Tuesday, October 14, 2008
The Self-regulating Market - NOT!
Some economists are fond of the theory that a free market will be self-regulating. They cling to this theory in spite of evidence to the contrary. To me, the market operates in a manner similar to a control system with positive feedback. Such a system is unstable and causes the system under control to undergo violent swings.
The positive feedback in the market is the greed and panic of speculators. When the prices of shares are rising, the greedy buy to get in on the action. When share prices are falling, they sell and even sell short. Both of these actions destabilize the market and drive prices to a high extreme in one case and a low extreme in the other.
Even though the present Bush administration is populated with "free traders," the government has decided not to let the natural processes of the market play themselves out. This experiment was tried in 1929 with dire consequences. Not only did the great depression ensue, but the public lost confidence in the Republican Party for fifty years. So, unhappily, the administration is administering a dose of socialism into the banking industry in an effort to avoid a repetition of 1929.
The positive feedback in the market is the greed and panic of speculators. When the prices of shares are rising, the greedy buy to get in on the action. When share prices are falling, they sell and even sell short. Both of these actions destabilize the market and drive prices to a high extreme in one case and a low extreme in the other.
Even though the present Bush administration is populated with "free traders," the government has decided not to let the natural processes of the market play themselves out. This experiment was tried in 1929 with dire consequences. Not only did the great depression ensue, but the public lost confidence in the Republican Party for fifty years. So, unhappily, the administration is administering a dose of socialism into the banking industry in an effort to avoid a repetition of 1929.
