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The Glories of Change

September 15, 2008

Tags Financial MarketsFree MarketsEntrepreneurship

The events on Wall Street, the collapse of Lehman and the selling off of Merrill, are magnificent and inspiring events. What we see here are examples of sweeping and fundamental change taking place, a huge upheaval that affects the whole of society, and toward the better, since what we have going on here is a massive reallocation of resources away from failing uses toward more productive uses.

Hundreds and hundreds of billions of dollars are on the move, sweeping all before them. And yet take note: it is not war accomplishing this. It is not violence. It is not the result of a planning committee. No election is necessary. No terrorist act took place. There was no government edict.

The agent of change here is that composite of all the world's exchanges that relentlessly shove resources this way and that way, so that they will find their most economically valued uses in society.

No one person is in charge. Layers upon layers of decisions by millions and billions of people are the essential mechanism that makes the process move forward. All these decisions and choices and guesses come to be aggregated in a single number called the price, and that price can then be used in that simple calculation that indicates success or failure. Every instant of time all around the world that calculation is made, and it results in shifts and movement and progress.

But as wonderful as the daily shifts and movements are, what really inspires are the massive acts of creative destruction such as when old-line firms like Lehman and Merrill melt before our eyes, their good assets transferred to more competent hands and their bad liabilities banished from the face of the earth.

This is the kind of shock and awe we should all celebrate. It is contrary to the wish of all the principal players and it accords with the will of society as a whole and the dictate of the market that waste not last and last. No matter how large, how entrenched, how exalted the institution, it is always vulnerable to being blown away by market forces — no more or less so than the lemonade stand down the street.

The need for dramatic shifts is essential for progress. But adapting to changing conditions and becoming an agent of that change, staying with the curve and jumping out in front of it — this is the real challenge. Enacting change — any kind of change but especially big and fundamental change — sometimes seems impossible in this world. We all desire it and know it is necessary. Seeking the reality of rebirth has an appeal. But finding the mechanism to make it happen is hugely difficult.

Try to change an institution from the inside and you will meet resistance around every corner. Bureaucracies are nearly impossible to change. Even firms in private enterprise are reluctant to adapt, and have to be pushed and nudged by the accounting ledger or no movement happens. Churches and other charitable organizations can whither and die without periodic and fundamental change and upheaval. Many institutions grow up around the principle of stability first. The organizational structure tends in the direction of the protective mode, with everyone burrowing in and resisting doing something different today and tomorrow from what he or she did yesterday and the day before. Inertia is the default.

How to break away from this problem is a great challenge. The theory of democracy was that we would have a voting mechanism to enact and force change, but the problem is that votes and personnel shifts bring a change in the look and feel of government but do not get below the surface. Wars and revolutions yield change but at too great a cost. The change wrought by markets goes to the very core of the issue. It makes and breaks whole institutions, sometimes overnight. And it does so in a beneficial way for the whole, without blood and without the risk of unanticipated calamity.

All the plans of big shots, all the desires of our governing masters, all the wishes and dreams of people who imagine themselves to be larger and more important than the rest of us, melt like snow on a sunny day.

In this sense, the market is the great leveler, the force in the universe that humbles all people and reminds them that they are no more important than anyone else and that their wishes must ultimately be shelved when faced with the overwhelming desire on the part of market traders that some other reality emerge.

For this reason, everyone has reason to celebrate the end of Lehman and Merrill. Overnight, while we slept, the seemingly mighty were humbled, the first made last and the last made first. The greatest became the least, all without a shot being fired.


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