There's a hole in my hedge. This is very worrying for me, because it shouldn't be there. I used to have a small shed which went up to the hedge and blotted out the light, so the hedge itself became thin just there. When the shed went, there was a large and obvious gap. No problem, I thought, it will soon grow back.
It's grown back a bit, but there's still a hole. Why don't the surrounding bits of privet just colonize this free space? Yes, I guess my new shed blocks out the light, which doesn't help. And it's been cold and there hasn't been much sun. So I don't suppose that helps. I know that eventually, it will grow back. But I want my hedge back now.
Markets are like hedges, or any other ecosystem for that matter. When things go wrong, purists expect them to correct and fill all the gaps instantly. Politicians, who have all been taught by their economics lecturers that markets are perfect, just can't bear it when markets don't correct instantly. They say it's a market failure, and propose to plug the gaps themselves. As if government failure wasn't worse.
Markets – if they are competitive, and free from government-sponsored monopolies and restrictive regulation – do adjust. But it takes time. Markets aren't perfect. Markets are people. And while people might see that investment is in the wrong place – in houses bought at inflated prices with cheap credit, for example – it takes them time to adjust. They need time to make a judgement about what they think will succeed in the future. They need time to assess a number of possible alternatives. They need time to unwind their current commitments and put their money, time, and expertise into other areas. And they need time to build the plant, equipment and networks they need to capture those new opportunities. Some of those guesses won't work, and there will be further setbacks. Some initiatives will fail because other people got to the same place faster. Others will stumble because other entrepreneurs are buying up the resources they need for completely different ventures. Market adjustment is never smooth, predictable, and perfect.
And meanwhile, unemployment will persist. Just like the hole in my hedge. But it will grow over eventually. There's no point in me creating a hole somewhere else in the hedge in order to plug the one I've got – just as there's no point in governments raising taxes, borrowing and spending that costs jobs in one part of the economy in order to try to boost it in others that are more politically troublesome. Hedge transplants and job transplants don't always take.
