Bringing together (relatively) disparate strands…

Tyler Cowen in today’s NYT (”It’s Hard to Thaw a Frozen Market”):

To understand the depths of the current crisis, let’s go back to an apparently unrelated episode in economic thought: the socialist calculation debate. Starting in the 1920s, Ludwig von Mises, the leader of the so-called Austrian School of Economics, charged that socialism was unable to engage in rational economic calculation. Without market prices, he reasoned, no one knows how much economic resources are worth.

The subsequent poor performance of planned economies bore out his point. For instance, the Soviet Union did a poor job of producing consumer goods and developing innovative industries. In the absence of well-functioning markets for capital goods, these mistakes festered, rather than being rectified by the independent judgments of individual entrepreneurs.

The irony is that the supercharged capital markets of the American economy are now — at least temporarily — in a somewhat comparable position. Starting in August, many asset markets lost their liquidity, as trading in many kinds of junk bonds, mortgage-backed securities and auction-rate securities has virtually vanished.

Market prices have been drained of their informational value and thus don’t much reflect the “wisdom of crowds,” as they would under normal circumstances. Investors are instead flocking to the safest of assets, like Treasury bills.

Now, Ernesto Zedillo on “Latin Blues” (Forbes, Current Events, March 27, 2006):

However, populist politicians — if elected at all and if they’ve learned anything from history — are unlikely to throw the baby out with the bathwater. They know by now that the financial markets’ tolerance of inconsistent policies has worn thin. Market reactions to foolish policies, which used to take months or even years to unravel, now erupt in a matter of days, if not hours, making evident in fairly short order their ominous consequences on GDP growth, employment and inflation.

And Zedillo again (”Globalization gets a presidential push: Mexico’s former head of state, Ernesto Zedillo, is fashioning a post-presidential career as an advocate for globalization, international development and social justice”, John Barham, LatinFinance, Nov. 1, 2001):

[Zedillo] says that “globophobes,” however well-intentioned, are both wrong and dangerous. Globaization, he warns, “is not an irreversible process. Governments and politicians can still resort to new forms of protectionism to roll back existing liberalization.” He worries that politicians in the western democracies may cave in to a pernicious “political correctness” that blames globalization for all the evils of the world.

And Zedillo one last time in his commencement address to Harvard on June 5, 2003:

Could international cooperation coexist with aggressive unipolarity? Hardly, if at all. A useful multilateral system depends on negotiations, compromises, and agreements. None of these can be cultivated in a soil of acrimony and resentment. From this soil spring the weeds of antagonism, envy, and fear — weeds that may crowd out the inclusive globalization and constructive interdependence that are needed more today than ever.

Inclusive globalization is needed, not only by the weak of the world but also by the strong; not only to defeat economic and social polarization but also to alleviate the old and new resentments that threaten the security and stability of our world. Constructive interdependence [emphasis added] is needed, not only to share better the benefits of prosperity but also to achieve better mutual understanding — and, eventually, irreversible mutual respect and tolerance. Interdependence is not always free of transitional tensions. But embracing interdependence is the only way to achieve a truly international regime of toleration — that is, of the peaceful coexistence of people with different histories, cultures, and identities. I believe it is only through the deliberate building of this interdependence, practical step by practical step, that we can achieve a more prosperous world with lasting security — a world in which the poor and excluded are released from misery and the privileged are released from fear.

In 1945, the United States saw the wisdom of building an inclusive world order in which every country could have a voice. True, since then much has changed, but much abides. True, the United States now enjoys unprecedented strength, but so it did in 1945. True, we face appalling new dangers today in the form of terrorism. But, in a deeper sense, terrorism feeds on the same forces that General Marshall fought with his plan for rebuilding Europe: the eternal enemies of “hunger, poverty, desperation, and chaos.”

To defeat terror, and to defend democracy and freedom, humanity and its leaders must prevail against those eternal enemies. This can only be done by working together through the multilateral system that, I repeat, was built under the impulse of the United States.

I submit that it is time to stop bashing the multilateral institutions. They are no better or worse than what the major powers put into them, in leadership, skillful bilateral diplomacy, and resources. The right way is not to undermine these institutions but, where needed, to reform them so that they can better serve the good causes of human rights, security, peace, and prosperity.

Now, two questions:

1. Has anyone done a comprehensive study on how state policies and regulations form the substrate for the effective operation of markets? (My guess on this one is: yes, probably.)
   
2. Has anyone done a comprehensive study of how advances in information technology have contributed to information efficiency and sped the operations of market forces? (My guess is: maybe?)