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« An Impertinent Critique of Polk Wagner, A Better Man Than I | Main | Net(flix) Neutrality »

September 07, 2010


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Laurent Franckx

I found it interesting to read this review, just a few days after having posted a review of the book myself on my blog.
I think we both share the enthusiasm for the book and that we broadly agree on the general theme of the book. I also understand that we both find that Seabright remains quite vague in his description of possible solutions.
There is one point where I would beg to differ with you, and that's on the causes underlying the exploding deficits of the last few years (I am not talking about the structural causes, such as demography of course). The basic reason is a collapse of trust in the finance sector (which, of course, has followed a period of excessive trust). Two years ago, banks wouldn't lend to each other (note that the root of "credit" is the Latin "credere", "to believe") because they could not trust that the borrower's balance sheet was not filled with toxic assets such as subprime mortgages; this, in turn, resulted in banks not providing credit to the private sector, and thus not fuelling demand. In these circumstances, having the government stepping in to restore the trust that does no longer exist between private sector actors, is the only option that is left open. Of course, one still needs to be able to trust that the government will eventually reimburse his debts, but, again, this is an issue of long term sound fiscal management. It does not prove that the increase in budget deficits we have witnessed is bad policy.
Also, I think that your final point (that institutions develop by trial and error rather than by deliberate design) is perfectly consistent with the contents of the book (although, of course, this does not imply that there is no need for deliberate design at all, just that we should not underestimate the - positive and negative- power of trial and error processes).

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