One thing that Paul Krugman go right in his much talked about New York Times Magazine piece on economists and the financial crisis is that, for various reasons, we thought we'd figured it all out. There were a lot of economists who believed we had all the solutions. There were a lot of traders who thought they had the right models to understand the market. There were a lot of finance experts who believed we'd perfected the market.
The free market was never meant as a perfect system able to solve all problems and create a utopia. It never claimed to be. It's just better than the other options (like tyranny, injustice, control by fallible humans, etc.).
What is surprising is that so many forgot. And that lesson is not completely learned.
David Wessel, author of the excellent new book "In Fed We Trust," posted a Richard Berner presentation on the WSJ Real Time Economics blog last week. (HT: Ezra Klein.) Berner, a managing director at Morgan Stanley, is reciting some lessons to take away from the crisis, some of which are very good. But at one point he writes:
A key lesson from this crisis is that competition among lenders breeds innovation, but also instability.
I don't think that is a lesson necessarily from that crisis. The crisis just reminded many of this. This lesson should have been known, especially to executive officers of a major financial institution like Morgan Stanley.
In thinking about this I can't help but recall P.J. O'Rouke's quips about the free market. In his generally spot on and frequently funny treatise on economics, "Eat the Rich," the CATO scholar writes:
"Wall Street's free-market capitalism is doubtless a wonderful thing and a boon to humanity, but scared me... Free-market capitalism was terrifying under the best circumstances."
"If we're going to have freedom and the money to enjoy it, we have to put up with [this] stuff."
(Sorry, no link. Got it from one of those old-timey things called books.)