Economics

Lessons Have Been Learned, Just Not by Kevin Drum

Kevin Drum ostentatiously condescends to read a post of mine only to make a really lame argument in response. Let’s recap: I took exception to Senator Christopher Dodd’s oft-repeated claim that nothing has changed since the financial meltdown and we are just as vulnerable as we ever were to the same mistakes being made again.

To which I responded, in part:

Except that’s not quite true. Something happened: The crisis itself.

Think of it this way. We are just as vulnerable as ever to the threat of Coca-Cola releasing another New Coke. No laws have been passed to prevent it. No new oversight authority has been created to warn of its looming threat. And yet, the odds of Coca-Cola rolling out another debacle like New Coke are severely limited. Why? Because, to paraphrase Roy Scheider in Jaws II, as God is their witness the executives at Coca-Cola don’t want to go through that Hell again.

“Example is the school of mankind,” observed Edmund Burke, “and they will learn at no other.” This is the fundamental insight of both conservatism and libertarianism. People learn from their mistakes. To use Dodd’s logic, I am just as vulnerable as ever to riding my bike without holding the handlebars. But I don’t do that anymore, even though the federal government has done nothing to make it harder for me to do it again. Why? Because I learned from my mistakes …

This is not to say that the financial crisis doesn’t justify any reforms. But let’s not forget that inherent to capitalism is the capacity for self-correction. Surely the disappearance of Lehman Brothers and the dismantling of AIG is an example that many can learn from. The real danger seems to me that people like Dodd haven’t learned the lesson that government is not the only—or best—corrective to the excesses of capitalism.

From this—and a speech excerpt from Chris DeMuth—Drum concludes that I don’t think any reforms are really necessary because “bankers have all learned their lessons.”

He then goes on with this really compelling argument:

Does Jonah really think that American industry’s capacity to launch stupid new products was diminished by the New Coke fiasco? Does he remember Pets.com? Or Webvan? Or, restricting ourselves just to the soft drink market, Crystal Pepsi? Or any of the other fine beverages on this list?

As for bankers learning their lesson, I’m at a loss for words. If there’s a profession on the entire planet that has aggressively declined to learn any lessons from its periodic collapse over the past several millennia, it’s high finance. In This Time It’s Different, it takes the authors three columns of text spread over four pages just to list the banking crises since 1800. They tally up 51 of them since 1980 alone.

To which I must respond: Huh? If only Kevin was at a loss for words, we’d all be better off. When did I ever say that the capacity of American industry to come up with new stupid products was constrained?

I did say that Coca-Cola’s capacity was constrained insofar as its leaders don’t want to repeat their mistake. And that is true.

I did not think that the geniuses behind Pets.com would look at New Coke’s flop and say, “Hey, maybe we should rethink a website dedicated to selling pet supplies because New Coke was an awful idea.”

Frankly, I find it mildly disturbing that Kevin would even make that inference. All I was doing was making an abundantly obvious point: that knowledge is cumulative and that people and institutions learn from their mistakes. It is hardly an iron law, alas. If it were an iron law we wouldn’t have to hear that line about being condemned to repeat history every time we forget it.

I did not say no reforms were necessary, I merely suggested that Dodd is wrong when he says nothing has happened that might deter firms from making the same mistakes again. Tell that to Lehman Brothers.

What’s disturbing about Kevin’s leap into hyperbole is it gives us a sense of how little respect he has for the market.  Apparently, it’s not enough that the people behind Pets.com paid the price for their bad idea (though it was hardly all that stupid). Kevin seems to think this reveals some terrible flaw with markets. I think it’s one of the great things about markets. If only government learned its lessons as well. In business, when a bad idea fails, it goes away and the people responsible lose their money. In government, when a bad idea fails, we’re told by people like Kevin it was under-funded and taxpayers lose even more money on the second go-round.

Perhaps the chief argument over the financial reform bill is about whether it will allow Wall Street firms to pay the price for their mistakes or whether the government will bail them out (again). There’s a disagreement about whether the bill will do that or not, but there’s a general consensus that more bailouts would be bad. Why? Because firms would have less incentive to learn from their mistakes.

But one gets the sense that Kevin doesn’t appreciate the fact that you cannot constrain the capacity of American industry to come up with new stupid products without constraining its capacity to come up with new fantastic products. Remember all those experts who thought no more than a handful of people would ever need a personal computer? Do we really want the government making that call? The trial and error of the marketplace is what decides whether something is new and stupid or new and revolutionary.

The only (limited) role for government is to decide whether a product is safe. That’s what the debate about financial reform is about: whether these firms can operate safely for the rest of the economy.

One last point. Even if we get the financial reform Kevin wants, I have little faith that the government will stop some new stupid products from getting through. Regulators and senators are great at coming up with rules to prevent yesterday’s problems. They’re less reliable at catching tomorrow’s.

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