Day By Day

Wednesday, February 02, 2011

Samuelson Speaks Sense

Public discussion of the current economic crisis quickly resolved itself into competing morality tales and universal finger pointing. That is to be expected in mass media driven democratic political culture. But the blame game has obscured the deeper, and much more disturbing, lessons that should be drawn from our current predicament. He writes:
In some ways, the boom-bust story is both more innocent and more disturbing than the standard explanations of blundering and wrongdoing. It does not excuse the financial excesses, policy mistakes, economic miscalculations, deceits, and crimes that contributed to the collapse. But it does provide a broader explanation and a context. People were conditioned by a quarter-century of good economic times to believe that we had moved into a new era of reliable economic growth. Homeowners, investors, bankers, and economists all suspended disbelief. Their heady assumptions fostered a get-rich-quick climate in which wishful thinking, exploitation, and illegality flourished. People took shortcuts and thought they would get away with them. In this sense, the story is more understandable and innocent than the standard tale of calculated greed and dishonesty.

But the story is also more disturbing in that it batters our faith that modern economics—whether of the Left or Right—can protect us against great instability and insecurity. The financial panic and subsequent Great Recession have demonstrated that the advances in economic management and financial understanding that supposedly protected us from violent business cycles—ruling out another Great Depression—were oversold, exposing us to larger economic reversals than we thought possible. It’s true that we’ve so far avoided another depression, but it was a close call, and the fact that all the standard weapons (low interest rates, huge government budget deficits) have already been deployed leaves open the disquieting question of what would happen if the economic system again lurched violently into reverse. The economic theorems and tools that we thought could forewarn and protect us are more primitive than we imagined. We have not traveled so far from the panic-prone economies of 1857, 1893, and 1907 as we supposed.
Finally, he notes that the simple pursuit of prosperity holds within itself the seeds of its own destruction. This is not to assert some simplistic Marxist belief in the "contradictions of capitalism" but to point out that prosperity is not, and cannot be, a permanent condition. Booms create busts.

There is much more to Samuelson's essay. It's worth reading in full. Check it out here.

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