Home > finance, guest post, rant > Towards a better financial system

Towards a better financial system

November 1, 2011

This is a guest post by H.R., a risk management quant:

First, let’s clear the ground for new ideas by questioning the myths that have justified the current system.

Myth 1: The wisdom of the free market is the answer to everything (if only we could get rid of market frictions like regulations and taxes).

Evidence against:

Myth 2: The work of the 1% is indispensable.

Evidence against:

Myth 3: The unemployed exist because they don’t have the right skills or attitude.

Evidence against:

  • Bill Mitchell argues that with the current lack of jobs, “skills training” and similar efforts may shuffle around who gets the jobs, but won’t solve the unemployment problem.
  • Economist DeLong concedes that maybe Kalecki had a point about unemployment as a means of lowering wage earners bargaining power.

Myth 4: The government can never compete with the private sector.

Evidence against:

US health care is ridiculously uncompetitive compared to other countries nationalized systems.

Myth 5: We have to choose efficiency over inequality.

Evidence against: Chris Dillow makes the argument that

  • better managed government can’t simultaneously deliver us maximum efficiency and equality,  and
  • there are good arguments for choosing equality over efficiency.

Myth 6: We are constrained by budget deficits.

Some basic ideas from Modern Monetary Theory would disagree.

Myth 7:

Next, we need to imagine the possibilities.

There will be government giveaways. Leave it up to the 1% and they will grab the giveaways for themselves. Let’s decide for ourselves what our priorities are and imagine a system that serves us all.

We can use the tools of

We can imagine the possibilities for a better system

If we aren’t happy with are national system, we can think about how to start local action.

Categories: finance, guest post, rant
  1. FogOfWar
    November 5, 2011 at 11:37 pm

    This is a whirlwind tour–lots of good stuff there!



  2. November 13, 2011 at 10:22 am

    Agree with FOW 🙂

    A word about some of the points –

    Human behaviour may be more rational than the ‘rational behaviour’ espoused by the economists who leave important costs out of there equations. For example in making a decision make sure the costs considered include the cost of considering each alternative the cost of constructing any economic or mathematical models used, the cost of costing all the above (recursively to the limit) and see if the human decision heuristic produce better or worse expected costs than the economists

    Adam Smith, in his original analysis pointed out that for the free market to deliver optimality one had to prevent players from conspiring together outside the market (he was thinking cartels and unions, but dark pools meet his definition) and the tendency for markets to fail to include the costs of sustaining production in the future (he was thinking failing to pay for worker’s children)

    Although pumping money into job creators does not cause effective ‘trickle down’, pumping money into the bottom does cause ‘trickle up’. The point is poor people spend rather than save, so any money you give them moves around the local economy immediately. In fact the demand and transaction velocity go up faster than supply can with inflationary consequences.

    However note that there are some advantages from being the most respected currency in the world. In particular your credit rating doesn’t matter. At one time it was Sterling, and the UK had those benefits. Currently it is the dollar and the US is currently cashing those free chips. Soon (by which I mean ‘in less than one century’) it will be China…so the US must fix its systems before then.

    Finally: what is the purpose of the financial system? The fitness for purpose of the current system and of any suggested alternatives can be easily concealed or gamed if we don’t agree on the yardstick.


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