Saturday, June 28, 2008

The economy is like a rainforest

The news always speaks of "the economy" as though it was one homogeneous whole. In fact, it's a host of micro-economies, financial equivalents of ecological niches.

In the rainforest, there are places that are light or dark, hot or cool, high or low, wet or dry. In the economy, there are savers, borrowers, amateur and professional investors, crooks, marks, young bold, cautious old, workers, shirkers and berserkers.

So centralised economic policy is enormously difficult. An intervention that helps one part, may hurt another, and further action is implied. It's like the tablets for hypertension that give you gout, which means you need tablets for the gout, which are likely to harm the lining of your stomach. Some might say, throw the lot away and have a glass of sherry before bedtime.

Or, in rainforest terms, let each species find its niche and organise its own survival strategies.

But I don't think this is an argument for complete liberal laissez-faire. To extend the analogy, maybe it's better to prevent harm than to seek to do good; the forest guardians need to control the rubber and banana companies, the clear-cutting loggers and polluting miners.


Lord James Bigglesworth said...

The FOMC and its interconnections seem pretty centralized to me, Sackers.


Perhaps they come under one of the categories in the last sentence.


... but let's take your, and my, point further. For example, why is there only one interest rate? If money loaned to business is more economically productive than mortgages on residential property, why not a lower interest rate on the former so that after the bank's risk premium, it's as cheap to borrow to expand your business as to speculate on housing?

The tax system has long been tweaked to encourage particular activities; why not the moneylending side, also?

Lord James Bigglesworth said...

I have been asking this for a long time about corporate tax. It seems clearly designed to penalize the risk taker.