Several times in fiction I’ve seen the case of some hard-driving businessman getting a report from a subordinate on his investments. Often, in the midst of an otherwise upbeat report, one stock slipping a few points in the market will be mentioned. In such cases, the hard-driving businessman says words to the effect of:
“Sell. I don’t back losers.”
This is patent nonsense. Look, any publicly traded company that hangs around for a while will have ups and downs in its stock market. Any “hard-driving businessman” who followed a policy of selling anything that ever slipped would, in rather short order, be without a portfolio. No stock price always increases in price.
While that’s a fictional case, we see similar effects in the real world. Opponents of an economic policy, no matter how well that policy might be working for the economy as a whole, can always find examples of companies doing poorly under it. Similarly, fans of a policy, no matter how disastrous for the economy as a whole, can always find companies doing well under it. That’s why you’ve got to cast your nets wide when attempting to judge the effect of an economic policy. You can’t just rely on a handful of businesses or a small subset of the population.
You also can’t look at the very short term. The market, while the most efficient way to allocate resources for maximum value in the long run, can be…somewhat volatile (okay, a lot volatile) in the short run. They say water seeks its own level but part of “seeking its own level” includes waves, tides, rivers, waterfalls, avalanches, and hurricanes (among many other things). So it is with the economy. As prices tend to a “market clearing” value (a price where the amount of a good or service people are willing to provide exactly matches the amount of the good or service people are willing to buy–at that price) that does not mean the path to that market clearing price is a smooth one. Things can vary wildly on the way to that price. Fads occur. People see others buying and so buy themselves, a momentum builds up and people keep buying until a lot of people realize they have more of the good or service than they really want at the price they paid for it and then turn to sell it back to the market, causing the price to crash. This is the very definition of an economic bubble.
A lot of people end up spending a lot of their resources to acquire something that they end up selling again for a lot less resources than they first expended with the result that they end up with less resources than when they started with nothing to show for it. A classic example is the Dutch Tulip Market Bubble.
This kind of volatility is behind many of the complaints against the market and there is some validity to them. An argument can be made that trading a bit of efficiency for a bit less volatility can be a good thing. That was one of the arguments for establishing the Federal Reserve. And, indeed, for a while it worked. Then, in 1929, the Federal Reserve, after having had a change of leadership and several structural changes managed to take the wrong move every. single. step. of. the. way. The result was what could have been a sharp, but relatively short, economic downterm (a “readjustment”) turned into the Great Depression.
As Thomas Sowell is wont to say, just because the government can do better than the market in some respect does not mean that it will. Any such meddling must be looked at with a jaundiced eye and, if taken, taken with a great deal of trepidation with cutouts to stop it if it does not produce the desired results if, indeed, it makes matters worse.
In short, exactly the opposite of the way we handle government meddling in the economy today.
And so, this ended up drifting quite a bit from where I was thinking it would go when I started, but there it is.