Friday, July 1, 2011

Correcting market failures doesn't strangle financial innovation.

Surowiecki outlines the case for active government involvement in "developing knowledge and information".

While his point about the essential nature of institutional support (formal and informal) for markets to engage in wealth enhancing exchange is dead on, I have reservations about his confidence that another government agency can accomplish much of this.

Surowiecki demonstrates a failure to apply what Bastiat articules in the seen and the unseen in failing to consider government failure and the unintended consequences of government activism.

Hayek outlined the essential function of knowledge in The Use of Knowledge in Society and the process by which knowledge is internatized seems to result when individual actors or agents use information for their own ends.

It seems the height of hubris when Surowiecki writes:


The housing bubble was a collective frenzy, but it was made much worse by the fact that millions of borrowers were making poorly informed decisions about the debt they were taking on. If people had known more, they might well have borrowed less.

It seems to me that a number of questions are sparked by this assertion rather than a convincing case for government intervention:

1. What incentives lead to the frenzy - were these incentives due to information asymnetries or ignorance or where they related to government polices, rules, and regulations.

2. Therefore, perhaps the decisions were not poorly informed, but rather quite rational and predictable given the incentive structures in place. While there is debate about the scope and breadth of government failure, it is hard to argue that there was too little government oversight and participation in this market. What many might agree on is that this government oversight and participation was ineffective and incentized a great deal of the "frenzy".

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