The onslaught of the US subprime mortgage crisis last year led to a series of shocks to the global economy, including the collapse of major financial institutions. That in turn caused a global financial crisis that has seen central banks around the world working together to save their stock markets.
These events have also seen Asian currencies devaluate rapidly and lead to rising unemployment in Taiwan.
This illustrates that economic problems are never isolated and that one problem can have significant effects on other sectors of the economy.
This series of events has forced economists to give serious thought to the pros and cons of capitalism.
The theoretical basis of capitalism is basically derived from Scottish economist Adam Smith’s theory of the “invisible hand,” which argued that the market would achieve equilibrium through trade between manufacturers and consumers, which would then help create reasonable, balanced prices and balanced production and consumption. This would lead to a more efficient distribution of resources, Smith said.
The equilibrium theory has long been the center of neo-classical economic theory. This theory, however, is based on assumptions from an imaginary world — not the real world.
The theory assumes that decision makers are shortsighted, yet capable of everything. It also assumes that decisions are independent, do not cost anything and that the world is simple and linear in nature.
However, the evidence clearly shows that in the real world, decision makers have foresight but are limited at the same time by rational thinking.
Decisions are not independent but interrelated and they have a cost. The world is complex and non-linear in nature and equilibrium is something that cannot be forced.
Under these circumstances, leaving the market to itself can result in disaster. Government planning and action are necessary to rectify problems as they arise.
The global financial crisis has revealed the basis of the theory of equilibrium to be fantasy.
To handle the economic crisis, the government should take a more active planning role. It should not try to draw up one complete and miraculous plan to solve all problems, but should seek a set of flexible measures for different problems such as the job market, the stock market and the real estate market and assimilate its plans with the projects of various governmental departments and the private sector to ensure appropriate action.
This is the only way the government will be able to solve the problems troubling the economy.
Using fantasy theories to try to solve real-world problems is as futile as the economic theory of equilibrium is unrealistic.
Lai Shih-kung is a professor in the Department of Real Estate and Built Environment of the College of Public Affairs at National Taipei University.
TRANSLATED BY DREW CAMERON
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