Tuesday, July 3, 2012

Read with Scepticism

If you're studying economics, one important aspect of your education will be to enable you to be discerning. It's particularly important I think in economics because the subject, especially at the macroeconomics level, is so infused with politics.

In my Google Reader, I have a blog called Liberal Conspiracy listed under politics and not economics, and this post about Tony Blair, not to mention this one about the supposed banking commission to be set up in the light of the Barclays fiasco, reveal precisely why.

On the Blair post, the writer criticises Blair for saying we should not “deny the financial sector a say in putting it [the financial system] right”.

The writer suffers from something many suffer from when they aren't students of economics, notably that of an over-confidence in their own ability and information.

How, exactly, does the reader know sufficient amounts about the financial sector such that he is able to tell what the right level of regulation is without even consulting those in the financial sector?

For example, why would it be so horrendous if we said to the financial sector "we plan on these regulations; what are the easy ways in which you would get around them?", in order to get some idea how good/bad any planned regulations might be?

Too many in government, and advising government, believe government has the kinds of information required to step in an regulate a market appropriately. This, generally, is not the case. Many economic studies, including some of my own, have established that information is disaggregated amongst market participants, those actually trading, buying and selling. To simply disregard all of this information is patently absurd and self-defeating - it just means the regulations that are set up will be totally ineffective at best, and harmful to the economy at worst.

And of course, this links us on to the second post, a supposed scoop on Andrew Tyrie, the Tory MP heading up the planned banking inquiry.  Shock, horror, he isn't a big fan of regulation, apparently. It's a bit of a "is the Pope really Catholic?" moment, really.

But moreover, the kinds of quotes in the article from Tyrie are actually simply questions that ought to be asked. We should not be willing to simply accept, as it seems the author of the post (Sunny Hundal) is, that regulation is always and everywhere a good thing. We should be inquisitive, asking why it is necessary and when. This is what economists do, and if as you read this, you're inclined to side with Sunny, and if you also so happen to be entering your second year next year at Birmingham, let me encourage you to take econ217.

In that module, we spend a lot of time looking at things like banking, the financial crisis, and more generally government intervention in markets. I hope to see some of you there!

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