Yielding to Natural Advantage
Remember that the Great Depression was perceived by most people to be a force of nature, like a bad storm. It just happens (the risk of loss is fully assumed) and we deal with the consequences the best we can. According to conservatives, back then, and like Amity Schlaes argues now, doing nothing at all (laissez faire, fully assumed, like in a free market) is the best practice.
Conservatives generally advance the argument that there is a natural advantage–an expected value–to catastrophic risk. Some people are smart enough to know how to advantage the destruction, and treating smart people like criminals, Hillary Clinton recently noted, for example, is counter-productive.
Schlaes argues that liberal policies and programs (regulations generally) aggravate financial crises by trying to mitigate the effects. Essentially she is correct. Dodd-Frank does not exist to prevent financial crises (the “big risk” Geithner describes in “Stress Test”). It deals with the effects because catastrophic events, like Dodd and Frank say, are naturally going to happen.
Dodd-Frank, like the New Deal, is reactionary–it conserves the value of the risk proportion. So, instead of liberal vs. conservative we have two reactionary factions occupying all the policy space all of the time.
When the reactionary regulations of the New Deal were undone to “make markets more efficient” like Reaganites argue it should, we had the “Great Recession” and now Dodd-Frank. Schlaes goes on to argue that it’s wrong to identify capitalism with warfare. If we just let it be and let the market shake out on its own, Schlaes argues, we are less likely to go to war. Instead, yielding to the natural identity of capitalism, allowing markets to do what they will, deflation and massive unemployment is transformed–delivered–into an asset class. Formation of the capital is the natural identity of the outcome. There’s no need to be pathological about it, just accept it!
Notice that Schlaes’ argument is Ayn Rand’s “objectivist identity” argument. Liberal intervention is unnatural. Liberalism, the Objectivist argues, has a negative yield, presenting “the risk” (the fully assumed loss) in the form of warfare.
(If we consider the probability Hitler would not have led Germany into world war if there had been enough time for the New Deal to work, then we could maybe say capitalism prevents war, but the crash in 1929 pushed Germany over the edge. Sorry, but the crash in ’29 is the natural identity of capitalism!)
Oscillating between liberal and conservative elements gives the risk identity–purpose. Occupying space over time arbitrages the argument. It appears the risk proportion is conserved and naturally yields to elite identity, delivering assets over time to the disposal of elite management, yielding to a natural advantage, turning a liability (the fully assumed risk, an otherwise dead-weight loss) into capital gained.
Arbitraging the risk, formulated to yield in the form of capital gains, is only natural because it always delivers the risk forward. Like Schlaes argues, it always yields to assets; but if we don’t let it yield to its natural advantage, like Rand says, the yield is unnaturally negative going forward. The formula then adapts to gain the natural advantage of the capital, which Schlaes posits is then falsely blamed for causing the risk to be avoided.
What yields from Schlaes’ hypothesis is a limited liability. Naturally, we react to catastrophic events with public assistance, but according to conservatives if we act to prevent the unpreventable we’re just asking for the risk to be avoided. What we get is what we deserve–massive debt–delivered to the futures on demand.