If you believe in bubbles, then why are you a libertarian?
By Scott Sumner
I’m not sure this will convince anyone, but I’ll try anyway. As you may have gathered from my previous post, I don’t believe in bubbles. In addition, I’m a libertarian. I see those two facts as being related. If asset markets are efficient, then the case for government intervention is weaker (although of course there may be other grounds, such as external costs like pollution.)
Here’s what I don’t understand. I often talk to libertarians who seem to see bubbles all over the place. But this implies that markets are not pricing assets at the proper level. Often this will be attributed to outside factors such as monetary policy. It would be like excusing inefficiency in soybean pricing by pointing to the fact that it was windy and rainy last week. An efficient market should price assets at the proper level, given the stance of monetary policy, as well as the expected future stance. If asset prices are obviously too high, and likely to fall after the bubble bursts, then markets are not efficient.
If markets are not efficient when monetary policy is off course, there is absolutely no reason to assume that monetary policy would be efficient when monetary policy is not off course. Inefficiency results from irrational pricing, it’s either a problem or it isn’t. People don’t become irrational just because the fed funds rate is set at 2% rather than 3%. Either markets are irrational or they aren’t.
If they are irrational, then the case for government intervention is much stronger. Of course government intervention is also prone to errors, so market inefficiency doesn’t automatically make intervention desirable, but certainly the case for it is stronger.
I wonder if libertarians who advocate bubble theories understand that they are at least marginally weakening the case for libertarianism?
PS. I very much like jc’s comment, after my previous post:
Markets are complex adaptive systems. As Dan Dennett notes, “evolution is smarter than you”.
(Always struck me as interesting, btw, how my progressive friends love to belittle conservatives who deny evolution – from single cell organisms to monkeys to humans – when they quite literally hate most modern applications of evolutionary thought, e.g., evolved preferences, human natures, complex adaptive systems that defy centralized mandates, etc.)
Soon I’ll try to do a post showing that liberals who claim Chinese exports raise the unemployment rate in America, are actually (implicitly) defending conservative arguments that structural problem and “reallocation”, not deficient demand, explain the high unemployment after 2008.