spontaneous processes

Merrill Lynch, the US investment bank and the largest brookerage in the World, reported today steep first quarter losses. Markets are falling and the dollar is approaching its all time low of 1.60 against the euro. Meanwhile, oil is posting new record highs (US$ 115 per barrel).

Some commentators have seen in the recent sub-prime financial crisis a failure of government intervention in the economy. Indeed, it can be argued that the FED created the conditions for the present situation by printing money far above the needs of a stable, healthy economy. However, it must be said too that it was private banks, not the FED, who lent that money to worthless borrowers and for a number of years made huge profits on such loans.

Blaming exclusively either the public sector or the private sector for the present state of affairs seems to me far off the mark. This is a situation where it takes two to dance the tango and the blame should be put on both.

Over the last few months I have had a contentious issue with Rui regarding the properties of spontaneous processes. Following Hayek, it seems to me that Rui believes far too much in the self-regulatory properties of spontaneous social processes, including that of the market. It was Hayek who coined the phrase spontaneous social order to describe the alleged harmony of social arrangements resulting from the operation of social processes free of government intervention. I must say, though, that he never showed to my satisfaction that such spontaneous processes lead to a social order, not to a social disorder. Thus, I consider Hayek's spontaneous social order an act of faith, not a demonstrable proposition.

Let me use an analogy. The human organism is also a spontaneous process. However, it would be difficult to argue that it always leads to an order. Oftentimes it leads to disorders, e.g., developing cancer. Now, should we believe in the self-correcting mechanisms of the human body to deal with cancer or should we call the doctor and eventually the surgeon? Hayek would adopt the first solution because, according to him, the intervention of the surgeon might do even worse than doing nothing at all. Indeed, in some cases it might be so.

The truth, though, is that people do call the doctor and occasionally the surgeon and I believe that they are perfectly rational in doing so. First, because it represents their last hope having lost faith on the self-correcting mechanism of their body (if it were that great it would not have developed cancer in the first place). Second, because experience has shown that by going to the doctor or the surgeon they end up, on average, much better off than they would be by relying on the self-correcting mechanisms of their bodies.