by Sandy Ikeda
Jeffrey Friedman and Wladimir Kraus have a new book out, Engineering the Financial Crisis, (Univ. Penn Press) that grew out of research that first appeared in Critical Review back in 2009 on the “Causes of the Crisis.” Friedman’s lead article in that issue did an excellent job of providing a detailed but readable description of the institutional setting of the crisis and an account of the complex events, domestic and international, that led to it. I’ve only skimmed the book, but it appears offer a similar kind of useful description and analysis of these and many other events surrounding the crisis.
What distinguishes this book, and what may be of particular interest to readers of this blog, is it’s explicitly Austrian perspective on the role of ignorance, in the private but especially the public sector, as the analytical starting point of the crisis.
The meta-mistake that economists make in ignoring ignorance (or in reducing it to “rational” or deliberate ignorance or to “asymmetric information,” where one party does know the truth) is suggestive, we think, of the problems that modern democracy faces: If economists are our most important advisers, but their worldviews have no place for genuine human error, we are in deep trouble (151).
A rationalist constructivist hubris led public authorities to create a “hybrid capitalism” that incited entrepreneurs to ever riskier investments, the consequences of which no one could foresee though they perhaps might have imagined. The book’s title Engineering the Financial Crisis captures that idea well.