Neither Efficient nor Neutral, Ice Madness, The Horror The Horror, Get People Working, Home Drowning, Graphically Speaking

Although we speak about a ‘global’ equity market, the truth is that all markets are not created equal; each national market operates in cultural and political contexts that have a defining impact, and although structural and cyclical economic forces vie with each other for dominance, they often are irrelevant to big market outcomes.

It is a myth to think of globalisation as purely an economic process; in fact ultimately globalisation is defined more by political and cultural forces.

This analysis is beyond the approach of most economists and strategists because they believe in the efficiency and cultural neutrality of markets.

One of the sad things about this dangerous blindness in contemporary economics is that the founder of economics Adam Smith gave the discipline all it needed to incorporate politics and culture into its analysis of how economies actually worked, as my son would say, ‘like, in real life’.

A deeply conservative Adam Smith has become a front piece for the unfettered virtues of the market as a long-deceased spokesperson – and therefore unable to quarrel with how his ideas have been misused – an ancient oracle for simple free market and profit-based slogans like the ‘market is always right and can self-regulate’.

Yet, Smith, as noble laureate and Duke University economist Amartya Sen has argued (ed’s note: starts at 6.20), has a balanced thesis for supporting society with multiple institutions in which the market was a necessary but not sufficient condition for success.

In Smith’s analysis those other non-market institutions play a vital role in creating the conditions for best in class social and economic outcomes.

Among those institutions is the rule of law, public education and health, economic support for the poor, and market regulation to protect the public, and the better run companies.

In Smith’s words, paraphrased for a 21st century audience, “the economy has two functions, first to give citizens the chance to become wealthy enough to take care of themselves, and second, to supply the state with sufficient revenue for public services.”

Smith argued that the combination of these things was vital to a successful society, as I like to put it, that ‘a strong economy and social justice are two sides of the same coin’.

And paraphrasing Sen, ‘Smith’s vital contribution to economics is that a society in balance will make room for the positive contributions of capitalism through market processes but also was acutely aware of the dangerous limitations of relying only on the market economy’.

Unfettered markets tend towards monopoly and worst, not best, practices requiring the state to get in the way for the good of society and the market.

The story of the unregulated mortgage market in the United States and its terrible legacy is a case in point.

The flip side to this of course is that solely state driven economies are also doomed to fail which is why Adam Smith was an advocate of free trade because of the tremendous benefit of specialization and its impact on productivity, Portugal’s wine and England’s cloth.

When Smith wrote his two important books The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776) in the mid-18th century commerce was suffocated by the state, taxation was often without representation, and barriers to trade prevented anyone accept those in favour with the ruling political elite to prosper.

In those days the state’s role was more to dole out favours than deliver best in class public services, a little like modern day Greece.

Smith’s genius was that he saw the totality of the market, the role of economics, politics, and culture.

I suggest we should too.

Articles on Iceland, Ireland, job talk and negative equity in the US residential market, and Edward Tufte, the data-design guru.

How Iceland fell into financial madness and economic catastrophe, and how they are working themselves out of it.

New York Times – Iceland’s Big Thaw
If you want to understand what happened in Iceland — the whole story of the crash, the banks failing, the recent signs of recovery — start at the prime minister’s office in downtown Reykjavik and continue east for a bit until you ascend a steep bluff overlooking the icy waters of Faxafloi Bay.

John Mauldin on the terrible choices facing Europe, and the problem with Ireland.

Pdf below -- Kicking the Can to the End of the Road

Related.

Irish Times -- Ireland's future depends on breaking free from bailout
WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.

Paul Krugman argues that whatever the rest of the world needs to worry about, in the United States, it is job creation.

New York Times -- Inflation and Economic Hooliganism
In a way, I miss the months that followed Lehman’s failure. O.K., not really — but if it was a time of terror, it was also a time of clarity.

Negative equity in the US home market.

Financial Times – US Homeowners: Brick and Water
Just as a broken clock is right twice a day, sooner or later the refrain heard from various quarters since 2007 that the US housing market is near a bottom will be correct.

 

How Edward Tufte turns numbers into graphics and changes how we think about the world.

Washington Monthly – The Information Sage
One day in the spring of 2009, Edward Tufte, the statistician and graphic design theorist, took the train from his home in Cheshire, Connecticut, to Washington, D.C., for a meeting with a few members of the Obama administration.

 

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