Gordon's Notes: Systemic failure and financial firewallsGlass-Steagall separated commercial and investment banking. One effect was to reduce the risk of contagion, but I think the intent was to reduce conflicts of interest.
... even if there are deeper economic and cultural failures, there are also more straightforward firewall failures in our current crisis. These are usually called "regulatory failures" but regulation can come in many forms. I think the most interesting forms are those that are designed to stop the spread of contagions.
Fires, seizures, epidemics, hurricanes and financial crises are all, famously, "chaotic". They have non-linear perturbation sensitivities, and they can roar up and die down in ways that are only loosely predictable.
Excepting hurricanes, we have firewalls for these things. In our brains are systems to dampen seizures should they arise, and, we think, to limit where they spread. In our buildings we have, well, firewalls. In public health we find immunization rings, targeted interventions, quarantine and the like...
... Firewalls don't show up, to my knowledge, in classical economics. I'm sure they show up in modern economic models of regulation and in studies of "complex adaptive systems" . Maybe this latest crisis will bring models of financial system firewalls, like the mourned Glass-Steagall act, to the level of popular economics.
Managing systemic conflicts of interest is one reason America's political system separates power between Congress, the Executive and the Courts. (One of the reasons Bush was able to fully leverage his incompetence was that the GOP controlled all three, and had near-control of the media as well.)
Conflict of interest is one reason, for example, that it's a very bad idea for orthopedic surgeons to own imaging facilities.
Speaking of which, there's yet another separation of powers that's waned over the past tweny years.
At one time American physicians dispensed medications and pharmacists prescribed. That's still true in many nations. Shockingly, the result was very high use of very inappropriate medications. The cure was separation of powers. Physicians would prescribe and pharmacists would dispense.
Time passed. Lessons were forgotten. Market deism and libertarian ideals joined forces. Now we have minute clinics owned by dispensing organizations, and oncologists who make a large share of their revenue by the margin on dispensed drugs.
I am very confident that we will rediscover that there was a good reason to separate prescribing and dispensing. We'll find, for example, that minute clinics dramatically increase the cost of "treating" self-limited conditions -- not to mention the sale of diet pills, supplements, and candy.
Firewalls to contain epidemic chaos. Separation of powers to manage fundamental conflicts of interest in an imperfect world of imperfect communication and incomplete knowledge. They both reduce efficiency. They are both essential. Sometimes they're the same thing.
I do wish our meta-memory wasn't so short.