Krugman and the Big Zero

Paul Krugman casts a jaundiced eye back over the last decade in his NYT column.

So let’s bid a not at all fond farewell to the Big Zero — the decade in which we achieved nothing and learned nothing. Will the next decade be better? Stay tuned. Oh, and happy New Year.

Personally, I learned a lot this past decade, though not much that had to do with the economy. Economically speaking, my family has had a rough decade, and certainly grad school, non-profit service, a hiatus in hospital, and post-docs all contributed to the threadbare look to the wallet beyond the recent general economic implosion. So I don’t think my particular experience speaks to much of the rest of the population, but I do get the sense that many others have had their own problems.

But Krugman’s general point, it seems to me, remains solid: when it comes to how we deal with economic policy, it seems that we have entirely too much forgetfulness of the lessons of the past. While popular economic lore holds that a free market will automatically optimize everything, most overlook that the assumptions underlying that theoretical ideal include the one that all agents are acting rationally, and we know that real economic agents often act for all sorts of non-rational motivations, greed ranking high among them. There is a role for regulation, and it consists in ensuring that the non-rational impulses of particular economic agents are curbed and the rational ones encouraged. We accept today that regulations for fire safety, for example, are reasonable, yet these obviously restrict the free market, where nightclubs could squeeze in a few dozen more people if only the pesky fire marshal weren’t so concerned about the ability of the sardine-like mass of partiers to exit safely in case of fire. We accept that our food manufacturers should include more actual grain and less actual rat poo, and trust regulation to make it so. We even pay some amount of lip service to the notion that monopolies are somehow bad and competition is good, though a century passing since the monopoly-busting days of Teddy Roosevelt seems to have relaxed our concern somewhat. We should be taking the point from the two worst economic downturns of the past century that banking and stock trading still requires genuine oversight to reach stability in our economy.