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Ignorance and Markets

This is an unsigned editorial from the January 2009 issue of Philosophy (vol. 84, no. 327). Submitted for comment, without much commentary from my end. (Yet.)

Editorial: Ignorance and Markets

It may not be true that no one predicted the recent crash in the financial world. But it is certainly true that most well-informed observers and participants, including most importantly those who believed they were actually running things, were caught unawares. If they had been aware, they would have been able to avoid the worst consequences, at least for themselves, and even profit from the situation.

The 2008 financial crash has been compared to the fall of the Berlin Wall, in that just as the one signalled the end of an uncritical belief in socialism, at least of a centralised sort, the other signals the end to an uncritical belief in markets.

Let us leave aside the point that the markets of 2008 were actually heavily regulated in all sorts of ways, and so hardly unfettered. There is in fact an interesting parallel between 1989 and 2008 in one significant respect. Both events were largely unforeseen.

In one sense this is encouraging. For all our knowledge and technology there is much, even in human affairs, which is unpredictable and uncontrollable. This is, in a sense, judgment on hubris. It can also be liberating, particularly for those who do not see themselves as masters of the universe.

But should 2008 be seen as a decisive moment as far as belief in markets is concerned? Much will depend on what is meant by a market, no easy question when, as already mentioned, no markets to-day are unfettered, and are not likely to be in the foreseeable future.

We should, though, not forget that for followers of Adam Smith, such as Hayek, one of the main philosophical arguments in favour of markets was precisely the unpredictability of human action and of events more generally. From this perspective markets are not seen as perfect predictors, which there cannot be. But in situations of uncertainty they are seen as the most efficient and least hazardous way of disseminating information in a society and of responding to what cannot be predicted. It would be somewhat paradoxical if a failure of prediction was in itself taken to be an argument against a system which takes unpredictability as its starting point.

— Philosophy 84 (2009), 1. Cambridge University Press.

Thoughts?

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  1. Gary Chartier

    Interesting. I appreciate the emphasis on the inescapability of uncertainty. But it does seem to me that lots of people do seem to have predicted something like the crash. The author is doubtless right that “those who believed they were actually running things” didn’t—perhaps because they were over-confident in their own managerial powers, perhaps because they were in the grip of bad economic theory, etc. So much the worse for the enterprise of “running things.”

    • Rad Geek

      Hey Gary,

      I definitely agree that the Nobody saw this coming! bit wears a little thin. (It feels a lot like the How did we all [sic] get it so wrong? hand-wringing from politicos and media liars about Saddam Hussein’s nonexistant weapons and the occupation catastrophe. Well. Some of us didn’t.)

      I guess that the author might get some leverage by making a distinction between knowing that something was coming and knowing when it was coming, or knowing what exactly it would be. (Folks who were most emphatic about the looming catastrophe were generally folks who don’t believe in making quantitative predictions about economic outcomes.)

      I definitely agree with you that the enterprise of running things is part of the problem, and that those who do the running were particularly ignorant — perhaps wilfully ignorant — about the crash. Overconfidence and bad economic theories are part of the story, but I would also want to emphasize some basic knowledge problems that come with their position — the ways in which they are necessarily overwhelmed by the complexity of the business they claim to be in control of, and cut off from the information they’d need to gain the needed understanding. Hence the need for more local knowledge, more horizontal arrangements, more worker control, more individual-level entrepreneurship and trade rather than internalized costs and bureaucratic allocation, and so on.

      (And of course we would expect to see more of that, ceteris paribus, if the State weren’t spending money on structuring markets in the bureau-corps’ favor, bailing them out when they fail, subsidizing scale, inflicting tax penalties on external transactions, etc. etc.)

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