Save the Econosphere!

I don’t need to tell you that the recent recession was a drag. It hit each of us where it hurt. We saw the wealth that we diligently saved in our homes all but vanish; watched equities plummet and experienced lost bonuses, reduced salaries, and the disappearance of entire vocations. It has been a rough time.

There appear to be reasons for hope: The economy is expanding again, including manufacturing. Corporate earnings are on the mend. Some of what was lost in the stock markets has returned. Home values appear to have stabilized, and even retail spending has shown signs of life—general merchandise sales are positive year over year. The world is looking a tad brighter.

But job growth remains elusive. Even if we see a month of expanding payrolls soon, it will be but a single step in a long journey to recreate what has been lost. I do miss 2007.

We're here to help

Fortunately, some smart people in Washington have a plan to cure what ails us. Here's how it goes:

First, prop up a few companies—companies deemed so important that they must not fail. Once saved, these companies can become forces for good. Next, purchase and insure debt no one else wants, which prevents massive insolvencies and lowers borrowing costs. Those low costs let Washington borrow billions, some of which it gave people to buy new cars, provided they turned in their clunky old ones to be junked. And although our troubles began after many people purchased homes they could not afford, we now offer people who haven't yet bought homes thousands of dollars to do so.

And while they're fixing things, these same folks have a few other ideas such as: Borrowing money to subsidize good technologies, so they will compete against and maybe even eliminate bad ones. Adjusting the pay of some people so they don't make so much more than other people. Changing trade rules to favor home-grown production over imports. In hopes of assuring good healthcare for everyone, taxing people who already have good healthcare. Cutting checks for old people, because they are old. And on and on.

The goal, evidently, is to remake the world the way it would have been made in the first place, if only the people who made it had been more enlightened. It's to create an economy that does what it is supposed to do, once and for all.

Back to the future?

Such aspirations remind me of the 19th and 20th century futurists who promoted the idea that the natural world was made for man to conquer. Cruel, random Nature was to be made rational, predictable and benevolent. Dam every river, fill every wetland, pave whatever needed paving; nothing could stop us.

Now, of course, we spend billions each year fixing the damage caused by trying to tame rather than adapt to our environment. We restore wetlands, decontaminate polluted earth, try to coax back sustainable populations of fish, birds, mammals, even insects. And we treasure those places where we can feel the grass under our toes, hear the waves lapping against clean shores, or smell air untainted by industrial fumes.

Meanwhile, those enlightened visionaries of the past—who turned out not to be so enlightened after all—have been replaced by a new bunch. Instead of remaking the ecosystem, this group wants to re-engineer what I call the Econosphere—our natural economic environment.

Economic ecology rules

Simple rules govern the Econosphere. Each of us is a utility maximizer; we do what can each day to maximize happiness through the pursuit of avocations and relationships. To obtain food and shelter we trade goods and services valued by others. Market prices tell us where to channel our time and effort, enabling us to help complete strangers half a world away maximize their own happiness as they help us.

In a land of infinite demand and finite resources, it is the Econosphere that provides the tools to do this efficiently and successfully. Of course many efforts run off the rails, but it is not the Econosphere that needs fixing, any more than nature needed fixing in the 19th century. Imperfect information is the usual culprit: When we overbuild, overinvest or overborrow, it is because we did not have the right information.

For example, why would homebuyers take on unaffordable loans? Maybe because they were told houses never lose value. Why would investors buy securities built of such poorly conceived loans? Maybe they believed mortgages are the last things Americans default on. Now, because of the bad information that led to such decisions, we have to dig out of an economic hole. And to do that, a healthy Econosphere is essential.

None too big to fail

We need market prices to show us what the world does and doesn’t value. We need enterprises that are no longer viable to fail quickly and completely, no matter how big they are—no firm is so big as to hold sway over the Econosphere. We need firms that can make better products or manage balance sheets more intelligently to be rewarded for doing the right thing. We need prices to fall until demand balances supply. We must have lending rates that reflect real risks. Perhaps most important, we need laws and regulations that are clear, fair and predictable. Uncertain rules drive up the cost of borrowing, investing or hiring.

Yet just when we need a blooming, robust Econosphere most, our economic ecology is being manhandled by those who would re-engineer it to further their own interests. In the process, the latter-day conquerors of nature threaten to pave over markets and fill in the wetlands of trade. Our metaphorical Cuyahoga River is aflame.

As we have gone green toward the natural ecosystem, we need a similar attitude adjustment about the Econosphere. Just as the tree-huggers of past decades spearheaded the environmental movement, we need modern-day “price-huggers,” to stand in front of those planning to bulldoze what's left of our benevolent, natural market economy.

Craig Thomas is a veteran private-sector economist and author of "The Econosphere" published by FT Press.