There is an interesting new summary of the work of the Systemic Risk Centre, whose theme is the idea of endogenous risk: risk created by the interaction of participants in a market or economy, and amplified through feedback loops. The pamphlet opens with a statement from Milton Friedman: “The great mistake everyone makes is to confuse what is true for the individual with what is true for society as a whole…. Almost any interesting economic problem has the following characteristic: what is true for the individual is the opposite of what is true for everybody together.”
It also, of course, quotes Hayek: “Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nusiance if not a positive danger.”
The centre focuses on finance. The summary is particularly good on the paradoxes: that making each individual market participant behave prudently will destabilise the whole financial system, in a real fallacy of composition; that many regulations amplify pro-cyclical feedback loops; that the Tobin tax on transactions would amplify market volatility; and so on. The work sounds like a terrific addition to the points made in Ian Goldin’s book The Butterfly Defect, which has a chapter on finance. Adair Turner’s forthcoming Between Debt and the Devil also looks at some of these issues.
Between Debt and the Devil: Money, Credit, and Fixing Global Finance