Comment on "Financial Markets and the State: Long Swings, Risk, and the Scope of Regulation" (by Roman Frydman and Michael D. Goldberg)
The Great Crash of 2008 was a systems failure, in the sense that it arose from dynamic processes involving a large number of interconnected actors. As in many complex systems, the dynamic behavior of the economy as a whole could not be predicted by examining the state of individual actors within the system. Rather, the collapse “emerged” in a somewhat unpredictable manner through the dynamic interactions among actors. Roman Frydman and Michael Goldberg brilliantly add to our understanding of the recent systems collapse, both through their cogent critique of the prevailing efficient markets (or Rational Expectations Hypothesis, REH) paradigm, which basically denies the possibilities of such system failures, and by postulating one key driver of system-wide failure, specifically the role of imperfect economic knowledge among market participants.