How close are we to having a free market in the United States — and does it matter?
This issue came up briefly in a recent installment of the excellent podcast series “EconTalk,” when George Mason University professor Russ Roberts interviewed Australian economist John Quiggin, author of Zombie Economics: How Dead Ideas Still Walk among Us. Quiggin, a social democrat, thinks free-market ideas should be seen as a casualty of the late financial crisis, yet those ideas continue to stalk the world: Hence, they constitute “zombie economics.” He favors vigorous government regulation of the financial industry because he assumes bailouts of big integrated financial companies are inevitable. The price of this safety net, he says, should be close oversight by the State. (Quiggin commits the Nirvana Fallacy — comparing “imperfect” real-world markets to idealized but impossible regulatory regimes.)
Admirably, Roberts protested that since the federal government and the Federal Reserve have stood ready to bail out the influential creditors of financial companies at least since 1984, it can’t be that the free market has been tried and found wanting. After all, if there were no prospect of a bailout, creditors would monitor risk and act as a brake on reckless financial activity – they don’t want to lose their money. But if creditors can count on being rescued by the government or its central bank, they will not perform that watchdog role, as least not as vigilantly as they would in a free market. (See Roberts’s paper “Gambling with Other People’s Money.”)
So, Roberts asked Quiggin, “Why wouldn’t you simply be in favor of no bailouts? …We’ve never tried market liberalism, so why do you think we should go in a different direction?”
To which Quiggin responded: “Of course, we’ve never had a pure system of market liberalism but equally of course my remaining communist friends tell me we’ve never had pure communism. At some point you have to say this is as close as we are likely to get, and the contradictions only get worse.”
This is a glib answer, which Quiggin should be called on. One hears it often, and frankly it makes little sense. Right off the top, so what if communists say — defensively and incorrectly — that pure communism hasn’t been tried? That in no way undermines the proposition that the free market — particularly free banking — has not been allowed to exist in this century, and was not allowed in the last or the one before that either, and therefore that none of the depressions and other economic debacles that occurred in that time can be attributed to it.
For the record, communism – in the sense of a State-planned economy with the market essentially suppressed — was tried, certainly in Cambodia and North Korea, if not elsewhere. The results were disastrous. It was also tried during the postrevolutionary Soviet period known as War Communism. The result? “The country, and the government, were at the very edge of the abyss,” Trotsky said. So Lenin enacted his New Economic Policy, reintroducing money (a gold ruble) and allowing some independent entrepreneurship (by the NEPmen). (See my article “War Communism to NEP: The Road from Serfdom” [pdf]. For the full story, see Peter Boettke’s first book, The Political Economy of Soviet Socialism.)
As for a free market in banking, I see no reason to join Quiggin in saying, we are as “close as we are likely to get.” First, we have never been very close. Between the state and national governments, banking has always been substantially regulated in the United States. From the start it was one of the commanding heights of America’s “Merchant-state,” to use Albert Jay Nock’s term. Intrastate branch banking was long illegal, interstate banking was forbidden until 1994, and governments almost always had the power to cap interest rates and regulate the currency, even when gold played a role. Alexander Hamilton, James Madison, and Abraham Lincoln gave us national banks. Then came the Federal Reserve, followed 15 years later by the 1929 crash, which raised the curtain on the Great Depression and more regulation.
To say the latest financial debacle has roots in the free market is simply to confuse the competitive market economy with the corporate state, the competition-inhibiting partnership between influential businesses and government officials. Implicit taxpayer-backed guarantees to creditors, government-sponsored enterprises such as Fannie Mae and Freddie Mac, deposit insurance that anesthetizes depositor wariness, Fed-organized bank cartelization — none of this has anything to do with the free market.
Moreover, Quiggin is in no position to say that we’re as close as we’re going to get to the free market. How could he possibly know this? The government-sponsored banking cartel is a key party to an impending economic crisis that just might wake people up to the need to remove government from this realm in favor of market competition without privilege. Criticism of the Fed at the grassroots has never been harsher.
Finally, Quiggin did not say what contradictions he had in mind, but the theory and history of free banking, in the few places it has been given a chance, justify confidence that banking without government – that is, freedom — is not only possible but also practical and efficient – not to mention just. (For details see various works by Steven Horwitz, Lawrence H. White, and George Selgin.)
It is the failed doctrines of statism that constitute the zombies that still stalk us.