Arnold Kling  

Jeffrey Friedman on Competition vs. Planning

A Glimmer of Hope on Freedom... Question for Recalculationists...

Self-recommending, but here is an excerpt:

In a complex world where nobody really knows what will succeed until it is tried, competition that pits people's ideas against each other is the only way to test these ideas. Competition among capitalists spreads society's bets among different, fallible ideas about where profit--and loss--might be located. For this reason, herd behavior among capitalists may cause systemic risk. But regulations, by their very nature, homogenize the behavior of those being regulated, automatically increasing systemic risk.

Keep in mind that many recommendations in the wake of the financial crisis are for more homogenization in regulation..

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COMMENTS (2 to date)
david writes:

The idea behind regulation is to homogenize behavior towards areas that discourage systematic risk (an extreme example is banning risk trading altogether; obviously, this prevents systematic risk).

Friedman denies that this is possible in practice:

If their ideas are good, we all gain; if they are bad, we all lose. The whole system crashed when the financial regulators’ ideas turned out to be bad, but this is inevitable unless modern societies are so simple that solutions to social and economic problems are self-evident to a generalist voter, or even a specialist regulator.

which is certainly a possible assumption to make, but given this assumption his conclusion is trivial. And it is precisely this assumption which is under contention, isn't it? Those who support regulation obviously don't think that they are incapable of foreseeing what effects their ideas might have - or, at least, that they are less capable than a market and all its potential failures.

Besides, once someone buys into J Friedman's argument, we have the consequence that 1) political attempts at deregulation will be equally unpredictable and hopeless [see also: any one of the numerous tax-reduction legislation during the past decade that did not, in fact, cut tax] 2) it's turtles all the way down. Let's all become Rothbardian anarchists, the state is doomed.

Doc Merlin writes:

I pointed out to my senators and representatives that attempts at risk regulation will only homogenize risk and thus make tail risk even more dangerous and intense. It will also tend to increase the amount of contagion.

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