On Efficiency and the Moralization of Capitalism

Since the crisis, Nicolas Sarkozy has shed any neoliberal trappings he once wore and become a great "moralizer of capitalism," an apostle of new, but most often unspecified, regulations to rid the economy of financiarisation (bad) and return us to the halcyon days of yore. Guillermo Calvo and Rudy Loo-Kung take a different view: that deregulation is "socially efficient" even if it yields bubbles that subsequently collapse in crisis. Politicians (and central bankers?) instinctively recognize this, they say, which is why they don't try harder to prick bubbles.

I don't think I buy this argument, but it's intriguing enough to warrant a cogent refutation. Not that I'm about to supply one. It's too early in the morning. Just sayin' ... something to think about. Being a pessimistic sort myself, I can see why society collectively might require periodic infusions of optimism, riskophilic stimuli, as it were. Bubbles might be just the thing ... And what if the good that bubbles do were interred with their sticky residue, while the evil, perpetuated in endless rehashing of the collapse and the "irrationality" of the boom years, cast a pall over enterprise for decades? The moralization of capitalism, Sarko's latest hobby horse, might then be seen less as a virtue than as the tribute paid by vice--Dr. Johnson's definition of hypocrisy.

ADDENDUM: Of course there's also the "Rahm Emanuel dictum": "A crisis is too important to waste." In other words, the possibility of fundamental reform in a political system choked by a surfeit of veto points depends on periodic crises and the clamor for effective action that they generate. Collapsing bubbles are thus a catalyst for necessary change. On the other hand, simply standing Calvo and Loo-Kung on their head ignores, as they do, the distribution of the costs of bubbles. Even if the social benefit exceeds the social cost, the distribution of benefits in both the expansive and contractive phases may militate against accepting a positive balance as optimal.