The Bottom Line: Government shouldn't fix what isn't broken

In response to the current recession and its relative intensity when compared to those of recent decades, many have made the bold suggestion that we should do away completely with the current way of doings things. Many have proposed nationalizing the American banking industry and, recently, protesters at the G-20 Economic Summit have called for the end of capitalism. Such revolutionary actions would be unwise considering it has been innovation in the natural way of doing things that brought us to this crisis. If we chose to drastically alter our current economic system, we run the risk of inflicting even more drastic consequences unto ourselves.

When considering replacing our current system with a newer and purportedly better one, we must first realize that our current economic structure was not planned or forcibly implemented - it evolved slowly over time. Capitalism was not designed; it merely came to be as people followed their own natural incentives. The institutions of our economy were formed through the slow process of trial-and-error. As men experimented with different tools of allocating resources, and after many failures, the ones that were found to work survived and were passed down to us. The makeup of our economy continues to improve itself as newer methods are constantly being tried. Some fail. Those that succeed live on.

The fact that the free market is most efficient at allocating resources, yet does not rely on any grand planning, is a phenomenon which deserves nothing less than awe. Adam Smith first introduced the concept of the "invisible hand" to describe this spontaneous organization. Economist and Nobel Laureate F.A. Hayek discovered that society was far too complex for one person or entity to fully comprehend. Knowledge is dispersed in society among many economic actors, and it would be impossible for any single actor to manage it all. The ability of businessmen to freely set prices allowed the efficient organization of resources. This allowed the synchronization of knowledge and facilitated the voluntary organization of the market.

The problem, thus, for people who seek to redesign and change our current market structure is that not all factors can be accounted for by one planner. Since no single person or organization can comprehend all the inner workings of our society, any wide-scale changes can fail to achieve the intended end or bring with it unintended consequences.

When considering large-scale innovations as a cure for our current ailment, we must first realize that it was widespread changes that caused this crisis. When the Fed cut and held short-term interest rates down to 1 percent to deal with the 2001 recession, the easy credit was unintentionally funneled into the housing market. The passage and expansion of the Community Reinvestment Act was intended to expand home ownership to the underprivileged but unintentionally put mortgages in the hands of people who could not afford them. Finally, financial institutions started the practice of bundling securities into diverse packages to reduce risk. These assets were too complex to asses risk the traditional way since it is impossible for one man to have sufficient experience with them all. Instead of relying on experience and practical knowledge, they used untried complex mathematical formulae that did not represent reality.

The failure of all these mass innovations put us in this recession and bigger changes, such as nationalizing banks, will not get us out. If the assets of a single corporation became too complex for their own executives to understand, why should we trust a government official to understand all the inner workings of the entire financial system? Any solution which relies on the government to take control of a larger part of our economy is doomed to plague us with graver consequences.

The answer, then, is to let these poorly-constructed methods fail. We should then allow the people who are on the ground and can manage smaller bits of information better to start rebuilding, carrying with them the lesson of this mistake. The government should also learn from its past mistakes and work to preserve, rather than revolutionize, our market structure.