Thursday, October 21, 2010


Last week in my class, The Myth of the Free Market, we made the turn toward the modern era. We had already discussed the historical role of the modern state in protecting rights and creating opportunities, especially in early America for settlers, people of color, and women, among others.

The goal in the first few weeks of class was to demonstrate how the state creates the conditions under which wealth is created. On a general level the state has to protect freedom and guard individual rights. More specifically, the state has had to work consistently to remove or soften the impact of market enemies like market conspiracies (monopoly, oligopolies, etc.), societal prejudices (racism, sexism, etc.), government-corporate collusion or capture (favorable legislation, slavery, bailouts, regulatory capture, etc.), hereditary privileges (inheritances, wealth transfers, etc.), and outright corruption and theft.

Slavery and the Black Codes did much to undermine Black America's ability to accumulate wealth.

Left untouched these enemies of the market undermine both talent and initiative, and work to destroy the moral justification of capitalism. This, as I described in class (and in my book), undermines the laws of justice and the integrity of the market.

But going after market deadening activities like market conspiracies, corruption, and collusion still doesn't allow us to create a level playing field. Especially when we consider how modern market players pursue the state in an effort to enhance their bottom line.  

To make my point I discussed several government sponsored (and taxpayer funded) market supports that make it clear how the state helps create the conditions under which wealth is created.

More importantly, these market supports also make it clear that if private market players don't operate in a marketplace free from government intervention it's because of the private sectors penchant for asking the government to give them a hand, and not simply because of regulatory excess.
Get Government Off My Back? Hardly ...
Among the many complaints that we hear from modern market players is that the state acts as a hindrance to their efforts. If only the state would leave them alone, all would be good, so the argument goes. Nothing could be further from the truth.

Market players actively seek out government favors. In class I'll be taking a look at some of the following market supports in greater detail over the next few weeks.
* Write-Offs and Write-Downs: Great for facilitating exchange and reducing tax burdens.
* Market Subsidies: Whether it's farm subsidies, oil subsidies, or grazing rights (among many others), it's clear market players are addicted to them.
* Market Protections: Ever wonder why you pay double and triple the price for medicines, or why you pay $1.69 each for an avocado, when our neighbors to the north and south pay much less? Want to understand why Americans pay almost double the rate for sugar that other markets around the world do? Think market protections.
* Market Interventions: Do we really let the magic of the market work? Or does trading on the NYSE shut down when the Dow drops by 10%, 20%, or 30%?  What about initiatives like the government-sponsored Public-Private Investment Programwhich helped kick start "private" investments after 2008?
* Regulatory Favors: How does did the financial sector benefit from "net capital rule" changes, and other decisions that allowed market players to suspend market prices for their toxic assets? (Hint: Their loans don't get called so they borrowed and bet more)
* Favorable Legislation: While there are too many to cover here, think how off-shore tax havens and the out-sourcing of jobs have been made even more profitable because of legislation developed in Washington at the request of industry lobbyists.  
* Government Sponsored Legal Cover: Let's just say that when the government forces firms to give up their day in court and then accepts multi-million dollar payouts (instead of going to court) has saved America's private sector from having to acknowledge or accept responsibility for many activities that we have found reprehensible.  
* Ex Post Facto Re-Classifications: Don't like the rules you had to play by? You'll especially like the regulatory decision that allowed investment firms to officially become banks after the 2008 market collapse (this allowed institutions like Goldman Sachs to become eligible for FDIC funds, and get access to government loans).
* Government Spending: If we had a spending problem before 1980, Ronald Reagan got us addicted. Think about it. Ronald Reagan almost tripled our national debt in 8 years. He did it with tax cuts and tax hikes that were focused on the wrong groups. Both acted as a conveyor belt for transfer payments. Think of the Reagan years as one massive public works program for the financial sector, which set the tone for years to come. 
* Monetary Policy: Alan Greenspan's loose money policies did much to inflate our economy, and create the illusion that prosperity could be had by all. There were no invisible hands here (as Jon Stewart got Greenspan to admit).
* Government Take-Over: No, I'm not talking about the bank nationalizations that should have occurred after the 2008 market collapse. Nor am I talking about the automobile deals in 2009 (which proved to be a huge success). I'm talking about the American taxpayer federal government assuming, or taking over, the private obligations that the private sector either screwed up or neglected. On this, think Maiden Lane(s) and private pensions.
* Government Bailouts: Don't get me started. But it's important to know they really got going in the 1980s (yeah, that was under Reagan too).
There's more. Much more (think of the role infrastructure projects, government sponsored R&D, public universities, the military, etc. play in propping up our market environment). But you get the picture. While our free marketeers want the government off their back, they definitely want the U.S. government - and the American taxpayer - to support their private efforts.
This brings me to my next point.
The State Creates the Conditions ...
The rugged sense of individualism that market players want Americans to buy into, and the idea that we operate in a free market environment, is supported by neither history or the facts. More realistically, as I and many others have demonstrated: The state creates the conditions under which great wealth has been created in America.

This is why it should be difficult for any American to buy into the idea that the private sector wants government out of their business. The record is clear. While market players may work hard, America's capitalists have consistently depended on the state to make their efforts in the marketplace even more profitable.
Problems, however, arise when market players overplay their hand.
We Regulate People, Not Markets
At the end of the day, we need to understand that while market players may have a bucolic view of how markets work - if the government would simply leave them  alone - the reality of modern markets is quite different. Market players will do what they need to do to get an edge and to increase profits, which includes seeking favorable legislation.
This is not evil (though some market players may engage in evil acts). It's simply market players acting rationally, and doing what they can to increase their bottom line. This is why we created laws and regulatory bodies. We need rules to insure that market players don't get out of hand in their pursuit of wealth. James Madison told us over 225 years ago (as I discuss in my book) that government intervention is necessary because market players have often overplayed their hand, to the detriment of society. This is why we have Art. I, Sec. 8 (and 9) in the Constitution.

In this way, we need to understand one simple truth: We don't regulate markets, we regulate people. Our Constitution is testament to this basic principle.
On Rationality and Reason
We regulate people for a reason. Apart from the fact that - as the Framers also pointed out in the Federalist Papers - men are not angels. The Framers understood this, and even discussed our penchant for not always acting rationally in a market setting.
To be sure, we may possess the capacity to reason and act rationally (a "truism" that the field of economics hangs it's hat on). But the reality is just because we possess the capacity to reason doesn't mean we will act reasonably - especially when a pile of money is staring us in the face and we can say (later, of course) that "it was legal."  
Because the state has determined that market players don't always do the right thing in a market setting, and understands that people must be regulated, it should come as no surprise that market players get upset with the government when it decides that it needs to regulate and create laws that don't allow them to do what they want, when they want. The state, in their view, gets in the way of their profit making ideas. It's one of the reasons market players argue that the state causes inefficiencies in the marketplace.
Is the Government Inefficient?
Is the government inefficient? My response to this question is, Compared to what?
Suggesting that the government is inefficient because it doesn't allow individuals to do what they want, when they want, isn't inefficiency. The state has different and longer term obligations than markets. States have to respond to societal needs which require that it focuses on infrastructures, the environment, public safety, the law, and other public needs that market players don't have to concern themselves with (markets and market players, on the other hand, must respond to fleeting tastes and consumer demands).
Here we have to remember that the idea behind modern government is to expand opportunities and guarantee individual freedoms. On this score, in spite of market responses that have often undermined individual freedoms (think slavery, child labor, and family wage laws, among others), the state has been very effective.
At the end of the day, comparing what markets do and what states do is like comparing an NFL team to the Russian ballet ... they're two different beasts.

I'll be commenting on the things market players ask for and demand from government in greater detail over the next few weeks.
- Mark

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