With the release of the movie The Big Short along with Akerlof and Shiller’s new book, Phishing for Phools on behavior economics, I am reminded of the optimistic teachings of Milton and Rose Friedman. They were Adam Smithian economists from the 80’s and 90’s that wrote definitive works on the positive aspects of capitalism. If the Friedmans could see what became of their coveted Invisible Hand they would probably throw their hands up in disgust and frustration.
The movie shows the ugly side of capitalism; how overzealous and arguably well-meaning (at the time) brokers tried to enable the common man to fulfill the American Dream, while still making a quick buck for themselves. This is the very definition of Adam Smith’s interpretation of capitalism, just the flip side of the coin- call it the Invisible Back-Hand. As we all saw, and most experienced, when you combine an emotional desire such as owning a home and growing your family, with predatory financing and securitization of America’s debt, you end up with a house of cards that even a toddler would be able to tell you is unsustainable. The Big Short is an excellent narrative of the events leading to the recession of 2008; the how, who, what, when, and where are a matter of history, but the why is what Akerlof and Shiller successfully communicated in Phishing for Phools, saying that all free market activity inevitably will have participants whose role is to prey on those less familiar and looking for a better life. Adam Smith and the Friedmans were correct when they said that economic freedom is important to a sound economy; what they didn’t see was its effects on mass media and access to credit that didn’t exist in their respective eras (at least not like today).
The crash of 2007 was built on a foundation of deceit by the people who knew better but didn’t care, to the mortgage holders just looking to raise a family and be left alone. Phishing for Phools shows how the Invisible Back-Hand will smack you if you aren’t paying attention. Anyone who has bought a car from a dealership, gambled, gotten a credit card without providing income information, or gotten an email offering sweepstakes winnings, knows that sinking feeling of being taken advantage of without being able to communicate exactly how.
The Friedmans were right in saying that the government needs a limited role in capitalism for it to thrive. “Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion (Friedman et. al, Free to Choose. Pg 2. 1980).” This statement is incomplete as it applies to the markets of today. True, the perfect economy exists free of political interference, but somebody has to keep the inevitable Ponzi schemes and out-of-control lending in check. The government has to provide for the social good, for its citizens but you can’t help those who won’t help themselves. We scream for laissez-faire economic policy but the depression of 1929 proved that is as unhealthy for the economy as heavy government regulation. We need to stop looking at the government to solve our problems. The recession of 2008 should be an alarming example of how citizens need to educate themselves when dealing with sleazy salesmen giving them a deal that’s too good to be true. We all want a smaller government then demand that they do something about our problems; we can’t have it both ways. As long as we keep looking to mom and dad to pay off our credit card bills, we’ll never be able to stand on our own two feet. We demand the government does something then we’re shocked when they end up being just as corrupt and self-serving as the people who got us into this mess in the first place.
In today’s world of predatory financing, we need to believe nothing of what we hear and only half of what we see. We’re sold cigarettes then die of lung cancer, we’re sold automobiles we can’t afford, given mortgages we can’t sustain, and are told that we can be fulfilled in life by living like the Kardashians. Then all of that debt is packaged nicely into a security and tied to your pensions and 401ks. The only way out of a bad situation is to ensure we don’t get ourselves into one in the first place. The sleazy salesmen of the world exist because there’s a market for them to succeed, governments are in bed with the banks because it serves their interests. We need to wake up and smell the bullshit.
Thank you for your time.