When we were first hit with the big crash this fall in the wake of Lehmann Brothers' collapse, commentators immediately began to blame, with general public concurrence, deregulation and laissez faire economics. "This is what you get," they said, "when you let those rich, Wall Street bankers run the show, restrained only by the limits of their own ambition and selfishness." The answer, of course, was more regulation. Yes, we let capitalism have its go at things, and because it failed, we must move toward the alternative of reregulation, of a government-restricted economy. Gotta force more disclosure, limit executive compensation, restrict further the types and amounts of loans banks can make, and tax their profits at higher levels.
But I'm not so sure this is true. Let's assume that the critics are right, and this whole economic mess is a necessary consequence of unrestricted, Bush-era capitalism. However, it no more follows that we should further regulate the economy because capitalism had some side effects than it does that we should go see a witch doctor because the chemotherapy didn't work.
The fallacy is in the base line from which we measure success. If the base line requires every citizen to be middle class or better, well-educated, with a prescription drug plan, a home, and job security, then it would appear that capitalism has failed its mission of bringing society up to this standard, and maybe we ought to turn to regulation instead. But that can't be the standard - when have we ever seen such a thing, and what evidence do we have that it is possible through regulation? The actual base line is probably something more like Locke's state of nature. In what condition do we find Man, and which governmental and economic system will best improve that condition? This kind of measurement does not seek to attain perfection, but rather asks what is the best possible solution.
Capitalism certainly has its defects; you can't premise an entire economic philosophy on human selfishness and always expect rosy results. But that doesn't mean regulation can do anything better. In fact, all the evidence is to the contrary. First, the market knows more than any set of regulators possibly can. Because the market knows more, if a problem can be anticipated, the market will anticipate that problem out of self interest, while a low-paid group of government regulators is less likely to anticipate the problem, having much diminished resources and incentives to approach it.
Second, the market is more flexible than regulators. While the market can quickly adjust to an unanticipated problem (and even find a way to make a buck on it), government is a slow-moving behemoth with a muddling bureaucracy that takes months to address a problem. Consider, for instance, that the FASB mark-to-market accounting standards are still in effect for publicly held companies even six months after the crash.
Lastly, regulation is often unnecessary, because the market learns from its own mistakes. For example, in the wake of this collapse, it will likely be unnecessary to tell banks to keep higher reserves, to be more careful with their lending practices, and to stay away from mortgage-backed securities, because they will all take those measures of their own accord. All the government could do would be to codify what will naturally develop as best practices among financial institutions. The government's new rules won't help anything, but will simply create a legal hurdle that may later prove an obstacle when we are faced with the next economic crisis.
As Obama is fond of saying, we shouldn't let the perfect be the enemy of the good. So off with idealism, and let us return to capitalism, that great engine of human selfishness, to propel us out of this turmoil and back into our GED'd, lower-middle-class lives, where we still rent our homes.
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