Thursday, May 14, 2009

The meaning of economic crisis and free market economies

Part of the discussion about the current economic crisis ,is still based on upon who to blame for it. But the important issue goes beyond the one to keep accountable, it deals with the nature of free markets economies. Some Classical economists ,used to blame the capitalist accumulation behavior as a key source for business fluctuations and economic crisis, as long as it was based on credit expansion and its implications for higher interest rates. This has been known as the Austrian economic school of thought .On the other side, Keynes blamed the firm behavior which was production – instead of inventory driven. Thus, as soon as the market demand fell below expectations, firms were afraid to get higher than desired inventories ,therefore they decided to decrease production and unemployment increased.
The differences between both approaches, were in the implications. While in the first approach, crisis meant capitalism collapse and its substitution by a different economic model, in the second approach, government was called to save capitalism throughout active intervention in the economy ,using fiscal policy. It is obvious that in both cases ,the result is far from controversy. In fact ,it has been the controversy of more than a century.
What about the facts?: Private decisions deal with risk, which means uncertainty with a reasonable probability of control. In other words, it is in the roots of private firms and market economy ,the chance of failure .Individuals have within their DNA, even since fecundation , the seed for risky behavior .We learn either to walk, or to speak taking risks. There is no other way to understand human kind progress, without a comprehensive approach about risky decisions made by humans. The problem is that we usually do no count that much the number of success, as we do with the numbers of failures . Just to give a current example, the robot machine actually trapped in Mars ,is part of the risk of getting a better knowledge about that planet , the same way as it was the tragedy of the Challenger. But above all, every step backward ignite a stronger step forward. The free market economy is not different from that pattern.-
Markets seeks risk as the natural path for efficiency. The risk level, is a filter for a better (the best)use of scarce resources. Of course, it should be important to have a limit for those risk which becomes systemic ones , like those connected to the financial sector. However, no matter that limit, and technology progress free market economy, will always stay on the edge of risky options .
Thus, the policy option it is not to avoid risk, throughout heavy regulation ,but to prevent its consequences before it get beyond the maximum tolerance level. Institutions, become relevant to deal with the range of that tolerance as well, and proper policy instrument complement them.
So, who is to blame for the current crisis?. The blame for this crisis is also accountable for the greatest success of human kind. We all should learn there is no way that within a freedom framework, we can avoid the risk of failure. But that risk is worthy ,if we still can count on the second chance to fix it. Thus freedom justify itself , just because it mean an additional opportunity to try what it make the difference between wealth and poverty, between right and wrong.-