In the last six months I have heard that the current economic crisis proves that free market capitalism is a failure. I have also heard that it proves that government intervention is responsible for market booms and busts. I have read that the causes of the current crisis are greed, irrationality, easy money, low interest rates, preverse incentives, complex financial instruments, subprime mortgages, people believing that house prices would always rise, people insisting that houses must be made affordable, the US congress laws that force banks to provide a certain percentage of subprime mortgages, the capital ratio requirements on banks being less for subprime mortgage backed securities than for prime mortgages, the distortion of mortgage lending by government sponsored entities (Freddie Mac and Fannie May), the lack of an exchange for credit default swaps creating un-noticed systemic counterparty risk, mark to market valuation of bank assets, too little government regulation, too much government regulation, the government scaring us, the government not scaring us enough, the lack of a bail out (stock market falls) , the delay of a bail out (stock market continues to fall), and the bail out (stock market carries on down).
Why am I talking about this? Because these circumstances are precisely the kind in which we in general and experts in particular indulge in a certain kind of epistemic irresponsibility: over-confidence in belief. When the stakes are high and circumstances highly uncertain it appears that we can hardly bear to conform our belief to the uncertainty. Paradoxically, uncertainty turns us to dogmatism.
Read More »Economic uncertainty and epistemic humility