These measures are not intended to take over the free market, but to preserve it, George W. Bush said in Orwellian tones Tuesday as he announced the partial nationalization of nine major American banks.
He was partly right, though not in the way he meant his words. There is no free financial market to take over. But that means there is no free market to preserve either. The moves he announced, which include government part-ownership of smaller banks too, were just more, albeit big, steps along the corporatist route the country has been following for generations.
The current occupant of the White House isn't the only one laboring under, or cynically promoting, the illusion that a free finance market exists and therefore is responsible for the economic turmoil we're experiencing. Many commentators who oppose Bush's views on most things nevertheless agree with him on that point. For example:
Acknowledging an important role for government in social and economic life is — and always has been — the American way. American capitalism has thrived in a mixed economy that accommodated a large role for the state. The exceptional period has been the last three decades, when truly radical doctrines took hold. It is actually radical to imagine that the economy will go forward smoothly if the government rips up the rules, deregulates willy-nilly, gets out of the way and stops investing in public goods (education among them) that the market tends to under-finance. [Emphasis added.]
That was written by E.J. Dionne of the Washington Post. His first two sentences are more or less accurate. The golden age of laissez faire is a myth. But it takes extraordinary ignorance or extraordinary dishonesty to write the rest. Fine-tuning the level of regulation is not a radical doctrine. We can infer from the fact that most deregulation in the last three decades took place under Jimmy Carter (with help from Ted Kennedy) and Bill Clinton. Did the U.S. government really rip up the rules, deregulate willy-nilly, get out of the way, and stop spending on education and other “public goods”? Hardly. Even with deregulation, we remain a heavily regulated society. The state has grown over the 30 years, even if the rate of growth has fluctuated.
So why do pundits write such things?
I have a hunch I know part of the reason. Too many people who say they favor the free market treat political slogans as though they were reality, putting partisanship and personality above facts. Now the chickens are home, and this free-market mirage is blamed for the economic turmoil.
So Dionne's colleague Harold Meyerson writes, [C]onservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism.
It's a little late for these folks to say, No wait. Despite all we've been saying all along, we don't really have a free market. It’s the government's fault.
They're hoist by their own petard.
The upshot is that many people who call for free markets have hurt the cause either by not knowing what free markets require or by the political company they keep. If you ally with politicians who only talk about markets without ever really doing anything to let them work, don't be surprised when the bad consequences are blamed on the market — and you!
There's an unfortunate phenomenon in politics. If a candidate says he favors markets but does little to actually free any markets once he becomes, say, president, lots of people will assume he's done so anyway. Evidence that he didn't won't matter. He will become known for his laissez-faire, hate-the-government policies — even if such policies are nonexistent. Rhetoric gets all the attention.
But there's an asymmetry here. As noted, the most important deregulation of the last 30 years occurred, or at least was set in motion, by Jimmy Carter (trucking, airlines, banking, oil prices, telecommunications, and more) and Bill Clinton (banking). But no one accuses them of devotion to laissez faire. Yet Republicans who initiate little or nothing in this regard — or worse, sponsor intervention such as protectionism — are portrayed as Adam Smith reincarnate.
Do you sense that a political agenda overwhelms objectivity? (Incidentally, although it's partly self-serving, Clinton does not blame banking deregulation for the current problems.)
Layer of Regulation
The temptation of some free-market advocates to make unwise political alliances may stem from a faulty understanding of the U.S. political economy and what's required to change it. Some advocates talk as though the political economy is fundamentally free, except for a layer of regulation that has been forced on business. All we need do, to hear them tell it, is to scrape away that layer, and — voila! — the free market will be restored.
This couldn't be further from the truth. After many generations, government intervention, much of it at the behest of business, is woven deep into the fabric of the political economy. There is no layer to be scraped off like frost on a windshield. I don't mean to say that early in our history there wasn't a historically unprecedented degree of economic freedom. But even then, there were significant government-business machinations, resulting in a system of interlocking interventions. The current political economy is a product of the past, and the past was not laissez faire.
Much interventionism focused on the banking industry because national and state leaders, along with their business allies, have understood the central importance of finance to the economy. Influence, if not outright control, of this vital sector was essential to accomplishing political-economic objectives. For example, officials at the national level understood that a monetary system which was beyond political control would be ill-suited to planning economic development, or buying support from key constituencies, or projecting U.S. power around the world for the benefit of select economic interests. Such expensive projects require a fiat-money system. (See Steven Horwitz's Free-Market Money: A Key to Peace.) This helps explain why the dollar has lost about 90 percent of its value since 1950. It wasn't a mistake. It was an implicit tax on the industrious classes by the political class.
Social philosopher Chris Sciabarra writes: “Throughout the modern history of the system that most people call lsquo;capitalism,’ banking institutions have had such a profoundly intimate relationship to the state that one can only refer to it as a 'state-banking nexus.'
Free-banking economist George Selgin adds,
Civil War legislation nearly wiped out the antebellum state banking industry, setting up new national banks that were forced to back their notes with government bonds. Eligible bond collateral became increasingly scarce during the last quarter of the nineteenth century. Over the course of any year, such banks were prevented from meeting seasonal peaks in currency demands. The result was an inelastic stock of national bank currency, which gave rise to serious currency shortages in 1884, 1893, and 1907. Government regulation thus played a key role in the destructive business cycles…. In addition to setting unnatural limits to the stock of currency, the government also prohibited national banks from setting up branch networks. This resulted in the proliferation of thousands of under-diversified and failure prone banks.
The consequences were far-reaching. The government-caused business cycle was portrayed as a natural feature of the market that only government (and its banking allies) could mitigate. This accomplished two things: it softened people up for more government power and it furnished the excuse for the exercise of that power.
Sciabarra quotes from an important paper written years ago by Walter Grinder and John Hagel:
Historically, state intervention in the banking system has been one of the earliest forms of intervention in the market system. In the U.S., this intervention initially involved sporadic measures, both at the federal and state level, which generated inflationary distortion in the monetary supply and cyclical disruptions of economic activity. The disruptions which accompanied the business cycle were a major factor in the transformation of the dominant ideology in the U.S. from a general adherence to laissez-faire doctrines to an ideology of political capitalism which viewed the state as a necessary instrument for the rationalization and stabilization of an inherently unstable economic order. This transformation in ideology paved the way for the full-scale cartellization of the banking sector through the Federal Reserve System. The pressure for systematic state intervention in the banking sector originated both among the banks themselves and from certain industries which, because of capital intensive production processes and long lead-times, sought the stability necessary for the long-term planning of their investment strategies. The historical evidence confirms that the Federal Reserve legislation and other forms of state intervention in the banking sector during the first decades of the twentieth century received active support from influential banking and industrial interests.
Grinder and Hagel go on to say that state cartelization of banking facilitates system-wide inflation of the money supply, freeing banks from market constraints and giving them leverage, through credit creation, over the rest of the economy. Since the capital market naturally emerges as a strategic locus of ultimate decision-making in market economies, it is reasonable to assume that, by virtue of their intimate ties with the state apparatus, banking institutions will acquire an additional function within the state capitalist system, serving as an intermediary between the leading economic interests and the state, they write.
A System of Exploitation
This is the system that honest industrious people have labored under for generations. It is not an exaggeration to call it a system of exploitation. (Earlier libertarians had no trouble using that word.) Yes, general living standards have risen dramatically throughout American history. But that only shows that something short of complete economic freedom goes a long way. The freedom permitted, however, takes place within a system of political constraints that shifts wealth from the industrious to the political class and its well-connected business allies who have never liked the free market because competition doesn't respect yesterday's market share. (After all, they gave us the Progressive Era and backed the New Deal.) People outside the political class may be quite affluent by world and historical standards, but if they would have been wealthier still — and, importantly, more independent — in a free market, then they have suffered an injustice.
This system is the one most people know as capitalism, a name given currency in the highly charged formulations of Karl Marx and other enemies of private property, Clarence Carson wrote 23 years ago in The Freeman. The word 'capitalism' still carries the overtones of this Marxian analysis. Many of us have used this term as a synonym for free market, but increasingly this is being revealed as a tragic error. Ludwig von Mises and Ayn Rand defined capitalism as laissez faire (a dubious undertaking, Carson says), but the historical system bearing that name was not laissez faire. Rather, it was, as Carson put it, the legalization and institutionalization of a preference for capital. No system in which officials can create inflation, trade restrictions, patents, bailouts, licensing, and other privileges can be described as free.
The recent nationalization of the mortgage market and of major banks represent leaps in the degree of intervention. Still, they can be seen as a logical continuation of what has gone before. The crises produced by intervention summon forth further, more intense intervention. This is the way historical capitalism has worked.
Fortunately, we have an alternative: freedom and the free market.