beliefs that served well in normal ups and downs--"I don't need no damn doctors giving me all kinds of treatments and maybe (likely!) making things worse!"--will serve very badly in a crisis of a different sort. And while colds come and go if left alone (treated they last a week, untreated they persist for 7 days)--burst appendixes are pretty much a one-way trip.

So suppose rather than just normal bubbles of enthusiasm and over-investment and then corrections, something really new and serious happens to an economic system? Suppose, despite protections built into the system after the 1930s, a downward spiral of loss of confidence, lack of demand, falling prices, unemployment, loss of tax revenue, and so on, actually recurred? Would there be anything outside the free market that could intervene, the way a surgeon can intervene when the self-correcting, self-healing system that is the human body is overwhelmed by forces too strong for its corrective mechanism? Obviously, too much intervention, unskillfully done, can make matters much worse. Most of the time, even with a bad stomach ache, you don't need surgery. But if you do need it, you need it bad. And a predisposition to say "Doctors (governments) are the problem, not the solution" will leave you in pretty bad straits.

So I wonder if we're like that healthy young person, who each year is more and more confirmed in her belief that the whole doctor thing is a n unnecessary evil, until she runs into something that she can't handle on her won. And I wonder if the doctor will be available and have the skill to help in a crisis?

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