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Mr.Chang is the author of the 23 Things They Don’t Tell You About Capitalism. It is a accessible book on Economics and economic theory that really, everyone should read. This brief twenty minute talk on understanding Economics is both necessary and enlightening.
As I am often told by my free market indoctrinated friends the market will solve societies problems, if….(insert the big whingy diatribe about government interfering here) it was just left to its own devices.
A sample of the pap I usually hear, coherently summarized by Mr.Chang and his book I happen to be reading right now.
“We should leave markets alone, because, essentially, market participants know what they are doing – that is, they are rational. Since individuals (and firms as collections of individuals who share the same interests) have their own best interests in mind and since they know their circumstances best, attempts by outsiders, especially the governement, to restrict freedom of their actions can only produce inferior results. It is presumptuous of any government to prevent market agents from doing things they find profitable or force them to to do things they do not want to do, when it possesses inferior information.
What they don’t tell you…
People do not necessarily know what they are doing, because our ability to comprehend even matters that concern us directly is limited – or, in the jargon, we have “bounded rationality”. The world is very complex and our ability to deal with it is severely limited. Therefore, we need to, and usually do, deliberately restrict our freedom of choice in order to reduce the complexity of the problems we face. Often, government regulation works, especially in complex areas like the modern financial market, not becaues the government has superior knowledge but because it restricts choices and thus the complexity of the problems at hand, thereby reducing the possibility that things may go wrong.”
-Excerpt from 23 Things they don’t tell you about Capitalism – Ha – Joon Chang. pp. 168-169
People always seem to forget that the rational self maximizing actors they talk about in economics text books are merely theoretical constructions and do not figure prominently in the real world. We are neither rational nor do we have complete information when it comes to making economic decisions. Therefore, as Mr. Chang implies government regulation can be a good, even helpful thing, when it comes to market conditions.
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