Dafod.com – Tracking Stupidity Worldwide

As a former supposed student of economics, I wish I had learnt enough to take a stand on economic policy and this bailout. There was a time when I believed in the free market – not because markets are inherently smart but because governments are run by bureaucrats and they are people no smarter than others. So when bureaucrats meddle, the intervention can be assumed to be counterproductive – partly because bureaucrats are likely to be bumbling idiots and partly because there is room for corruption, kickbacks and misuse of power. So one would assume that free market capitalism is indeed the best option.

But not so fast. Participants in free markets are also human. They have frailties too – fear and greed. Markets are dictated as much by sentiment as by rationality. How can a company be worth $25 billion one day and $1 billion the next? There is nothing rational about it. You may argue that true free market capitalism separates fools from their money. But while there is some merit in that argument, rational intelligent people can still lose a ton of money because the market itself behaves in weird ways.

Perfect free markets with perfect information never exist, nor can they. External constraints like structures of organizations and the mesh that is human society make such markets impossible. And imperfect free markets that exist in the real world are significantly worse than perfect free markets so several theoretical advantages of free markets are lost in the real world.

In the end, perhaps free market capitalism is like a democratic form of government. It’s not the perfect solution but it’s better than any other solution we’ve come up with so far.