Wednesday, March 30, 2011

Differing views of the world

As you begin to read Econned I hope you will notice the large gap between abstract theory and real world practice.  Smith comments on a recent editorial by Alan Greenspan where he again explains how financial deregulation and innovation led to world prosperity.  Smith compares the the real cost to the world economy (think of a world production possibilities function) of the financial crisis (between 60 and 200 trillion) to the benefits of unregulated banking.  (see here)  The US has a real GDP in the range of 14 trillion dollars.  So the costs of the crisis are multiples of our yearly real output.  Note too how large the large banks have gotten--Citibank is a $1.8 trillion dollar firm.  That's over 10% of our GDP.  Somehow it doesn't seem to me that we live in a world best characterized by perfect competition.  Comments??
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2 comments:

  1. UnknownMarch 30, 2011 at 11:15 AM

    I agree with you as I have long thought that economic theory while it makes sense when thinking about it doesn't cross over into real life efficiently or very cleanly. I think theory is interesting and relevant to see how the thought develops but it cannot be applied as is to the real world and has to be translated before it gets to the application.

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  2. MARKMarch 30, 2011 at 7:14 PM

    I mean, there are numerous industries operating within our country that do not have "perfect competition." This is reality, but this is not just some industry in the United States. This is our financial system, the life blood of our country and a major part of the global economy. Imperfect competition in the banking industry puts the wealth of all Americans at greater risk. Yes, the deregulated financial system created a lot of "wealth," but the wealth was not real or distributed in an ethical manner. I am hoping for more ethical oversight within our financial industry.

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