The Great American Free Market Fallacy


It is kind of fun to hear the liberals on one side decry the evils of deregulation while the conservatives moan about Wall Street greed. Those furthest to the left triumph in the fall of capitalism while the Republican ideologues are in a panic about government intervention and seek shelter in tax cuts. But the truth of the matter is that both sides are wrong. The American free market does not exist, and while certain types of regulation are essential for the well-being of the economy, there are plenty of Democrats out there to blame for the counter-productive deregulation.

True capitalists out there have to face the fact that Bill Clinton was a much better Republican than George W. Bush ever was. Under Bush, the Republicans talked a good show, but never really walked the capitalist walk. Rather, the government systematically intervened in the marketplace. Republicans may have called them tax credits, subsidies, permits, deregulation, or even war, but they’re all examples of intervening in the marketplace in favor of industries and companies at the expense of the free market. If you associate deficit spending with government intervention, then George W. and Ronald R were the great swelling intervenors. And yes, the Republicans’ obsession with what Americans do in their private time and behind closed doors is all about government intervention.

When yesterday on This Week with George Stephanopoulos Jim DeMint (R-SC) accused the Obama Administration and the House Democrats of trying to pass the largest spending bill in U.S. history, Barney Frank (D-MA) correctly noted,

The largest spending bill in history is going to turn out to be the war in Iraq. And one of the things, if we’re going to talk about spending, I don’t — I have a problem when we leave out that extraordinarily expensive, damaging war in Iraq, which has caused much more harm than good, in my judgment.

And I don’t understand why, from some of my conservative friends, building a road, building a school, helping somebody get health care, that’s — that’s wasteful spending, but that war in Iraq, which is going to cost us over $1 trillion before we’re through — yes, I wish we hadn’t have done that. We’d have been in a lot better shape fiscally.

. . . The problem is that we look at spending and say, “Oh, don’t spend on highways. Don’t spend on health care. But let’s build Cold War weapons to defeat the Soviet Union when we don’t need them. Let’s have hundreds and hundreds of billions of dollars going to the military without a check.” Unless everything’s on the table, then you’re going to have a disproportionate hit in some places.

But it’s not just military spending. It’s also the special treatment to oil companies, mega farms, the banking and auto industries, and other areas. So when Senator DeMint says that we’re facing a decision between a free market economy and a government-directed economy I wonder which country he is talking about.

As I have written before, regulations are essential to a healthy economy and society. Why do we have referees for sporting events, speed limits and stoplights for traffic, and criminal laws? Because without them “Wall Street” greed would go from an asset to a crisis. Could the free market’s invisible hand regulate, say, air traffic or pharmaceuticals? The U.S.’s competitive advantage was precisely its financial regulations – the Securities Regulations of 1933 and 1934 – that created an atmosphere of transparency that allowed investors to rely on the information available in the market and thus for the free market to flourish.

So when during the Clinton and Bush years we either deregulated or failed to regulate certain types of transactions (i.e., Hedge Funds), then the information in the market was inaccurate and the market eventually failed. Come on, does anyone really believe that absent disclosure and transparency requirements, corporations are going to be honest with us? Of course, in theory, the free market should prevail over time – without reliable information about a company, investors will not invest and will go elsewhere. While this is true over time, the same can be said of markets. Investors seek not just reliable companies, but also reliable and liquid markets where they can sell off their investments as easily as they can buy them, creating a virtuous cycle of wealth creation. Presently, Wall Street is losing its competitive advantage – its companies, directors, and regulatory scheme no longer inspire confidence. As a matter of fact, between the financial crisis and the bankers’ misuse of the bailout funds, Wall Street is destroying its global brand.

So when Senator DeMint says we have a regulatory system that makes us less competitive, it is for the reasons I just stated, not for his claim that U.S. corporations pay the highest taxes in the world. While that may be the case on paper, the government intervenes to make sure U.S. corporations get tax breaks requiring them to pay on average only five percent (I believe). Any student of the history of corporations will also know that in the great experiment of American federalism, there was a push to make corporate law very much a creature of state law. Many liberal critics called this the “race to the bottom”, arguing that states would compete to attract corporations by passing pro-management laws and reducing fees and taxes (thus diminishing shareholder rights). But the “race to the bottom” is not what made Delaware prevail as the forum of choice – for other states could easily follow with similar substantive laws. Rather, Delaware had the competitive advantage of certainty and reliability by having the most qualified and experienced judges and legislators. Certainty in the law and in the information available in the market is what makes for a strong, attractive financial services industry.

Back in September 2008, my brother was trying to make a connection between the violence caused in the name of religion and capitalism, arguing that there was something inherently violent in both. I gave the following quick argument in defense of capitalism:

Ironically, the development of corporations was actually a form of freedom from power being centralized in one single person or governing body. It meant that major, capital intensive projects could be endeavored without the king taking control or keeping everything for himself. Only through the pool of resources (through shareholders) could such things be achieved. Some of these first corporations were highly beneficial to society like schools, hospitals and other infrastructure. But others were more destructive and imperial like the British or Dutch corporations that were granted the exclusive rights to exploit India, Asia, and North America. In this sense, I suppose you could make the argument that these first corporations were following in the Church’s footsteps when the Church divided the world between Spain and Portugal at the Treaty of Tordecillas (I believe), audaciously granted one half to each country to exploit.

Nevertheless, religion is based on a totalitarian system of government with God as the supreme, unquestionable, unimpeachable, and infallible “benevolent” dictator. Religion governs and regulates, even when it may have certain “economic” goals in mind. Capitalism, in itself, aims to remove all regulation. It’s kind of ironic when you think about it, how Republicans want to remove economic barriers, but impose moral ones. They don’t want the state to interfere in the economy but they demand that the state interfere with your personal decisions.

But in the United States today it is hard to take the Republicans seriously when they whine about government intervention and plead in favor of the free market and the American way. Capitalism is about creating the mechanisms so that a free market can flourish, even if it includes measures that require government to provide services to its citizens (like roads and health care). Capitalism is not governmental corporatism, or promoting certain corporations and industries at the expense of others; that is pure government intervention. It all minds me of Nietzsche’s argument that God was dead because the masses had killed religion. For those out there, especially the liberals, who think that capitalism failed, they’re wrong. It was forgotten.

(As a footnote for Europeans who think that the U.S. offers no “social” protections, just as an example, unemployment benefits in New York are higher than those in Spain).


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