So, about this free market thing...

[Floppit]

I distinctly remember a discussion regarding whether the academic consensus on virtues of 'Free Market Economics' could be even remotely compared to the consensus regarding evolution as the origin of the species.

Due to my new found addiction to radio 4 (partly enforced by Munchkin's demands on me to sit still with my hands full!!), I've had chance to listen in to much discussion regarding the causes of the current banking meltdown. Phrases like 'Free Market Fundamentalism' and 'lack of market regulation' repeatedly seem to be used by many a well qualified source in explaining how things went 'orribly wrong.

So, about this free market thing, does anyone out there still consider it as the only sane and sensible way forward?

I need proper references to spout my own view, which takes more time than I have - but for what it's worth you may guess I'm not, and never have been convinced that the free market model is globally the best, I think it all depends where it's applied.

[lazerustheduck]

The freemarket isn't a good system, it's barely a system at all. But it's the only thing that people will tollerate, the rich amass more than they need and the poor aspire to be the rich it's a top heavy tower and it falls on regular occasions, but people are too busy trying to build it up again to see if they can get a little higher in the pecking order no one stops to actually plan how to make the tower stable.

[Mulder]

The free market is a bit like democracy - it's not perfect but the alternatives (which have been tried) are even worse.

[brodski]

The free market is a bit like democracy - it's not perfect but the alternatives (which have been tried) are even worse.

That depends on how one defines both the free market and democracy.

All modern western societies have deemed in necessary to curb the excesses of both, indeed in their pure forms they would be incompatible with each other.

[Floppit]

...but the alternatives (which have been tried) are even worse.
Would you include the NHS and welfare provision as an alternative to the free market?

I think of the whole subject in grey terms rather than state control versus absolute market freedom, the latter of which I would also see as being at odds with democracy.

[Tim the Mage]

Floppit did ask for references and evidence...prescious little of that so far.

If you have time and willpower start at the beginning and read Adam Smith's "...Wealth of Nations" - it's still valid today and the the core of his argument has been tested to destruction and holds up. If you can't face that amount of reading PJ O'Rourke wrote a couple of very witty books on economics (Eat the Rich and Wealth of Nations).

As a general principle businesses - and especially large busineses like banks - do not like what Adam Smith would call a free market. The understandable need for regulation creates barriers to entry as does scalar efficiency. It is very hard to describe the financial system as a genuinely free market system.

The evolutionary theory link is an interesting one that many economists have examined (http://www.econ.mpg.de/english/research/EVO/discuss.php) and this reflects the (sometimes uncomfortable) fact that no-one invented the free market, nor does it necessarily relate to the circulation of money or the legal structure or nature of what we call a 'business'. Human societies evolved exchange systems that gravitated to the 'win-win' nature of free market exchange. Not because someone ordained that this would happen but because it is the most efficient way of 'fairly' (a tricksy economists definition of this word though) distributing scarce resources.

Throughout history (and probably prehistory) those in positions of power have sought control or monopoly over exchange systems. I would recommend - again a fat read but absolutely brilliant - S E Finer's 'History of Government' for a political science perspective on all this from prehistory to the 19th century (sadly Finer died before completing this work - the culmination of a lifetime's study).

Finally an opinion - managed market theories have much in common with ID. They look OK until you start to examine; 1) the evidence; 2) the basis of the theory.

[brodski]

The pardox at the heart of the ideas behind the "free market", is that it requires regulation in order to exist, despite what you may be told by anarcho-capitalists.
Indeed this paradox can be seen as an extension of the paradox at the heart of liberal-democratic theories, "freedom" is only meaningful if freedoms can be protected, and the only way to protect some freedoms is to curtail the freedom of some to impinge on the freedoms of others in certain ways.
An extreme but easy tog rasp example is that in order for people in the society in which I live in to be free from slavery, I must give up my freedom to own slaves- in order for a market to be free, those in the market cannot be free to commit theft and fraud. Both cases require regulation of some kind.

[Tim the Mage]

The pardox at the heart of the ideas behind the "free market", is that it requires regulation in order to exist, despite what you may be told by anarcho-capitalists.
Indeed this paradox can be seen as an extension of the paradox at the heart of liberal-democratic theories, "freedom" is only meaningful if freedoms can be protected, and the only way to protect some freedoms is to curtail the freedom of some to impinge on the freedoms of others in certain ways.
An extreme but easy tog rasp example is that in order for people in the society in which I live in to be free from slavery, I must give up my freedom to own slaves- in order for a market to be free, those in the market cannot be free to commit theft and fraud. Both cases require regulation of some kind.

You are right with the poli-sci Brodski but this is economics and therefore a rather more robust science. Rules (and their enforcement - which is most of the story about the banking collapse) are needed to stop people cheating as anyone who's played monopoly would know.

Essentially you have to take away the ability of some to interfere with fair exchange (e.g. by waving a big club). Sadly Governments are the worst offenders when it comes to fixing markets - usually to support some favoured businesses (e.g. banks) at the expense of consumers.

The liberal democracy stuff isn;t really a paradox when you think about it however. Any communal arrangement has to involve compromise (forced or otherwise).

Free markets are a convenient theoretical construct in economics rather than anything real - circumstances of perfect competition are practically unrealisable but that doesn't make the concept and its proof any less valid. As consumers we should always (the theory says) choose greater competition over less competition as that: 1) drives down prices; 2) reduces the power of the producer to coerce; 3) limits the capacity of government to control meanign they stick to their job of enforcing the rules.

Finally we should note that the free-est market environments are private clubs with their own rules (e.g. stock exchanges).

[Tony Williams]

The "free-market" economy may well be the natural way of doing things, but if taken to extremes it can clash with another strong human instinct - for fairness. This can be seen now in the disgust expressed about the vast bonuses earned by City financiers for gambling with other people's money.

[Tim the Mage]

The "free-market" economy may well be the natural way of doing things, but if taken to extremes it can clash with another strong human instinct - for fairness. This can be seen now in the disgust expressed about the vast bonuses earned by City financiers for gambling with other people's money.

As economists care about this so much we even have theories on, and conduct experiments into fairness...

Affect and Fairness in Economics
http://www.springerlink.com/content/21t693p1k8k06121/ (http://www.springerlink.com/content/21t693p1k8k06121/)

Theories of Fairness and Reciprocity - Evidence and Economic Applications
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=255223 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=255223)

[Tony Williams]

I'm afraid I tend to lump economics in with long-range weather forecasting as far as reliability is concerned. It's great at explaining what has happened once it's all over, not so hot at predicting what's going to happen next. Hence the current mess we're in...

[gsh341]

The pardox at the heart of the ideas behind the "free market", is that it requires regulation in order to exist, despite what you may be told by anarcho-capitalists.

The real problem though is in determining how much regulation there should be, what those regulations should cover and how to enforce those regulations. The current mess here in the US was actually created by OVER regulation by the government.

The idea was advanced that the government needed to do something to make it possible for everyone to own a house. The problem was that some people have lousy credit and no way to afford a house.

A potential homeowner would go to a bank for a home loan and the bank would look at them and say "You have a lousy job with low pay, are often unemployed and are behind on your bills. I'm sorry, but you're too risky to give a home loan to."

The government solution was to pass the Community Reinvestment Act (CRA) back in the 1970s and use Fannie Mae and Freddie Mac as a guarantee that home loans to risky borrowers would be covered. They also stipulated that banks HAD to engage in sub-prime loans or face penalties. Government regulation makes it's presence felt.

Now the banks could tell that same potential homeowner "Don't worry about a thing. You may be a terrible risk, but the government will insure your loan, so let's get to work. Typically you'd barely qualify for $80,000 but because of the government guarantee we'll qualify you for $130,000. Isn't that nice?" Then the poor homeowner goes broke trying to pay for a house he can't possibly afford, the mortgage company starts accumulating foreclosures that it can't sell, Fannie Mae and Freddie Mac can't possibly cover all the foreclosures and the trouble begins.

And now the politicians that created this problem shift the blame to the guy that wasn't even in office when the problem was created.

If the government had kept out of it, the number of failed mortgages would be very low and the whole mess would have been prevented or at least minimized.

The key is minimal regulation and if a business is going under, let it fail. That way the other remaining businesses can learn from the mistakes of the failed businesses.

[gsh341]

I'm afraid I tend to lump economics in with long-range weather forecasting as far as reliability is concerned. It's great at explaining what has happened once it's all over, not so hot at predicting what's going to happen next. Hence the current mess we're in...

Yup! It's the law of unintended consequences in action.

[Tim the Mage]

I'm afraid I tend to lump economics in with long-range weather forecasting as far as reliability is concerned. It's great at explaining what has happened once it's all over, not so hot at predicting what's going to happen next. Hence the current mess we're in...


Which is a bit like blaming physics or chemistry for an air crash. Things go wrong (if that's the right word) because of our incomplete knowledge of economics plus a tendency (among us politicians) for persistent ideological attachment to theories that are demonstrably false. For example autarky remains very popular despite all the evidence that it destroys rather than protects economies.

Where the fundamentals are agreed (e.g. pumping cash into the economy stimulates demand in the short-run but creates inflationary pressure) we can safely argue over the choices as to how we put in that cash. Some favour public works (the 'New Deal' under Rooseveldt and it appears Brown to day) whereas others favour tax cuts (Reagan in the early 1980s, for example) and still other looser monetary policy - cutting interest rates.

None of these approaches are 'right' and all have advantages and disadvantages but all are based on the premise that at the level of macro-economics we can only influence markets, we cannot control them.

Finally, markets that follow rules are predictable - the problem comes (and this seem increasingly to be the case with the current crash) when individuals, groups of individuals or even Governments believe that the rules don't apply to them.

[Tony Williams]

Things go wrong (if that's the right word) because of our incomplete knowledge... yep - the same problem with long-range weather forecasting ;)


Finally, markets that follow rules are predictable - the problem comes (and this seem increasingly to be the case with the current crash) when individuals, groups of individuals or even Governments believe that the rules don't apply to them.
Ah, those dratted people. How stupid and inconvenient they are. Now if we had a system without any people in it, economics would work beautifully!

[Trinoc]

The key is minimal regulation and if a business is going under, let it fail. That way the other remaining businesses can learn from the mistakes of the failed businesses.
I spot a common logical fallacy here. Just because one piece of government regulation compelled the banks to give sub-prime loans (allegedly - I'm not familiar with US law) does not mean that all regulation is bad and that the best way would just be to let the market run free the way it has done for the last couple of decades.

[Floppit]

Floppit did ask for references and evidence...prescious little of that so far. I perhaps could have worded it better but it was my own references that I lacked. I've been listening to numerous interviews and debates take place on the radio so I'm very aware my opinions aren't really my own (just yet...) but to track who said what would be very time consuming, especially as mysource was spoken rather than written.

On a more intuitive level I believe there's a reason why regulation and interference does get votes. There's more to people than gains and losses in terms of goods and funds, regulation (I think) may reflect human empathy, even compassion, which while less quantifiable remains a factor influencing trade. I watch the Co-op adverts and see compassion treated as an attribute affecting the worth of products. Secondly, I see more and more fairtrade goods appear on shelves, but perhaps more interesting are the increasing demands for 'fairtrade' to be regulated. Last of all I watch who is apparently 'cared about' by the media in the current situation, not the bankers who's tax payment used to boost our economy but the pensioner who is seen as vulnerable.

So (maybe just me, I don't know) I don't want a world ruled freely by competition even if that would mean more money - even if it would mean more money for the very poorest, if the price was to leave behind our compassion, to truly not care about the losers in order to preserve the greater good.

The above in mind I have been so heartened to listen in on Paul Krugman's comments last week (radio 4), certainly not the rave review of free market economics I might have expected from a Nobel Prize winner if there was such minimal debate re their virtue.

[gsh341]

I spot a common logical fallacy here. Just because one piece of government regulation compelled the banks to give sub-prime loans (allegedly - I'm not familiar with US law) does not mean that all regulation is bad and that the best way would just be to let the market run free the way it has done for the last couple of decades.

I never said that ALL reguation is bad. I merely stated that minimal regulation is preferable to more regulation.

Had the government not tried to interere with businesses by forcing them to support and issue shaky loans, there would be no mortgage based crisis now.

John Stossel from ABC news recently did a rather good piece on politics. It's rather entertaining and informative.

http://www.youtube.com/watch?v=apsz_1sSTS0

Ihope you enjoy it.

[Mulder]

The real problem though is in determining how much regulation there should be, what those regulations should cover and how to enforce those regulations. The current mess here in the US was actually created by OVER regulation by the government.

It wasn't a government who 'securitised' the sub-prime loans in such a way that they appeared to be prime so that they could be sold on as 'assets'!

[gsh341]

It wasn't a government who 'securitised' the sub-prime loans in such a way that they appeared to be prime so that they could be sold on as 'assets'!

True, but if the government forces you to make sub-prime loans that you know will come back and bite you someday, wouldn't you try and get rid of those loans?

That's what happened. So who's the real culprit? The government that forced the creation of the dodgy assets or the company that was forced to look for a way out of them?

[Mulder]

Governments often 'mean well' but characteristically fail to realise the unintended consequences of their ill-thought out legislation. Companies, by contrast, generally have a pretty good idea what they're doing.

[lazerustheduck]

True, but if the government forces you to make sub-prime loans that you know will come back and bite you someday, wouldn't you try and get rid of those loans?

That's what happened. So who's the real culprit? The government that forced the creation of the dodgy assets or the company that was forced to look for a way out of them?In that situation I would say private business was the culprit, you find yourself with a problem you don't solve it by playing hot potato.

[Tim the Mage]

Leaving aside the "there should be no regulation" argument (I refer you to the stock exchange which is an entirely rules bound environment that works well), there are some interesting bits of discussion.

1) Free markets are the problem. This argument remains moot for no other reason than that the markets we are primarily concerned with are not 'free' - the property market and the financial market are among the most regulated markets. Thus the arguments that rage as to whether it is misplaced regulation or misplaced business that is the problem. The more complex the regulatory system the more scope for 'creativity' and the greater chance of undiscovered cheating - guilty party bad regulation. But the sinner is the capitalist - I'm sure no subscriber to this forum has ever cheated at Monopoly - which makes him (probably in gender terms) the guilty party. In all this free markets are innocent because the advantage is gained by exploiting market imperfections (i.e. constraints on market freedoms). In the USA, Government - the regulator - encouraged lending to those we now dub 'sub-prime'. This was a political decision but it remains the case that banks did not have to either lend to these people or bundle up the loans in such a way as to disguise so-called "toxic debt".

2)Free markets are less compassionate. Any system of exchange (other than one in conditions of perfect competition) results in winners and losers. I see the task of Government - in respect of economics at least - as being to create a system that keeps the winners and losers to a minimum. This is not to say that people won't win or lose (some are more open to risk than others, after all) but that people cannot validly blame exogenous influences for their loss.

3)Ideology has (literally) a price. The case of the co-op ads or fair trade (more on this to come) relates to the willingness of consumers to purchase something because it claims to deliver an ideological good. The promoters of "ethical banking" or "fair trade" have decided to differentiate their offering (i.e. to create a separate market) by claiming a moral superiority. Economists are not concered with the ethics of this but with the impact it has on markets. But what is really created is a different product - different because of the moral or ideological claims.

4) Fair trade vs free trade. While fair trade was a consumer led model (see above) it merely gave a bigger choice to the consumer and was essentially benign. When advocates reject moral equivalency with other business models and encourage public authorities to select 'fair trade' for 'ethical' reasons the problems begin. Most commodity markets were for many years (and some like petroleum still are to some extent) 'managed trade' with prices set by some international cartel - usually of producing countries or of dominant businesses. The result of this is either glut or shortage both situations that can be leveraged by traders to deliver monopoly profits. Fair trade is a system a managed trade that gives preference to one producer model (the producer co-operative) over all other models. Thus preferring fair trade puts plantation workers out of a job and makes it hard for more traditional business models to emerge. And some take monopoly profits.

Finally - economic forecasting has an OK track record

http://www.staff.city.ac.uk/r.a.batchelor/Consensus2000.pdf

http://research.stlouisfed.org/publications/review/88/11/Forecasts_Nov_Dec1988.pdf

Not perfect but better than average...within margins of error I think these results are pretty impressive.

[gsh341]

In that situation I would say private business was the culprit, you find yourself with a problem you don't solve it by playing hot potato.

It's funny you mention the game "hot potato" when referring to this mess. That's what happened. Actually, it's more like playing catch with a bomb. It's going to blow up and no one wants to get hurt, but someone always does. In this case though, the government is the one that lit the fuse.

What you fail to realize is that the government forced banks to create these bad mortgages. No business in the world would want to keep such toxic paper on their books when they know it will eventually destroy their company.

[Tony Williams]

A somewhat wider perspective in last week's New Scientist, which has several linked articles under the general heading "The Folly of Growth".

This makes the point that our economic system needs constant growth to be successful, but there are finite limits on agricultural land, cheap fresh water and other natural resources. With the world's population constantly growing, and everyone trying to improve their standard of living (= use up even more resources), this is unsustainable. We are constantly accelerating towards a terminal crash.

The articles suggest ways in which we can ameliorate the problems and achieve long-term sustainability, but they involve abandoning our current economic system. Of course, no politician wants to hear that, because we (the short-sighted public) don't want any restrictions on our ability to burn up resources as we please. Business doesn't want to know either. So we charge on towards the precipice...

Nothing could better illustrate the schizophrenic attitude of our politicians than the coincidence last week of the UK Environment Minister committing the country to meet even tougher CO2 reduction targets, at the same time as the Prime Minister was putting pressure on oil companies to reduce the price of fuel. Wonderful!

[Tim the Mage]

This makes the point that our economic system needs constant growth to be successful, but there are finite limits on agricultural land, cheap fresh water and other natural resources.


This is I think a false contention in that it assumes a direct link between economic growth and resource use - albeit that resources are finite. Since the "economic system" is self-limiting because of the price mechanism there really isn't the need to panic that some non-economists seem to believe. And why is it that while folk like me accept (most of the time at least) the results of scientific enquiry by chemists, geologists, physicists and other scientists but those folk seem to think they can do economics better than economists?

This shows the accellerating decoupling of resource use from growth in the EEA.
http://dataservice.eea.europa.eu/atlas/viewdata/viewpub.asp?id=1556

[Trinoc]

What you fail to realize is that the government forced banks to create these bad mortgages.
Did the US government force US banks to conceal the dodgy nature of the loans and sell them on to the other countries of the world, thereby dragging down all of our economies along with their own? Where was that most basic of regulations, the prohibition of dishonesty?

[Croydon Bob]

True, but if the government forces you to make sub-prime loans that you know will come back and bite you someday, wouldn't you try and get rid of those loans?

That's what happened. So who's the real culprit? The government that forced the creation of the dodgy assets or the company that was forced to look for a way out of them?

Interestingly, in the UK there was no such law but financial institutions did the same thing anyway...

[gsh341]

Interestingly, in the UK there was no such law but financial institutions did the same thing anyway...

I can understand why they would.

If you look at the astronomical short term gains it is VERY appealing, but in the long term it was bound to fail miserably. When the UK saw the stock market and profits being made in the US they got greedy decided to follow suit.

However, if you look at the way the mortgage business was being done prior to the Community Reinvestment Act of 1977 you will notice that loans were given based on solid financial requirements such as debt to income ratio, payment history and job history and loan values were fixed rate.

After the CRA most of those financial requirements had to be thrown out to meet the government's social needs requirements.

[Tim the Mage]

I can understand why they would.

If you look at the astronomical short term gains it is VERY appealing, but in the long term it was bound to fail miserably. When the UK saw the stock market and profits being made in the US they got greedy decided to follow suit.

However, if you look at the way the mortgage business was being done prior to the Community Reinvestment Act of 1977 you will notice that loans were given based on solid financial requirements such as debt to income ratio, payment history and job history and loan values were fixed rate.

After the CRA most of those financial requirements had to be thrown out to meet the government's social needs requirements.

So it took 30 years - and two recessions plus a couple of property booms and busts - for it all to go wrong. Frankly scratting around in the dark ages to find the ultimate causes of today's problems is ridiculous.

1) There has been regulatory failure - both in not intervening using available powers and in the unintended consequences of capital adequacy rules and daily reporting brought in following the Enron scandals
2) There might have been fraud and there has certainly been deception - and I suspect Government officials will be to some extent complicit in all this (they really aren't as stupid as they sometimes pretend to be)

As I said upthread:


But the sinner is the capitalist - I'm sure no subscriber to this forum has ever cheated at Monopoly - which makes him (probably in gender terms) the guilty party. In all this free markets are innocent because the advantage is gained by exploiting market imperfections (i.e. constraints on market freedoms). In the USA, Government - the regulator - encouraged lending to those we now dub 'sub-prime'. This was a political decision but it remains the case that banks did not have to either lend to these people or bundle up the loans in such a way as to disguise so-called "toxic debt".

[Mulder]

Here's a fun story:

http://stlouis.bizjournals.com/stlouis/stories/2007/04/02/daily18.html

and this

http://www.homesgofast.com/view_news/616/

Lovely quote "New York state officials are suing a total of 26 banks and two accounting firms that did business with Countrywide Financial Corp., saying the companies failed to ensure that the beleaguered mortgage company failed to be honest with investors."

and this:

http://news.bbc.co.uk/1/low/business/7667896.stm

I've got nothing against Barclays, it's just an example of how everyone is blaming everyone else. So there you have it, the answer - NO ONE is responsible!

[Trinoc]

"... saying the companies failed to ensure that the beleaguered mortgage company failed to be honest with investors."
Many a true word is spoken in typo!

[Floppit]

There is a distinction between the blaming 'free markets' and blaming the belief that free markets are always the safer bet, that discussing alternatives is heresy. As far as Im aware it's an undue level of faith in free market economics whih has come in for some heavy criticism over the last fortnight.


1) There has been regulatory failure - both in not intervening using available powers and in the unintended consequences of capital adequacy rules and daily reporting brought in following the Enron scandals
Perhaps more skepticism would have led to increasing the care given to regulation.

[gsh341]

So it took 30 years - and two recessions plus a couple of property booms and busts - for it all to go wrong. Frankly scratting around in the dark ages to find the ultimate causes of today's problems is ridiculous.

1) There has been regulatory failure - both in not intervening using available powers and in the unintended consequences of capital adequacy rules and daily reporting brought in following the Enron scandals
2) There might have been fraud and there has certainly been deception - and I suspect Government officials will be to some extent complicit in all this (they really aren't as stupid as they sometimes pretend to be)

As I said upthread:

Actually, 30 years is about right for everything to go bust. Recessions are a normal part of any economy. However, the housing bubble kept growing and it took 30 years to burst. The first 15 years or so were pretty tame.

In 1989 the problems of the CRA were compounded by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA).

Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA) required Fannie Mae and Freddie Mac to purchase and securitize these bad mortgages. That's right, the government FORCED the purchase, securitizing and sale of these mortgages.

As I said, too much government interference in a place it has no business interfering with.

More info here.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

[Tony Williams]

This is I think a false contention in that it assumes a direct link between economic growth and resource use - albeit that resources are finite. Since the "economic system" is self-limiting because of the price mechanism there really isn't the need to panic that some non-economists seem to believe. And why is it that while folk like me accept (most of the time at least) the results of scientific enquiry by chemists, geologists, physicists and other scientists but those folk seem to think they can do economics better than economists?

This shows the accellerating decoupling of resource use from growth in the EEA.
http://dataservice.eea.europa.eu/atlas/viewdata/viewpub.asp?id=1556
I don't doubt this for the countries shown: the EU 15 (i.e. Western Europe), which have enjoyed a high standard of living for decades, and already enjoy all of the material goodies which come with this. The New Scientist makes the point that some growth is still sustainable, as long as it is based on genuine improvements in the efficiency with which resources are used. Advanced technologies can help here, as they are in the EU.

Also, the fact that the use of resources in the EU 15 has been kept down by exporting much of the production of consumer goods to cheap-labour economies elsewhere in the world is no doubt an important factor in accounting for economic growth without use of extra resources. But those resources are still being used somewhere to satisfy western demands.

Also, the EU situation is not reflected, to anything like the same degree, in those less-developed countries which are now aiming for a dramatic improvement in their standard of living. This means motorbikes instead of bicycles, cars instead of motorbikes, flying off on foreign holidays, eating a lot more meat, buying lots of fridges, freezers, washing machines, TVs, DVDs and other nice-to-haves. The classic case is China (with a population three times that of the EU 15) whose use of all kinds of resources is accelerating rapidly (partly, of course, to satisfy western demand for consumer goods).

The world is facing three really major long-term problems (in which I don't include the current economic blip, which I expect will sort itself eventually as they always do):

1. The continuing increase in the world's population. Yes, I know that it will level off when (if?) the poorer countries become richer. But by the time that happens, it will be one heck of a lot higher than it is now, and it is already far too high to enable everyone to enjoy a comfortable standard of living. As one of the articles points out, if everyone on the planet enjoyed the same level of resource use as the EU, the resources of five Earths would be needed to supply that. If the global resource use were raised to the level of the USA, fifteen Earths would be needed.

2. This links to the second problem, which is the (entirely legitimate) aspirations of the poorer parts of the world to achieve the same standard of living as the richer part. That will inevitably have a massive impact on resources.

3. The third problem, also linked to the others, is that increasing industrialisation is having a major impact on our atmosphere, which is in turn beginning to affect our climate. No-one knows what this will lead to and where it will end, but given that our current pattern of agriculture and infrastructure is based on existing patterns of climate and sea levels, any change from these will cause serious problems.

Taking all of the above into consideration, the future looks as it may be very uncomfortable. Sorting out the current mess with the economic system may come to be seen as on a par with rearranging the deckchairs on the Titanic (while still going full steam ahead).

[Tim the Mage]

Tony, I agree with your three broad challenges and recognise the degree to which it is easy to look at the "economic system". My point was essentially optimistic - namely that we have the capacity, initiative and ingenuity to deal with these concerns. And to observe that many of the "we must change the economic system" arguments have the same relationship to real economic truths as homeopathy has to proper medicine.

Economics is essentially the study of how (and why) we distribute scarce resources. And the fundamentals of economics - the price mechanism, marginal utility, perfect competition, comparative advantage etc. - are very useful tools that can help us make the choices we need to make in response. In a funny kind of way this is the observation Bjorn Lomburg made - there's only so much resource available each year and we need to direct it to the most effective (we can argue about what this means) cause.

The theories that are the basis of economics are largely agreed and settled (other than by opportunistic, populist politicians like Barak Obama) what matters is the application of these ideas - do we build a suspension bridge or a cantilever bridge?

All this is a tad controlling - the idea of the free market ends up being how human wants are satisfied not how bankers pocket monopoly profits (the antithesis of the free market).

[Tony Williams]

Tim, we can deal with these concerns - but at the present time, the world as a whole shows no inclination to do so. The population is accelerating, the use of finite resources is accelerating, climate change is accelerating.

The ultimate consequences in economic terms will be ever-increasing prices as a result of the combination of growing demand and increasing scarcity. This will of course result in demand falling because of the price. We are seeing this in miniature now with the violent fluctuations in the oil price. However, no-one doubts that the current fall-back in the price is anything other than temporary: the underlying demand is increasing, the quantity of oil in the ground is finite, and it becomes ever more expensive to extract. We will eventually be forced to do things in a different way, and that is likely to mean a reduction in the standard of living of the wealthy countries. Our choice is between evolving our economic system to introduce these changes gradually, or to do our very best to ignore the issue for as long as possible. No prizes for guessing which is more likely.

Incidentally, you asked in an earlier post: "And why is it that while folk like me accept (most of the time at least) the results of scientific enquiry by chemists, geologists, physicists and other scientists but those folk seem to think they can do economics better than economists?" Well, the authors of the New Scientist articles include a Professor of Sustainable Development, the founder of the David Suzuki Foundation which investigates how society can live in balance with the natural world, a former senior economist at the World Bank (now a Professor of Ecological Economics), the Policy Director of the New Economics Foundation, the author of 'The Bridge at the End of the World: Capitalism, the Environment, and Crossing from Crisis to Sustainability', and the chair of the board of the Transnational Institute which addresses global problems. So they are not exactly pontificating outside their fields.

[Tim the Mage]

Low growth economics requires markets to be more free and for governments to stop either creating or rewarding monopolies. What the theory says is that where there are more producers/suppliers with free/equal access to users/consumers under conditions where everyone has the same information levels of profit tend to zero. No one - not even Marxist economists dispute this (Marx certainly didn't) yet Governments often (usually?) take a different stance.

We can assume that growth outwith greater resource use is benign (hence low growth rather than no growth) which leads us to whether the mechanisms of laissez faire economics will deliver the required outcome?

The price mechanism -part of which Tony describes above - will always tend to balance supply and demand but, where there is unmet demand substitutes will be sought. As oil prices rise renewable alternatives become more economic and if those oil price rises are permanent because of scaricity rather than (as we've seen today) due to producer market rigging the investment in renewables and nuclear energy will progress.

The second form of change lies in greater efficiency of resource use - higher the price the less the waste. The proportion of UK energy use by transport and industry has fallen relative to domestic and service sector usage since 1990. Despite a considerable increase in UK road vehicles the amount of fuel used has barely increased over this period - suggesting that fuel economy is significantly higher.

My main concern is that political considerations (at least as politicians see them which is pretty short term) both in the developed and the developing world consistently reduce the effectiveness of market mechanisms. And that those who want to see things 'put right' react against the fruits of political interference as if they were the faults of 'markets'. The economic system wasn't designed and where we try to design a better system the results really don't work as well - maybe the NEF 'no big business' model will prove different but (much though I love NEF for their work on local markets and local economic models) somehow I have my doubts.

[Tony Williams]

Suggestions for a sustainable economic system made in the New Scientist articles include the general use of "cap and trade" systems for purchasing emissions credits, coupled with a switch in taxation policy to focus on taxing natural resources as they are extracted. Since this would be regressive in effect, some of the income would be used in support schemes for the poor.

[Tony Williams]

Another interesting article on the economic system in this week's New Scientist, this time on medium-term measures aimed to reduce the risk of a similar crisis happening again.

It is argued that economists failed to predict the crisis because they tend to see markets as fragmented, rather than as a whole. So in assessing overall risk, they looked at the risks involved in many individual markets and added them up. But that ignores how much more interconnected everything is than it used to be: what they should have done is to multiply the individual risks together, not add them up.

Parallels are drawn with other complex systems such as ecologies or the weather, in which a minor change in one aspect can have a domino effect which produces massive changes in the whole system (basically, like chaos theory). The article goes into the detail of how this actually heppened to cause the current economic crisis.

So how to reduce the risk? By breaking up the existing homogenous, interlinked, international system and returning it to a more heterogenous state, thereby limiting the risk that a problem in one area will automatically - and rapidly - spread throughout the system. However, it will be important not to over-regulate as that has been shown not to work. One suggestion is a system which adopts some of the principles of Wikipedia - which has a tiny staff and runs itself within a set overall framework.