Economic Theory

There was a funny article in the International Herald Tribune today.   It was about how professional economists had missed the factors leading to the current economic crisis and are now engaged in handwringing about their relevance to the real world.  Oops.  It leads me to a consideration of naivete.  One popular theory in the Bush administration has been that the general public lacks an appreciation for the danger of Islamic extremists and thus the necessity for hard men to deal with them with extreme violence.  That is a theory I do not subscribe to.

I believe the naivete of many in the U.S. relates to a lack of recognition for how special, fragile and positive, a stable society with respect for the rule of law is.  Many of the US proponents of a "free market" and limited government seem to take for granted a baseline societal understanding on values and the limits of trading behavior that is by no means universally accepted elsewhere.  Is is legitimate to traffic in slaves, particularly in women and children?  Is it legitimate to push workers until they are injured or die and then cast them aside?  These are practical, rather than rhetorical questions, but Americans seem to assume a baseline where trafficking in humans or organs is not permitted.  That is only a construct of law and values, however, and if a US administration declares that it does not believe in universal human rights and that in the name of expediency it will detain and torture individuals without judicial review, then that is profoundly destructive.

What has confused economists and called into question their relevance, is the collapse of trust that has led to a seizure of the international credit markets.  But such trust underpins a complex, modern trading market.  And such trust depends on market and societal norms that must be respected by all.  New York law, which is the basis for my career and employment, assumes a covenant of "good faith and fair dealing" in all contractual relationships.  This is a far different ideal than that of a pure "buyer beware" construct.  It provides that market participants will not seek to defraud others.   Looking at the behavior of sub-prime lenders and of "mainstream" financial groups such as Citigroup, it seems they may fall far short of such a standard in practice.  Despite his fall from grace for his personal failings, Eliot Spitzer's attempts to give teeth to anti-fraud provisions of NY law seem well justified.