Arnold Kling  

Truth and Narrative

When Do You Disbelieve a "Chan... Size of School Districts...

Consider two propositions:

1. Market failure is inevitable.
2. Government failure is inevitable.

In talking about the financial crisis, I believe that to speak the truth one has to accept both propositions. Most people prefer narrative, which either explicitly or implicitly denies one or the other. Those who deny the inevitability of market failure want to pin everything on the Community Reinvestment Act or somesuch. Those who deny the inevitability of government failure want to say that, yes, government failed, but that was because Bush was President, or (if we go back to Clinton) the ideology of free markets and deregulation was at fault.

For those who deny that government failure is inevitable, I am wondering what the narrative is for the "rescue plan" that Congress passed in September.

(a) You believe that it is succeeding, proving that government failure is not inevitable. If so, please list the signs of success that I should find comforting.

(b) You believe that team Obama has a much better plan that they are keeping secret for now. If so, any guesses as to who has the plan or what it might contain?

My interpretation of recent events is that government has seized a huge chunk of our wealth and enormous increments of power. Unless that in and of itself makes you happy, this is just another instance of government failure.

COMMENTS (8 to date)
R. Pointer writes:

Dr. Kling,

I am a student of the fall of Eastern European Governments. The situation in the West now is similar to what happened in 1989-1995.

1.) What amazes me is that most people in the US thought that the institutions were setup in such a way that it couldn't fail so terribly. But the quickness with which power was arrogated to the Fed & Treasury calls into question those institutional constraints. Instead of three branches, we actually had four, but we didn't realize it. And the fourth ended up being a usurper.

2.) Caesar has crossed the Rubicon. I don't know how we put the limits back on government. This is not about the broken banking sector, this is about the broken institutional constraints. How do we push Caesar back into Gaul?

3.) Rule of law was said to be the answer to the question, "Why is the West so prosperous?". But I think that misses a key point. Namely, why do players agree to those rules generation after generation. I think I have an answer, but it isn't consoling. Once the system stops giving the payoffs that are expected for following the rules, it's back to fighting about the rules of the game.

4.) Where do I put my money? Where do I look for a job? Which country should I look for citizenship? I didn't agree to this bailout business (that wasn't the game I thought America was playing), and I am not going to pay taxes to a government that keeps mortgaging my future earnings.

Lastly, keep it up Dr. Kling. Your commentary is excellent.

ionides writes:

Axel Leijonhufvud has an interesting idea along these lines. He says that there is a corridor of variability within which the market is self-correcting; however, outside of this zone, errors tend to be self-amplifying.

Thomas DeMeo writes:

When government and markets fail, then the ability to delineate debts and obligations among entities is compromised.

Our wealth hasn't been taken, it has been obfuscated.

Dr. T writes:

Regardless of whether Obama has a workable economic plan (which I doubt), the thin silver lining to the dark cloud is that Paulson will go. It's possible that Obama could appoint someone worse, but it would take some doing.

lxm writes:


Governments fail; markets fail. Inevitably.

Markets succeed; governments succeed. Inevitably.

It's the details that count: the when and the how and the interplay between the two.

The government has not seized my wealth. It's being devoured in the stock market meltdown. I don't see how the government has seized your wealth either.

I do see the government giving lots of money to financial institutions, but then I do not see much difference between the behemoths of the financial world and the government. They are one and the same to me.

You guys get hung up on labels. Government this, markets that. There is no clear distinction between the two.

B Kitts writes:

When I first heard about the bailout I went into shock. Everyone I hope knows that Uncle Sam is not rich and does not possess Billions to bail out anyone be it Wall Street, Investment Banks or the Automotive industry or Uncle Sam himself who is sadly in deep debt. Uncle Sam has this cozy relationship with an institution called the "FED" which is a misnomer. Uncle Sam has an unlimited line of credit with the "FED". The "FED" creates debt and charges interest back to our Uncle Sam and the economy grows and the world spins toward a golden future. We the Citizens have allowed this to occur without questioning the validity of the system since 1913. Alan Greenspan admitted that the FED caused the 1929 crash and Depression. Greenspan in his effort to ward off inflation sent our economy into recession which took a few years to recover from. Unfortunately this situation is many times worse than 1929 or the early 90's. There are only two choices: quick death (do nothing and let the markets run their course) or slow death by creating more debt than could ever be paid back in three generations. Flooding the market with Dollars for a bailout will ultimately lead to inflation and there isn't enough Gold to hoard in the world for a safe haven. God help us. Our Congress doesn't understand the system we have and is not qualified to vote on the propositions they did. The only exception is good old Ron Paul who tried his hardest to divert attention to the economy while McCain could only point to how successful the "surge" in Iraq was going. What happened to Ron Paul and his serious appraisal of the economic situtaion? He was marginalized and not allowed to even debate. This is a critical moment in our history and since our President is a lame duck no one is at the helm to steer the ship of state and we are headed into the perfect storm. Prepare for the worst....

saifedean writes:


I would frame this differently, and would love your thoughts on this:

THE Government's failure is probably inevitable.
A market actor's failure is probably inevitable.

Any actor or organization, market or government, can fail. The problem with government is that whenever it fails it forces everyone to fail with it, because everyone is forced to be vested in their government's schemes and actions.

The good thing about the market is that even though the vast majority of actors and organizations eventually fail, when they do so, they only harm people who consciously decided to be vested in them in one way or the other.

The reason you would want market and not government is not because market actors are more efficient or smarter than government actors; on average, they may well not be. But the reason is the government's monopoly on survival and its spreading of the downside to everyone, whether they like it or not.

Arnold Kling writes:

I certainly like your last paragraph

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