QuoteOriginally posted by: Traden4AlphaThe events of the last few years show how a changing technological context can introduce new problems in an economy. In essence, capitalist entities fell into the same failure mode as is seen in central planning -- too many individuals, banks, and investors converged on the same plan of investing in housing. Rather than encourage a diversity of divergent competing approaches to financial investment (a key advantage of market economies over centrally planned ones), the transparency of high returns from housing, mortgages and mortgage-based financial products lead to a convergence of approaches. Everyone jumped on the housing bandwagon because everyone could see it was a real money-maker (the same phenomena occurred in the internet bubble).If convergence is the problem, preventing it might be the solution. One of the reasons of the convergence is the limited outcome space. In this context, it means e.g. regulation and central intervention (not necessarily just government intervention (depends what one means by this)) -- e.g. central bank reducing the interest rates & keeping them low in response to 2001 slowdown necessarily limits the outcome space for the entities (consumers, firms, GSEs) operating in the market; or, rather, it limits the feasible outcome space (supported by expected profits, preferences, discounted w/ expected interest rates, etc. -- further complication arises here, since the probability measures used for those expectation by each entity might quite differ, preferences definitely do, etc). What is on average profitable in low-interest-rates-regime (borrowing money/leverage, risky malinvestments, etc.) isn't necessarily so in any higher-interest-rates one. Hence, centralized configuration of the interest rates might pretty much IMPOSES the herd behavior -- it might even be (locally) optimal for a large range of preferences/expectations' pr. measures ("it's optimal to ride the bubbles"/timing matters).I don't think it's realistic to expect that we can prevent for any X "everyone jumping on the X bandwagon because everyone could see it was a real money-maker" when the X bandwagon is pretty much artificially created in the first place, and then the market entities are steered/pushed (if not forced) into participating in it.---On a related note -- the economic calculation problem seems to support free market economics so far -- optimality of central planning seems to require stationary state (e.g. non-growth economy) as a necessary condition (not even mentioning the sufficient ones, perfectly rational fully-informed always-optimally-elected political entities with frictionless optimally-timed perfect legislation process being some of those, w/o analogous one being necessary in the decentralized free market case). Not that the current state of economy has anything to do with free market, mind you...---More on topic -- apart from obvious reasons (see: economic calculation problem above), Soviet economics failure nicely illustrates the failure of the assumptions required to hold for the central planning to be optimal -- it's easy to point out a few Enrons out of several million companies in the world and declare "the market has failed", it's even easier to point out most of the governments of nearly two hundred countries of the world and notice "the politicians (and governments) are failing almost all the time" -- it was just even more pronounced in the USSR case, all with political leaders being less than perfectly rational and eliminated if they got too close to threaten the current leader (Stalin-Red Army generals, Nikita Khrushchev-troika (Lavrentiy Beria, ...)), happening in the right conditions in the right moment. Attempts to hold an overstretched empire (violent suppression of Hungarian, Czechoslovakian, and other Eastern Bloc uprisings), forced massive heavy industrialization & militarization of the economy, very important propaganda factor (better to export "luxury goods", like chocolate, to demonstrate the "superiority of Soviet economy", rather than leave some for the citizens), botched Afghanistan "operation", etc. didn't help.
Last edited by Polter
on January 2nd, 2010, 11:00 pm, edited 1 time in total.