A very optimistic view of how the market works, which sometimes is associated to Adam Smith,
is the view that you have self-regulation of the market and that the natural forces,
natural market forces can take care of everything, and in particular can ensure that inequality
will never increase to such an extent that it becomes socially and economically and politically
useless or even dangerous for that matter.
Now I think, in fact if you reread Adam Smith or if you try to look at the economic developments
throughout history you see that you cannot expect everything from the market.
You cannot just rely on natural forces to solve all problems.
And I think one of the conclusions from the history of political economy and the history
of economic growth and inequality is that you need strong public institutions in order
to put this powerful market forces in the right direction.
Market forces can produce a lot of innovation, a lot of incentives for inventions and entrepreneurship
and this is very positive.
But it would be a mistake to rely and count on these natural forces to sort of self regulate
themselves.
And if you look in particular at the period going up to the financial crisis of 2007/2008,
you have a very large concentration of economic gains into a relatively small group of the
population.
And I think everybody agrees today that this has contributed not only to the stagnation
of median household income but also to the rise of household debt, which in turn put
pressure on the financial system and probably did contribute to fragilize the financial
system with the consequences that we know in terms of financial crisis, recession, unemployment,
which we are now starting to get out of this, but there has been many years of lost growth
and a lot of social suffering because of this.
So we need strong public institutions in order to regulate these market forces.
And sometimes there's really excessive phase in these forces.
There are cycles over history.
Probably after the Great Depression, after World War II people realized that market forces
need to be strongly regulated.
And then starting in the '70s and the '80s with Reagan and cultural revolution and even
more so after the fall of the Soviet Union, we entered in the 1990s and 2000 in a new
cycle of sometimes unlimited phase in the self regulation of markets.
And to a large extent we are still in this phase.
And I think there's a reaction, a policy reaction to the financial crisis of 2007/2008 has been
too limited so far.
And this could happen again.
We've asked a lot to our central banks in the U.S. and in Europe.
And of course it's easy to print billions of dollars or billions of euros to avoid complete
bankruptcy of a financial system, which is what happened in the 1930s and which ended
up in a complete catastrophe.
So it's better to avoid that.
But at the same time printing money is not enough to solve the central problem that we
need to solve.
So the good news is that we avoided a complete bankruptcy and complete depression, but the
bad news is that we did not really solve the structural problems which might in the future
create new crisis.