Edmund Phelps:

Widespread ignor­ance of the hazards of capitalism has made imprudence in markets and policy neglect all the more likely. Regaining a well-functioning capitalism will require re-education and deep reform.

Well into the 20th century, scholars viewed economic advances as resulting from commercial innovations enabled by the discoveries of scientists - discoveries that come from outside the economy and out of the blue. Why then did capitalist economies benefit more than others?

Friedrich Hayek portrayed a well-functioning capitalist system as a broad-based, bottom-up organism that gives diverse new ideas opportunities to compete for development and, with luck, adoption in the marketplace.

From the outset, the biggest downside was that creative ventures caused uncertainty not only for the entrepreneurs themselves but also for everyone else in the global economy.

Unfortunately, there is still no wide understanding among the public of the benefits that can fairly be credited to capitalism and why these benefits have costs.

Now capitalism is in the midst of its second crisis.

Why did big shareholders not move to stop over-leveraging before it reached dangerous levels? Why did legislators not demand regulatory intervention? The answer, I believe, is that they had no sense of the existing uncertainty.

Over at The Week, Brad DeLong offers a history lesson about The Panic of 1825:

This was the birth of central banking as we know it.

When politicians wash their hands of a financial system in crisis and fail to intervene on a large scale, things do not turn out well.