Friday, August 26, 2011

What Adam Smith Didn't Know. The "Invisible Hand" of the Market is Holding a Knife to Our Throats.

We weren't supposed to have to worry about such things.   The "market" was supposed to be self-regulating, self-correcting.   Adam Smith told us as much and, after all, he was a Scot.

But the free market capitalism that Smith foresaw was an illusion, a theory that worked moderately well for a good long while - until it didn't.   Now some, such as noted economist Nouriel Roubini, ponder whether Marx wasn't right when he described capitalism as inherently self-destructive.  The Guardian warns that the modern perversion of capitalism is ready to blow.  Nobel laureates Krugman and Stiglitz have been warning us for so long they're getting warned out.   Robert Reich implores us to recognize, in time, that wealth inequality of itself will doom our consumer economy with the rich taking the greatest losses but the poor suffering the greatest misery.

Now it's Paul Woolley speaking out.   The expert in market dysfunctionality who founded a research institute into the subject at the London School of Economics, tells Der Spiegel that today's markets are spinning out of control.

The developments in recent weeks have made it quite clear that the markets don't function properly. Things are spinning out of control and are potentially dangerous for society. Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn't reaching equilibrium -- it's falling into chaos.

...The finance sector can -- and is -- growing until it overwhelms the economy. In good years the US finance industry cashes in on more than 40 percent of all corporate profits. In bad years they are saved by the taxpayers. The agents are doing a devilishly good job of developing innovative, complicated new products that people can't understand. It gives them the opportunity to earn excess returns and attract the best talent. While they are acting rationally, the result is a catastrophe.

Woolley's focus is on reforming the markets.  He doesn't believe governments still have the ability to regulate market stability.  His view is that it is up to the truly big investors to compel fund managers and bankers to mend their devious and avaricious ways.  Yet, while Woolley's proposals could, if enacted, restore some commercial stability to world markets, they would no nothing to answer the greatest threat, the social challenge.

1 comment:

Anonymous said...

Well, the markets are really just an elaborate shell game, and there's a fee each time a shell is moved. So who's making the money here? The shell movers of course! The shareholders (yours and my retirement mutual funds) are responsible for paying these fees (at the behest of the executives and fund managers). Problem is, when we turn the shells over there's going to be nothing under any of them!!!