The recent financial crisis has included some surprises. One surprise for me has been the realisation that amoungst even libertarians the idea of laizzez faire has a quite qualified following. After some contemplation it seems to me that the reason for this is that belief in what Alan Greenspan called “irrational exuberance” or what is sometimes refered to as an “economic bubble” is far more widespread that I thought. I don’t mean the soft form of irrational exuberance where we accept that some people some of the time do foolish things (including investors with money) or that given the same wrong information many people will make the same wrong decision but rather a belief in the notion that capitalism is prone to regular bouts of mass hysteria that knocks the whole economy out of kilter. It seems that this school of thought believes that free markets sometimes cause people on mass to do really stupid things and that at these times we need a mild dose of socialism to put things back on track.
Another name for this belief might be the “shit happens” view of markets. That prices are not set by meaningful processes in response to the real world but sometimes just by entirely random processes.
To counter this belief we would ideally list each crisis from history and work through the fundamentals that drove the event. We could consider the Great Depression, the stagflation of the 1970s, the stock market crash of 1987, the asian financial crisis of 1997, the tech wreck or the latest banking crisis. And we would find if we looked carefully in the right places that the root cause of each crisis was different. However I think we could also show that the root cause is not sustained mass hysteria or irrational exuberance or the notion of an economic bubble or some failing of capitalism per se. A notion that in my view is akin to an economist chucking their hands in the air and saying “I don’t know, blame it on the bubble”. As if the cure lies in either seeking out and destroying bubbles in the economy before they form or else in deflating them gentle when big ones are found. I don’t believe there is any basis for an anti-bubble ministry to improve on capitalism whether focused on prevention or on cure. The problem is not in capitalism or in markets but rather in government policy and regulation.
However given limited time and space I figured I’d simply make a start today and refer you all to an article about one of the more famous bubbles from history. The dutch tulip bubble of the 17th century. So here it is.
And if you have made it this far you might like to read the following article titled “Every Crisis is Just Like all the Others” by one of my favourite gold bugs, Nathan Lewis.