A part of The Economist obit for Paul Samuelson caught my eye.
As for Mr Samuelson’s friend of 50 years, Alan Greenspan, once chairman of the Federal Reserve, “the trouble is that he had been an Ayn Rander”—a devotee of laissez-faire capitalism. “You can take the boy out of the cult but you can’t take the cult out of the boy,”
A nice line about Rand and I like labelling it a cult, which I did not go as far as.
Ultimately Samuelson was a believer in regulation,
Yet Mr Samuelson also understood that beyond the ivory tower the conditions necessary for efficient markets rarely existed; they needed regulating. “To understand economics you need to know not only fundamentals but also its nuances,” Mr Samuelson would explain. “When someone preaches ‘Economics in one lesson’ I advise: Go back for the second lesson.” The latest crisis (for which he felt some responsibility, since he had helped develop financial derivatives that company executives did not understand) proved that “free markets do not stabilise themselves. Zero regulating is vastly suboptimal to rational regulating. Libertarianism is its own worst enemy!”
Ultimately there is an important lesson here. Command and control economies are not alternatives to market economies, because in the end aggregate behaviour comes down to individual choice. As the saying goes, you can lead a horse to water but you can't make it drink. You can't make the actual consumption decision for the individual. On top of that every command and control econmy inspires a thriving "black market." So ultimately markets always decide the final outcome.
But markets aren't perfect. There are lots of reasons why they are not - including assymetric information, herd behaviour (which causes bubbles) and lags. But equally relying upon the doctrine of "market failure" is an inadequate guide to how to regulate. As John Kay noted in Prospect magazine "The market failure doctrine is based on an imperfect understanding of why markets succeed, not just why they fail, and hence provides a misleading guide not only to when government intervention is appropriate, but also to the ways in which market forces can improve the operation of the public sector."
The purpose of regulation is not to cover market failure but to make markets work. Ultimately the protection of physical property and the law of contract is a piece of regulation to make markets work, the distinction between this "public law" and economic regulation (as promoted by say Anthony Ogus) is a false distinction.