Financial Crises as Information Problems

If you haven’t seen it already, be sure to give a read to Friedman Prize winner Hernando de Soto’s recent piece in Business Week, “The Destruction of Economic Facts.” It’s a fascinating perspective on the economic and financial turmoil that is wracking the United States and the world.

As de Soto perceives more easily from working in developing economies, an important input into functioning markets is good information—about property, ownership, debts, and so on. The “destruction of economic facts” is one of the roots of instability and uncertainty in Europe and the United States: “In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.”

The law and markets are information systems, says de Soto:

The rule of law is much more than a dull body of norms: It is a huge, thriving information and management system that filters and processes local data until it is transformed into facts organized in a way that allows us to infer if they hang together and make sense.

If you’re interested in information and transparency, it’s worth a read.