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Here, he writes,


Competition puts capitalists' different motives, like their different ideas, to the acid test of consumer satisfaction. This tends to give consumers what they want--or at least what they think they want--and it diversifies a capitalist society's investment portfolio. Capitalism thus mitigates both human greed and human fallibility.

Now consider again the alternatives liberals tend to favor--either the regulation of capitalism or its replacement by something more democratic, like an idealized socialism. Since regulators' or citizens' ideas would then be imposed on the whole economy at once, they could not be put to the competitive test--any more than the conflicting arguments of debaters, the conflicting promises of politicians, or the conflicting forecasts of budget analysts can be tested. If the citizens' or the regulators' ideas happen to be good ones, we all gain; if they happen to be bad, we all lose.

The point is that government regulation, by reducing diversity, actually makes markets less robust. This is counterintuitive. Instead, the conventional wisdom is that regulation makes markets more robust.

Next, in this blog post, he writes,


if one actually reads accounts of the decision making in the years leading up to the crisis, such as Gillian Tett's Fool's Gold and William D. Cohan's House of Cards, no decision makers factored bailouts into their calculations. Why? Because they didn't think they were doing anything particularly risky (an ignorance-based human error), so they didn't even consider the chances of being bailed out.

Friedman steps into the minefield of what Austrian economics is or is not about--good luck to him on that. For me, the most important point is that it is wrong to boil down the causes of the financial crisis to incentives, without taking into account ignorance and error.


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COMMENTS (8 to date)

The point is that government regulation, by reducing diversity, actually makes markets less robust. This is counterintuitive. Instead, the conventional wisdom is that regulation makes markets more robust.

This observation deserves to be made more precise. What specific kinds of regulation are we talking about? Government backing of property rights? Antitrust?

Megapolisomancy writes:

Jeffrey Friedman's remarks resemble a point that has been made by the anarchist social philosopher Anthony de Jasay:

"When a social state of affairs, instead of being collectively decided, is left to emerge from a large number of individual decisions, the effects of the latter tend to be normally distributed: a few prove disastrous, a few are superbly good, and most are middling. The likelihood of the resulting state of affairs being totally disastrous or wholly superb is negligible. When, however, one collective choice is responsible for a state of affairs, no normal distribution can be relied upon."

http://www.againstpolitics.com/2008/12/01/the-bell-curve-of-individual-choice/

Loof writes:

Michael F. Martin is about right questioning the type of regulation.

If robust markets are healthy markets able to withstand adverse conditions, then Arnold’s point is relevant: reducing diversity makes markets less robust. Conversely, the argument falls flat: as it follows that in re-constructing healthy markets regulations that increase diversity would make markets more robust.

Chris Koresko writes:

@Loof,

How can regulations increase diversity in a market? Aren't they generally rules forbidding certain practices? Doesn't that necessarily restrict the kinds of enterprises and behaviors that make up the market?

What am I missing?

david writes:

@Chris Koresko

If there are multiple imperfections in a market - and there usually are, and at least some are non-regulatory imperfections, like assorted market failures - removing one doesn't make the market more perfect.

For instance - patents and copyrights can increase the diversity of ideas through the granting of a limited monopoly of some rights over said idea. This restricts certain practices, obviously, and the whole concept is arbitrary, especially over term length. Nonetheless, it can improve diversity.

Matt writes:

@david
What evidence do you have that things such as patents and copyrights increase diversity. Of course a term productivity to length would result in a parabola, but everyone assume that at zero the slope is positive. No one can assume such a think, the whole slope could be negative if term length of IP are greater than zero. People always concoct these scenarios that might make a super efficient government beneficial to the world. They almost never show evidence that scenario is what we are experiencing, let alone given the failures in governments, that the whole system is beneficial.

david writes:

@Matt - I said "can". I am aware of the growing libertarian support for ending intellectual property legislation, and I look forward to observing a colorful fight between them and the Ayn Rand camp from the sidelines.

But regardless of the evidence, I was making a theoretical point against Koresko's theoretical point (over whether restriction necessarily restricts diversity). I am not an expert on the vagaries of existing IP legislation.

Even you concede that the slope "could be" positive, and this is indeed the mainstream assertion.

Loof writes:

Chris Koresko asks:
How can regulations increase diversity in a market? Aren't they generally rules forbidding certain practices? Doesn't that necessarily restrict the kinds of enterprises and behaviors that make up the market?
What am I missing?

What’s missing is the positive side of regulations that many years ago were supposed to develop free and fair competition for healthy markets; as opposed to the free-for-all filthy markets nowadays where foul competition can occur, especially with no regulation or de-regulation.

Yes, the rules forbid certain practices. Relative to diversity the main thing you’re missing is the competition law (Antitrust in the US considered old-fashioned nowadays). Regulation was supposed to stop practices restricting competition between businesses, particularly with cartels and monopolization. The classic case in US law was the Sherman Act (1896) but no politician had the guts to really enforce it until Teddy Roosevelt did in 1911. Standard Old was found guilty of monopolizing the oil industry and was divided up, diversified, into competing firms.

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