Written by Econintersect Guest
— this post authored by Keith Caldor
What could possibly go wrong with free markets?
The same as last time.
Why do we have so many asset bubbles? It’s Hayek’s fault, he didn’t learn anything from the Wall Street Crash.
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Finance and Free Markets
Free market beliefs were at a low ebb in the 1930s and there were just two bastions of free-market thinking left:
- The University of Chicago economics department
- The LSE
“Stocks have reached what looks like a permanently high plateau.”
— Irving Fisher 1929.
This 1920’s neoclassical economist who believed in free markets knew this was a stable equilibrium.
He became a laughing stock.
The pressure was really on in the US as their free-market thinkers had made complete fools of themselves. They really needed to get their finger out in the wind and find out where they had gone wrong.
They eventually worked out there were two factors at work, which had artificially inflated the market:
- Share buybacks
- The use of bank credit for margin lending.
Henry Simons was a founding member of the Chicago School of Economics, and he had worked out what was wrong with his beliefs in free markets in the 1930s. Banks can inflate asset prices with the money they create from bank loans.
Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money:
“Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”
They had worked out where they went wrong, but by this stage everyone else had moved on with the New Deal, and no one was particularly interested in their findings. They had missed the boat.
Hayek was at the LSE, and seems to have been totally oblivious to the Wall Street Crash, and it never even occurred to him that there might be something to learn from it. He just ploughed on as if nothing had happened. In the 1940s, Hayek put together his theories of the markets being a mechanism for transmitting the collective wisdom of market participants around the world through pricing.
It was never going to get into the mainstream until nearly everyone had forgotten what happened last time they believed in the markets, i.e. until the 1980s.
Unfortunately, Hayek won out and the lessons of 1929 were forgotten. You need to keep bank credit out of the markets – This was the lesson of the Wall Street Crash: The banking system and the markets become closely coupled so when asset prices collapse, so does the banking system.
Risky Research
The Chinese get the state to do that risky and costly, research and the development to keep them ahead. The US does the same, but just keeps quiet about it so it doesn’t spoil the narrative.
“The parts of the smart phone that make it smart – GPS, touch screens, the Internet – were advanced by the Defense Department. Tesla’s battery technologies and solar panels came out of a grant from the U.S. Department of Energy. Google’s search engine algorithm was boosted by a National Science Foundation innovation. Many innovative new drugs have come out of NIH research.!”
- The US state takes the risks, and pays all the costs of developing new technology, and then hands it to the private sector to take the profit.
- Europeans just fall behind in technology as they have legislation preventing state aid. The Europeans are taking the neoliberal ideology far too seriously.
Wise up.
Private companies don’t like taking the risks, and shelling out the costs, necessary to develop new technology, which may never have a successful commercial application; the state has to do it.
The Telegraph revealed that UK civil servants wrote most of the legislation preventing state aid. This is a lasting reminder of the UK’s EU membership, as they fall further and further behind in technology.
Caption graphic photo credit: From image by Greg Montani from Pixabay
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