Bryan Caplan  

The Crisis Prophet Speaks

Techno-escapism... Wages of the Dead...
Robert Higgs, my favorite crisis prophet, has wisdom for the self-styled free-market economists who freaked out during the past few months:
Back in my days as a professor, I always endeavored early in the course to teach my students the fundamental importance not only of the first laws of demand and supply, but also of the second laws of demand and supply. Thus, the first law of supply states that the greater the price, the greater is the quantity supplied per unit of time, other things being equal. And the second law of supply states that the own-price elasticity of supply is greater, the greater is the time allowed for response to a change in price. The first and second laws of demand are expressed similarly... Thus, although we can expect markets to respond to price changes, we must recognize that the responses take time; and the greater the time, the greater are the responses. Anyone who expects markets to restore a disturbed equilibrium instantaneously will be disappointed. People cannot discover the relevant changes, confirm and assess them, consider alternative arrangements of their affairs, and carry out those changes in an instant. The competent economist appreciates the necessity of patience in evaluating the market's operation. Simply because the market does not appear to have reconfigured itself fully soon after a shock, we have no warrant to conclude that "the market doesn't work anymore" or that "the market doesn't work the way it used to."
He adds:
Decent analysts know these things; I am not breaking new ground here. So, we can only shake our heads in wonder when we see well-known free-market economists and other formerly sound analysts and commentators embracing unsound and ill-considered positions. Among other things, we must appreciate that the sky is not falling, even if the news media and the politicians talk and act as if it is.
I still can't believe it was FDR, not Higgs, who said "There is nothing to fear but fear itself."

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COMMENTS (6 to date)
Peter Twieg writes:

Given that Higgs criticizes that specific FDR quotation in Crisis and Leviathan, I don't think he would use it for the current fiasco.

Greg Ransom writes:

It would be great if someone could track down and document all of the "free market" economists who have freaked out in the last few months -- as well as all of them who have consistently gotten everything wrong.

Note well that among those who were following things and didn't see any of this coming was Milton Friedman . . .

The Cupboard Is Bare writes:

"Anyone who expects markets to restore a disturbed equilibrium instantaneously will be disappointed."

I find that they are implementing economic strategies in much the same way that people repeatedly press elevator buttons. However, unlike the elevator, which is capable of ignoring the incessant button pushing and arrives when it's good and ready, non-stop nudging wreaks havoc on an economy.

The fact that our society as a whole is always in a hurry and lacks patience suggests to me that we are going to be in this mess for longer than is actually necessary.

Wasn't it Alice in Wonderland who said, "The faster I go, the behinder I get?"

Marc Resnick writes:

Another second order effect that should be considered is volatility. The more volatility of the price, the longer it will take to reach a new equilibrium because it is harder for anyone to see where the new equilibrium is.

Given the huge swings we saw in 2008, that will slow us down further. And I don't think TARP is helping at all in this respect.

And kudos to the previous commenter. Your elevator analogy and Alice in Wonderland comment are both very apt!!

Carl The EconGuy writes:

And The Third Law is: Markets overreact, in the short run, both to good and bad news. Initial market corrections are therefore always wrong, but tend to be self-correcting, given a bit of time.

Which brings us to the Fourth Law: The Government overreacts too, but never self-corrects. Government interventions are therefore always too heavy-handed and based on too selective/limited information. Both monetary and fiscal policy therefore tend to be too late, and regulations/statutes misguided and never go away.

And that leads to the Inevitable Conclusion: We have nothing to fear except Congress itself.

You can take that to the bank, and, if you use this as a principle of investment in the coming months, you'll make money.

Craig Howard writes:

"Note well that among those who were following things and didn't see any of this coming was Milton Friedman . . ."

I suspect that his death two years ago contributed to his lack of attention.

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