Friday, February 13, 2009

Economics and history

There is a saying: those who do not learn from history are doomed to repeat it. Another maxim that is mostly true would be that we do not learn from history. The chief lesson that has failed to be learned, I would say, is that history is still important. People deceive themselves if they think otherwise, although they will often attempt to rationalize their deceptions with "it's different now." To quote that French philosopher: "plus ça change, plus c'est la même chose"—the more things change, the more they stay the same.


A classic example of this can be seen in the current economic situation. There is a close analogue that has happened in recent years, the Great Depression (of the 1930s). People may tire of this comparison, but it is still a very valid one nonetheless. Both have similar observable effects: there was a long increase in asset prices before the crisis, followed by a quick and severe financial crisis (involving, in part, a restoration of asset prices to normality) which quickly became an economic crisis.


People may reasonably disagree on the causes, but certain actions taken in the early years of the Great Depression had lasting consequences. Perhaps the most important action was the passage of the Smoot-Hawley Tariff, which set off a blitz of tariff retaliations that seized world trade. Economists (1028 of them, in fact) were against it then, and the Depression is proof of the dangers of protectionism. Yet the United States Congress is at it again, with the "Buy American" provision in the stimulus package that would be both difficult to enforce and the starting salvo in a round of retaliation.


Another key factor that history has told us is the price of government volatility of action. We have already seen the mighty effects of seemingly arbitrary actions: the financial markets quickly fell apart as a result of the U.S. Federal Reserve deciding not to bail out Lehman Brothers. Fortunately, it seems that arbitrary action has fallen out of favor in recent months, in favor of just helping everyone at once.


The final historical lesson I wish to point out is the danger of acting too quickly. Government legislation moves slowly in large part due to debate. To act quickly is to cut off debate, which would imply that the proposed bill in question is mostly correct. In that assumption lies a great deal of danger: it is the hastily-written bills passed with little debate that have the greatest propensity to become bad laws.

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