Economists long insisted that the heroic stakes were framed around Market Competition versus State Planning, with Competition clearly winner of the palm. Who needs Illiquid Government when you have Liquid Markets?
Odd then that economists began to agree that the maintenance of the storied perfect competition (all price takers and constant returns to scale) would have undermined entrepreneurial capitalism as actually practiced. Odd that one winner of always-late capitalism would not have been possible without imperfect competition (some price makers and increasing returns to scale) and an important role for—guess what?—government policies to foster technological change. Odd that, after all those storylines about the rising tide of market liberalization lifting all ships, it turns out that liberalized capital markets continued to be associated with rougher seas of financial instability.
Even odder is that implacable criticism economists levelled against price-setting by planners who couldn’t possibly process all that complexity when everyone knows that price discovery through markets does so much better. In the aftermath of 2008, however, economists told us that even core market mechanisms like auctions—Léon Walras must be turning in his grave!—can’t work because of the sheer complexity of the instruments of financial economists to be auctioned—which meant the defamed planners had to get involved anyway. Odd that economists also told us we needed dark pools and out-of-sight markets because price discovery, rather than being the raison d’être of markets, is merely a public benefit that markets may, but need not, provide.
To be fair, markets manage some risks better than government, but only those risks and certainly not the uncertainties that can come with their managing those risks through markets. The management of the latter has been placed in the hands of government and regulators.
There’s probably no part of the economic stories told us that even an eye-dropper’s worth of realism wouldn’t have improved.