An object lesson from AIG, cheap at the price

Many people reading the bit about sustainable, universal pie making as a policy objective tend to think that I'm closer to Marx than Hayek in my thinking. After all, the whole point of the pie-a-week notion of prosperity is that it is not resource intensive, and, in theory, could be achieved by a planned economy. History suggests otherwise. If you don't believe me, I'll spot you a rolling pin and a pie plate for a little trip North Korea, Cuba, Belarus or even Venezuela.

The problem, at least one among many, is that in a planned economy compensation is determined by political rather than economic forces. The way we determine the number of doctors, lawyers, ditch diggers, engineers, etc. in most of the world now is increase their pay when we need more and decrease it when we need fewer. In some cases, this system can get out balance, especially when governments try absorb risk. We, however, have a built-in correction mechanism that, while painful (or funny), sure beats the alternative.

So, at the low, low price of $160million (plus probably twice that in gov't employee and media air time), we get an object lesson in how a nationalized economy must respond to popular pressure. The result of this is going to be a flight of the people who best understand the financial WMD to smaller firms where, hopefully, they will be able to do less damage. The crisis will drag out an extra half year or more as the people willing to accept lower pay and the political risk of working Citi, AIG and others get up to speed on exactly what was going on, and despite all the calls for more lending, we won't see much.