Out of Control Policy Blog

The Free Market Never Meant Perfection

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.)

Anthony Randazzo is Director of Economic Research

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Comments to "The Free Market Never Meant Perfection":

Meldred | September 16, 2009, 1:15am | #

With the persistent threat of the economic meltdown every companies tries to do their own strategy on how they could lighten the impact of the global crisis. Some companies tend to be conservative in their investment, they adapt the fund diversification in order to lessen the probable loss but one thing that is common to them is the fact that they learn to do some cutbacks. They try to maximize the profit on the best that they can. There are so many troubled companies that seek for the financial assistance from the government and we have to be thankful that government immediately grand the request of those delinquent company so as to restore its normal growth. The financial assistance could be a good source of debt relief. It is worth having a pay day loan to dig the issue of the economic meltdown

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