Thursday, March 15, 2012

The Freeman: "The Parable of the Broken Traffic Lights"



This parable was published today on The Freeman Online.Org, by Steven Horwitz, the Charles A. Dana Professor of Economics at St. Lawrence University.

The Freeman is a publication of the Foundation for Economic Education.

Here's a bit of the parable:
Suppose on some sunny afternoon in a large city somewhere in the western world, a man discovers on awaking from a two-hour nap that several hundred car accidents had occurred in the city while he slept.  He wonders why... 
As his brain slowly awakens, he stumbles across the likely culprit: Something must be wrong with the traffic lights.  He concludes that the lights are not working, leaving the drivers to figure out how to negotiate the intersections on their own.  Wouldn’t that, he wonders, cause many accidents?  He turns to his wife and suggests that explanation.  She replies:  “If you came to a traffic light and saw it was not working at all, wouldn’t you slow down and proceed cautiously?  In fact, after Hurricane Katrina didn’t people in New Orleans just treat broken traffic lights like four-way stops, without explicit direction to do so?”  Our fellow acknowledges his wife’s insightfulness and continues to ponder.
Soon it hits him: It’s not that the traffic lights were not functioning at all, but rather they were all green.  If all the lights were green, drivers would have no reason to think the lights were not working and would proceed through every intersection — with the result being the hundreds of accidents...
If you've guessed by now that Professor Horwitz is drawing an analogy by using those traffic lights to somehow represent the actions of the Federal Reserve System in responding to the boom that generated the post-2001 financial crisis, you would be right.  If you click above on "This parable," you can read the whole piece.

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