Thursday, February 11, 2010

Against the New Consensus

For what it is worth, here is Wladimir's and my response to the new consensus: "A Silver Lining to the Financial Crisis: A More Realistic Understanding of Capitalism." In it, we move from a rebuttal of the Corporate Compensation Myth to an explanation of the homogenizing effect of capital regulations that privileged Fannie, Freddie, or AAA/AA-rated private-issue mortgage-backed securities; and we contrast regulatory homogenization against the normal situation in markets, namely competition among businesses with heterogeneous interpretations of what they should do to make profits and avoid losses. That heterogeneity, we maintain, is the chief justification of capitalism, and the best insurance against systemic risk.


wondering said...

Has anybody elese except Armen Alchian said that regulations cause systemic risk?

Anonymous said...

Alchian didn't say that the way I remember Alchian. He said capitalism doesn't need self-interest. It just needs competition between heterogeneous firms. He compared it to evolutionary competition among genetically diverse biological organisms. Friedman & Kraus notice that the opposite of heterogeneous firms is homogeneous regulation.