Lately, I’ve been thinking a lot like Bryan Caplan on the financial crisis. The link goes to a short entry where Caplan has the following to say about the Crash of 2008 (is that what we’re calling it now?):
Once in a century, a once-in-a-century mistake happens. The end.
Which kind of reminds me of Mrs. Webber – my two-time history teacher in high school. Turning history into a soap opera was her schtick, she was good at it, and I learned a lot – but of course if you’re turning history into a soap opera you’re tending to overly dramatic, simplistic interpretations. And one of her favorite refrains was how there has been economic turmoil every 50 years like clockwork, so our generation would see a Great Depression.
I have no idea whether she got her facts right. I’m CERTAIN she got the “like clockwork” bit wrong: there was no Great Crash in 1979, though we did have some inflationary problems. But if I extrapolate her warnings and recast them into a more sober, plausible claim, what I come up with is this: “the economy,” broadly defined, is hugely complex. NO ONE understands all of its darker corners, and ALMOST no one even understands its daily transactions all that well. While we can make some broad predictions about it with reasonable accuracy, for all practical purposes on the micro level it’s a Random Walk.
Think of it like a giant slot machine, only instead of three of those spinners you have hudnreds, each of which is mildly dependent on the others. Given a long enough time horizon, someone is eventually going to spin all lemons.
When Mrs. Webber was telling us about this, she had one of those circa 1970s “eerie facts” in mind – the kind that’s supposed to inspire in you a sense of awe and wonder at the universe, convince you that there “are more things in Heaven and Earth, Horatio…” Either that, or suggest some kind of shadowy conspiracy behind the engines of growth. Which, to be fair, might have been a teaching tool more than a personal belief – and is certainly an effective tool for high school students! But the reality is that even without the awe or the shadows, it just seems mathematically plausible to me that when you have a Great Machine whose workings you don’t fully understand and whose output you can’t really predict, but which you know is a harmonic system of some kind, it eventually happens that it gets randomly really far out of whack and has to engage in a bigger-than-normal correction. There’s an earthquake in Tokyo every day, you know – but the last doozy was in the 1920s.
So I wonder if Arnold Kling doesn’t have the right remedy.
The overarching principle I have is that we should try to make the financial system easy to fix. The more you try to make it harder to break, the more recklessly people will behave.
Agreed. You can’t guarantee the performance of a machine you don’t understand. What you CAN do is accumulate an arsenal of fixes that seem to work and stock up on supplies in the event of a breakdown.