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Asymmetric markets are not “self-correcting”

May 9, 2013

Joe Stiglitz, via Vox: The lessons of the North Atlantic crisis for economic theory and policy

In analysing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last thirty years – as liberalisation policies became dominant – have given us a wealth of experience and mountains of data. If we look over a 150-year period, we have an even richer data set.

With a century and half of clear, detailed information on crisis after crisis, the burning question is not “How did this happen?” but ‘How did we ignore that long history, and think that we had solved the problems with the business cycle’? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.

Markets are not stable, efficient, or self-correcting

The big lesson that this crisis forcibly brought home – one we should have long known – is that economies are not necessarily efficient, stable or self-correcting.

There are two parts to this belated revelation:

  • One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous.

There are not only short run endogenous shocks; there are long run structural transformations and persistent shocks. The models that focused on exogenous shocks simply misled us – the majority of the really big shocks come from within the economy.

  • Secondly, economies are not self-correcting.


To add an asymmetric point on the question of “endogenous” and “exogenous.” If nature, including the economy, is fundamentally asymmetric, then it is interconnected is such a way as to make perfectly exogenous shocks impossible. But borderlines can and should be drawn to define circumstances and cases arising in models within the economy, within nature. But nothing can be totally outside the asymmetric economy. This endogeny, as described in Unicycle, provides a foundation to deduce a progressive ethics of the market, as well as more generally.

It is predictable that the political orientation of believers in a self-righting market would be temperamentally against endogeny and prefer to emphasize “outside” shocks to the economy that would supposedly upset its closed perfection, as though there are perfect circles in reality. The illusion is to think we can step outside the market (try fasting); if we want to help the market, we must do something positive about it.

Heraclitus, according to Plato, famously said something like: we can’t step in the same river twice; he might have added something like: nor can we step out of the “river of asymmetry,” where all our actions together include the bustling marketplace, day after day.

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