23 Things they don't tell you about Capitalism

Proponents of free markets often suggest that people and companies are best left to do as they please because only they possess the information necessary to make rational decisions. Drawing on the work of political scientist Herbert Simon, Chang points out that human rationality is “bounded” by the inability to fully comprehend the world’s complexity.

In this light, government regulations can be effective not because the government knows better but rather because it has the power to simplify complex problems by limiting the available choices. Chang considers the case of Robert Merton and Myron Scholes, two Nobel Prize-winning economists who oversaw a series of hedge funds that failed. Given that these individuals could not accurately read the economy and make rational decisions, suggests Chang, it is foolish to think that other people and companies will do any better. Similarly, the leadup to the 2008 financial crisis involved the exchange of increasingly complex financial derivatives, some of which even experts in the field poorly understood. Going forward, Chang suggests that regulations limit or prevent the sale of such assets, much as drugs must be proven safe before companies can sell them.