Opinion Nuggets: Slapping down the Invisible Hand

Krugman... The guy has a name like an 80's high school villain. The guy who pushes the bike-riding protagonist off the road and into a ravine while speeding by in the convertible. (I'm envisioning the Goonies, but most 80's movies featured their very own resident jackass, so take your pick.) It’s hard to believe sometimes that the bearded, tweed-clad weirdo is a Nobel Laureate. Take this little gem from today’s column, for example:

…[T]he financialization of America wasn’t dictated by the invisible hand of the market. What caused the financial industry to grow much faster than the rest of the economy starting around 1980 was a series of deliberate policy choices, in particular a process of deregulation that continued right up to the eve of the 2008 crisis.

If you’re not banging your head against the wall, you’re not paying attention. The “invisible hand,” Adam Smith’s eloquent elucidation of the omnipresence of market forces, describes the natural forces at work in the economy. These forces can be diverted or dammed by non-market forces like regulation. Yet the removal of regulation has the precise effect of showing the direction and magnitude with which the invisible hand pushes the markets. In other words, the “financialization of America” was absolutely and necessarily dictated by the invisible hand, not—as Krugman obtusely suggests—by deregulation.

More astonishing, however, is that Krugman acknowledges that “a series of deliberate policy choices, in particular a process of deregulation” was what “caused the financial industry to grow much faster than the rest of the economy starting around 1980.” And yet Krugman’s conclusion, remarkably, is that regulation is the answer to our economic woes. Indeed, in addition to showing greater growth up until 2008, the financial sector has rebounded more briskly than the rest of the economy as well (and not as a result of bailouts—there were plenty of fiscally solvent institutions to take up market share had some of the big banks collapsed). Wages are higher. Productivity is higher. The industry employs a veritable legion of well-paid and well-trained high-performers in bespoke suits. While we can quibble about how they’re all kind of assholes in their personal lives (though my experience has been that they are not), from a macroeconomic sense, there is absolutely nothing to not like about a lightly regulated financial sector.

The drumbeat of anti-capitalism drowns out the low hum of cognitive dissonance for the readers of the Times. Krugman knows that these arguments are downright silly, but he has long since sold out his credibility to rank populism.