Released today, The Oxford Handbook of Austrian Economics (edited by Peter J. Boettke and Christopher J. Coyne) contains contributions from two of our Senior Fellows: Kevin Dowd and Anthony J. Evans. In his chapter, Evans takes an Austrian look back at the causes of – and the lessons we can draw from – the UK’s 2007 Financial Crisis. Focusing on regime uncertainty, he rejects both the idea that the crisis was “caused by greedy bankers, complicit politicians, or capitalism itself” and the prominence of analysis that overstates the role of incentives in the run-up to the crisis. Instead, he takes the view (with reference to the work of Jeffrey Friedman, among others) that
There is far more evidence to suggest that it was ignorance and error that caused the crisis and that theoretical issues such as regime uncertainty, big players, recalculation, price naiveté, trading strategies, and corporate governance deserve closer attention.
Allowing insider trading (to improve market efficiency) and reducing barriers to entry and exit (so that foreign banks can provide additional competition) help to thaw the economy and to solve the knowledge problem.
That “ignorance, not omniscience, is the norm” (and a well-functioning price mechanism is the only feasible method by which to ameliorate that problem) is a point too rarely made in reference to the crisis, which is most often blamed on the greed of bankers or the laxity of financial regulations.
As well as being a Senior Fellow of the ASI, Anthony J. Evans is Associate Professor of Economics at ESCP Europe Business School in London and a member of the IEA’s Shadow Monetary Policy Committee.