For years, we were told that Wall Street attracted the very best. That was why American investment banks were the envy of the world; that was why stratospheric salaries and bonuses were essential. Other financial centers, such as London, fought tooth and nail to attract the same elite. They were worth it, we were told: If you pay peanuts, you get monkeys.

That argument seems hollow now, but it was always a misunderstanding of the way financial markets work–indeed, the way the whole growth miracle of capitalism works. It’s not that financial markets themselves are a sham: There are indeed very smart investment bankers in the world, and some of them help to make us all richer by providing a bridge between those who could use money and those who have money. It’s just that this is not the whole story.

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The fact of the matter is: The market system does not work because of the incredibly smart people in charge. (The Soviets had some pretty smart people.) The market system works because nobody is in charge.

Even when markets surround us, we prefer to forget this. It is easier to focus on personalities, so the financial press like to talk about the leadership of great CEOs. When things go wrong, we search for fools and frauds: a Dick Fuld or worse, a Bernie Madoff. We think that the elite betrayed us or that the elite wasn’t as smart as everyone thought. Politicians–temperamentally inclined to believe in the “great man” theory of everything–tend to agree.

The truth is that markets stumble upon prosperity. New ideas are constantly being tried out. Most of them are bad, but that is fine, because markets ruthlessly eliminate bad ideas. A few of them are good, and that’s enough, because good ideas spread fast in a market system. In the language of biology, markets are evolutionary environments that select very powerfully for wealth-creating organizations. They attract the smart people to the right places, magnify their good qualities and smother their failures.

Once we accept that economic progress is largely a matter of trial and error, with accidental successes catching on and bad ideas failing really fast, the financial crisis itself looks very different. Yes, there were a lot of ideas out there that seemed smart but turned out to be flawed: issuing bad mortgages, repackaging them and betting big on the outcome. But that wasn’t the root of the problem. Every day, thousands of ideas that seem smart turn out to be flawed. A small firm might go bust, some people might have to look for new jobs, but there is no catastrophic consequence for the country as a whole.

This time, the problem was that the seemingly smart ideas simply didn’t fail quickly enough. This was largely because they grew so fast. Credit default swaps–quasi-insurance contracts that, unlike real insurance, can also be used to make side bets on the likelihood of financial distress–are barely a decade old. When the dot-com bubble burst, they were a niche market. Yet last summer, the Bank for International Settlements estimated that there were almost $60 trillion of over-the-counter credit default swap contracts outstanding. (The market had doubled in size in the year preceding the credit crunch, June 2006 to June 2007.) Such astonishing growth exemplifies the exotic instruments that entangled a brave new financial system. By the time the vulnerabilities of the new ideas became apparent, they were large enough to take down the world’s banks.

Next time, we’re going to have to make sure that the next clever financial idea grows a little slower or is tested a little earlier. One way or another, early failures are better than late ones. As for the elite, I’m not too worried. They’ll be able to find something useful to do–even if it isn’t on Wall Street.

Tim Harford, the “Undercover Economist” for the Financial Times, is author of The Logic Of Life.