Reflections of a stormy petrel

This is seriously the first time you've seen this? Heh. That the United States has a "mixed" market economy ( http://en.wikipedia.org/wiki/Mixed_economy#Modern_U.S._economy ), not a free market economy, should be widely known.

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That there is no such thing as a "free" market economy in the sense this man has it should be universally known. No state intrusion means no obligation to respect contracts, no obligation to deal ethically with customers, indeed no obligation not to do murder. These are all things that are not done because the State regulates against them, and provides formidable incentives not to pursue them. Were there no 'state regulation" (which is another word for "law"), mankind would have become extinct under the push of conflicting selfishness.

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If it doesn't exist, then he can't be called stupid for saying that the US doesn't have one and that it can't be blamed for imminent depression.

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No, sorry, you are being illogical. If it does not exist, it cannot be called innocent, since that is an attribute of things that exist. The stupidity is the assumption that such things could and should exist, and it reminds me of nothing so much as a Communist true believer. "Communism/The Free Market has not failed, comrades! It has just never been tried properly!" But by raising and settling (to his own satisfaction if nobody else's) a false problem, this man shifts attention away from real problems and above all prevents us from thinking in constructive and sensible ways about law and intervention.

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By that token, if it doesn't exist, then it cannot be guilty: guilt is also an attribute of things that exist. There are as many people who are running around saying "the free market" is guilty--including the President--as there are running around saying "the free market" is innocent. In fact, the latter are responding to the former. They have the power, and they are attempting to correct a problem that, as you say, cannot exist. That is dangerous.

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The real issue for me is that he seems to be trying to equate capitalism with a free-market. They are not the same thing.

When he says "The truth is that we don't have a free market.... so it's misleading to say that "capitalism" caused today's problems. The free market is innocent."

The truth is that we don't have apples... so it's misleading to say that oranges caused today's problems. Apples are innocent.

He's either stupid or hoping that people won't notice his sleight of hand.

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Probably both

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In this context, they are the same thing. The fact is most Americans use capitalism and free market to refer to the same thing, and the two are interchangeable in popular discourse. Assuming he's acting in good faith (difficult to tell for a political pundit), he just thinks they're synonyms and isn't trying a sleight of hand.

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But a pundit is not supposed to echo and refine the worst of popular discourse, but to raise its level and content. While there is no point for him/her in antagonizing his/her readers, the proper use of punditry is to sharpen and enlarge the terms of debate. If, instead of doint so, the pundit just repeats and hardens ill-grounded prejudices, s/he is betraying his/her position.

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So why use both terms? Why not say

"The truth is that we don't have a free market.... so it's misleading to say that the free market caused today's problems. The free market is innocent."

Do you think he is seriously saying that because the US does not have an unfettered free market, that it doesn't have a capitalist ecconomic system?

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Yep. It might be hard for you to believe, but there is a substantial that believes that, say, the PRC has a more capitalist system than the US does.

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substantial *population

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And this comment isn't a debate, I'm genuinely curious. Do you really think that "there is no obligation not to do murder" unless there is a government to say otherwise?

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There is no enforceable obligation, and therefore the pressure in the other direction is nearly irresistible. In a collapsed society, people will resort to the biggest bandit in the neighbourhood for justice, even if they know that he is a bandit (that is how the Frankish kingdom rose among the ruins of the Western Roman Empire), because justice without power simply does not exist. People instinctively demand that power should do justice; it is one of the two oldest functions of any power (the other is war). And at the same time, power itself arises largely from the consensus, the recognition, of the whole population. At its most degraded level, the recognition of a whole population that one bandit has risen above all others turns that bandit into a king. And this consensus is not only an essential part of power, but also of social intercourse of every kind. If people want to talk, they have to have agreed means of communications. If people want to trade at all, they have to have an agreement as to contracts, conditions and fulfilment, and that agreement has to be enforceable; without the might of the whole society to enforce contracts, society would devolve into a context of feuds arising from ancient and often forgotten mutual slights. Without the societal agreement that, even at the most debased level, forms power, justice and fair intercourse are impossible; in other words, the same consensus that makes power also makes mutual recognition of obligations.

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cerebresque.livejournal.com

On the contrary, sir, that I and others historically do in fact respect contracts (and non-binding promises, i.e., keep our word), refrain from defrauding customers, and, well, don't kill people even with no guns to our heads, policemen at our shoulders, or plausible possibility of lawsuits clearly demonstrates that the obligation to do these things does exist in the absence of an enforcement body.

(Not everyone respects their ethical obligations, or would in the absence of force, of course, but since even the most far-reaching security state has had bulging prisons full of people who didn't respect them in the presence of extensive State regulation and enforcement, I dismiss this as an argument.)

In any case and more cogently, you're conflating two things that we free-market types do tend to assume are obviously qualitatively different, and so may not be as clear about as we need to be. No free-markets advocate (except possibly for a few anarcho-capitalists) argues against state enforcement of the necessary preconditions for a free market, i.e., the obligation of contracts, the prevention of fraud, enforcement of property rights, &c.

What we do argue is that the market becomes unfree when the State becomes a player in the market, rather than a referee, or becomes a biased referee that acts to pick winners rather than ensure the game is played by the rules. Since the State possesses many economic powers that others do not, to tax both absolutely and preferentially, to subsidize, to regulate selectively, to impose asymmetric burdens, to tariff, to manipulate currency value, to determine which contracts and contract terms may exist, and ultimately to rewrite the law to favor its clients (per, for example, the ex post facto creditor reordering in the GM bankruptcy case), it is obviously capable of stacking the deck everyone else has to play with to favor whatever outcomes and clients it likes.

Now, reasonable men may - and I am virtually certain we do! - disagree as to to what extent political ends and well-meaning technocrats attempting the economic equivalent of pushing water uphill are responsible for causing present and historical economic crises, but I do think we must admit the capability, no?

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Yes, you are such a virtuous person. I do not doubt that. But I know that I am not virtuous, and I have little confidence in most others. The point is not that virtuous people will keep their obligations, the point is that everyone must - the good, the bad and the so-so. And that will not happen because they are all so pleased and happy and satisfied with their own righteousness. And that is not even mentioning problems with perception, memory and understanding. No two people will interpret a contract in exactly the same way. I have a little experience in the commercial world in what is beginning to be a longish life, and my experience is that there is no contract so fair, and no two partners so just, that they would not find a reason to quarrel if they were not restrained by fear.

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I am sure that D will have some constructive suggestions.

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o.O he probably does.

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fede-cba.livejournal.com

Of course strictly free market and total communism doesn't exist, but that's not the meaning of the words, the meaning of any word comes from it use, and in the daily and academical use of the word, free market mean a state who regulate little about the economy and just cares for public security, high school education and a few more things. So it's perfectly correct to say that free market caused a global economic crisis, because was that kind of economic way and not the idealistic and unpractical definition of you of free market what caused the crisis. You are trying to be creative, but you need to talk like an adult if you want to be in a conversation with adults

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I suggest you use polite language in someone else's blog. Trolls are not welcome here, and I feel no obligation to preserve their provocations.

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I have to disagree with you, I am entirely in agreement with this statement. Much of the financial problems in America were caused by places where the government had interfered in the market to cause an incentive. Once the government does this--like urging banks to give out certain kinds of loans that a wise bank would not issue--the situation is no longer capitalism.

I don't know what you do call it. It's not exactly socialism either, but it is not a free market because none of the pressures in a free market that tend to correct for abuses are allowed to oporate once the government regulation is in place.

In fact, every major financial problem in America in the last thirty years has been in markets where the government regulations allowed for some foolish behavior and forbid the forces that would naturally stop this behavior.

For years, I've pictured this as a bull who is charging, but tied by one foot, so he runs in a circle instead. He can never charge straight ahead and get where he's going, because some other regulation is still impeding him...leading to a bad result.

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I never expected you to agree with me. But my view is that the whole area in question is nothing more than a verbal trick. If you like and approve of a state intervention, you call it law, and declare it sacred; if you do not, you call it regulation and claim it interferes with the sacred free market. But in point of fact there is no difference between a law against murder, a law against intolerable working conditions, a law against false statements on labels, and a law regulating prices and wages: they all are "interventions" of the State, "interfering" with the free market by exactly the same statutory and force-backed ways. To draw a line between them and claim the ones to be virtuous and the others wicked, is to disregard their own nature. Even laws regulating prices and wages have their times of being useful (in wartime).

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Ah, but there is such a thing as a good law and a bad law. A good law against murder discourages murder. A bad law would encourage it by accident or perhaps punish some but not others for similar crimes.

And there are good regulations and bad regulations. Because lawmakers seldom understand what the effects of their work is upon the economy, regulations regularly have bad effects that were not intended by those who made them. These bad effects are sometimes mitigated by later additional regulation. Sometimes, they are left to fester until a really bad thing happens (like forcing banks to offer loans to low income people who cannot pay them back, and then being surprised when this leads to a bad result.)

Good laws lead to a good state. Good regulations help protect against abuses and fraud. But in a world where lawmakers pass laws without understanding the consequences, we have many bad regulations...probably more bad regulations than bad laws concerning theft and murder, because the effect of those laws is easier to see.

In particular, quite a few financial troubles of the last several decades in America involve a regulation that encouraged a bad activity that would never have happened had the government not stepped in to begin with.

I wish there were a better, quicker way of ascertaining the results of an economic regulation. I suspect both you and I would not want to live in a world were there were none at all, and yet there are so many that cause damage.

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Thre are two things that I object to. First, the invention of an imaginary free market with no evil state intervention - when the market itself is a product of the laws and could not exist without regulation. Second, the claim that all financial disasters and crimes are primarily caused by bad state intervention. This, to me, is nothing more than moral escapism: blame the State for the collective infatuations of thousands of free agents who deliberately threw themselves into what seemed, at the time, rivers of gold. Not our fault, of course not! That some regulations are bad or damaging or dangerous I do not argue; that speculative bubbles and ramps are in any way primarily caused by bad regulation I will believe when I believe human beings have ceased to be moral agents. Nobody obliged anyone to take a stupid debt, but thousands of people did, and thousands of people - naively or worse - took jobs which depended on their selling bad debts.

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You make a good point.

There are factors in the free market that tend to correct for certain abuses if left alone, but, of course, there are other abuses that are not corrected--or not corrected quickly enough, to make a complete free market a wise idea. For one thing, one would at least need criminal laws to stop fraud.

As to the second, I do think that in particular the last few financial catastrophies in America were enabled by government regulation...but you are entirely right that a dose of good judgement would have kept those loopholes from becoming disasters.

I have a friend who was offered a huge loan by their bank. They had the wisdom to refuse. But there are others who were not as wise--particularly because, up to ten years before, one could rely on banks to tell you how much you could afford wisely. Anyone who still trusted their bank to do this suffered.

They are the innocent ones.

But what about the banks who were doing this? They did not need to indulge in such outrageous behavior? Or banks that encouraged people to lie about whether or not their purchase was for living or investment? The very idea of a bank encouraging someone to lie on a form is outrageous.

So, you are entirely right that the many, many individules who deliberately chose to take steps they had reason to know were unwise are responsible for the disaster that followed.

The government is at fault for creating misleading incentives...but each person who knowingly followed up on those incentives is also at fault.

I do not blaim anyone who was deceived into thinking that they were doing the wise thing. I think they are the victims here. (I have friends who were assured by realtors, etc, that they would be able to do this or that to make an nigh-unpayable bill more affordable later. Some of these friends are really struggling now, and they just didn't know they were being mislead. I really feel for them.) These people are, I feel, different from people who knew very well that they could not afford something, but accepted the debt anyway.

What saddens me the most is that many of those in the business must have known what they were doing was wrong...because they have recently switched to outright fraud. Many ex-mortgage companies and lawyers are now offering debt protection programs that are just fraudulent. They take people's money and do nothing. There are thousands of complaints about this per state.

So, while I do agree that we, at least in America, do not have a fully free market and that government regulations contributed to our current distress, I also agree with you that the individuals who took advantage of the situation are equally responsible.

What puzzles me the most is that I knew several people who predicted the real estate crash in 2004 or 5. (One was an economist friend who spoke on a panel that was visited by John McCain. McCain later sponsored a bill to try to halt some of the abuses going on at the time. He was voted down. The opposition claimed he was racist because the loans he was trying to stop could help poor people.) If these folks knew it was coming, how come the guys whose whole livelihoods depended upon it could not see it and prepare.

I am reminded somehow of the seven fat years and seven lean years in the Bible...but we are without a Joseph who correctly predicted what was to come.

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The thing is -- it wasn't just the bad debt. It was the selling of fraudulent derivatives which turned a relatively localized problem in the housing market into a systemic financial crisis. We *used* to have regulations which would have prevented this, but they were relaxed or removed -- alas, in the name of enabling the free market.

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As I said above, I'm all in favor of laws restricting fraud. I do not think one can have civilization, much less a market place, without such laws.

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Maybe I am misreading you. I had thought you were writing as though the bad loans were a sufficient cause of the financial crisis. As far as I can tell the bad loans were necessary but not remotely sufficient.

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Sorry...wasn't clear. I think bad loans were sufficiant for the current real estate crisis...forclosures, etc. But you re entirely right that the general crisis goes far beyond that.

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Well, no, that is not the primary problem with Britain. The problem is that the public were encouraged, over a period of thirty years, to get themselves into debt on increasingly overpriced brick-and-mortar collateral, at the same time as the State lost revenue because of the collapse in domestic manufacturing and squandered the revenue it had. As a result, Britain today is unpayably in debt on both sides: most British citizens owe more on their homes than they can ever repay, while the State needs to either make dramatic cuts or raise taxes, both of which will increase the general misery. The country badly needs political leadership, and has none.

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Not that I exactly disagree. As far as I can tell there are three necessary causes for the crisis which are together sufficient in both Britain and the US:

the erosion of productive economic activity like manufacturing
an accumulation of debt in order to maintain/achieve a standard of living in the absence of sufficient productive activity to support it
the eventual de facto re-foundation of the economy on activities which essentially involve trading this same debt as a commodity in a sort of infinitely-regressing pyramid scheme

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Just so. Bad law did oblige many bad loans to be made, but by itself that would not have made a financial crisis if speculators had not seeded the financial foundations of the world with these loans, deceptively packaged, a thing which was only possible due to the relaxation of important financial regulations over the past few decades.

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Bear in mind that we had no such bad laws in Britain, and that our situation is, if possible, worse than the USA's. It was simply a bipartisan orgy, in which I can only say with very modified satisfaction that I was never tempted to take part. I could not have afforded it, but that did not stop many people.

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My understanding had been that the British finanicial sector also has serious problems with derivatives. And certainly the regulation of derivatives is an area in which the UK has parted company with the rest of the EU. For a recent example: http://www.eubusiness.com/news-eu/britain-finance.1zu

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By the way, you've probably seen this, but if you haven't, it is both funny and sad, as it came out in 2007...a whole year before things really went bad.

http://www.youtube.com/watch?v=mzJmTCYmo9g

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I'd have to say that you were half-right in your assessment of the causes of the chaos in the ecconomy. Not only did the government "urge banks to give out certain kinds of loans that a wise bank would not issue". Something that was, in effect, a tax on the banks. The problems came later when another government removed the regulations arround those loans. Fannie Mae and Freddie Mac were left with obligations to give out loans based on certaion critieria, but were not required to actually check that those criteria were fulfilled.

The problem would have been avoided by either having a properly regulated system or a non-regulated system. The compromise caused the problem.

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>The problem would have been avoided by either having a properly regulated system or a non-regulated system. The compromise caused the problem.

That is really well put.

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At which point one has to consider that laws are made for, and by, human beings. Once things had taken a seriously bad bend, where was the incentive for anyone to tell the people the truth? Warren Buffett could do it, because he has made himself so rich that he does not have to care about what anyone thinks. Ambrose Evans-Pritchard could, because he had already made himself a crank in the eyes of most people with his bizarre pursuit of the Clintons for murder; he had no reputation to lose. But what would a politician have gained if in, say, 2000, he had said: our countries are in a dangerous condition, we have to stop this business of borrowing beyond our needs"? He would not even have been listened to; he might not have been re-elected, and he certainly would never have been let anywhere near a leadership position. That is one reason why it is important to place certain kinds of restraint on human activities; that once the restraints go, all the incentives are towards the worse and not towards the better patterns of behaviour.

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And, in fact, John McCain did try it in 2005...and wasn't listened to.

But I was thinking more of the guys who were making the money...how come they didn't see it coming and back off. I assume none of these big finance companies wanted to go broke. It's kind of weird.

Maybe it's like skating on thin ice...you think you can go just so much farther and not fall in. Then, crash.

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"But I was thinking more of the guys who were making the money...how come they didn't see it coming and back off. I assume none of these big finance companies wanted to go broke. It's kind of weird."

You would think that. But there is another problem here, shareholders. Any Chief Exec or President, who kept his financial services company out of the trough when the Mortgage boom was going on would have been sacked by his shareholders. Companies no longer exist to make money, they exist to maximise their share price and since investors think in much shorter terms these days, that in turn forces companies to do the same.

The expectations of Shareholders have changed. Most no longer buy shares for the dividend, the income, but rather as a gamble on them being able to sell the shares at a profit at a later date. That has changed the nature of the stock market and of business in general. And almost assures that we are locked into a boom and bust cycle.

The people who succeed most in modern capitalism are the guys who sell shares/commodity futures etc at much more than they are actually worth, who take advantage of and oft-times are able to manipulate price bubbles. I'm afraid the stock market and most other financial trading is now little more than a game of Poker, and I’m afraid to say it isn’t a straight game either.

The big players have lots of aces up their sleeves.

As far as I can see there is only one law of finance that is always true - bubbles burst.

Edited Date: 2010-01-14 08:00 am (UTC)

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A good point. Even if the guys running the company can see trouble ahead, they are still under an incentive to mess up.

Really a shame, considering that everyone suffered for the short-sightedness of some.

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I'm late in jumping in here, but I'd like to point out that no libertarian (or free marketer) thinks that laws are unnecessary. Both Hayek and Friedman recognized the need for "formal laws" -- that is, laws that tell us "how" to arrange our affairs. The need to obey contracts, and so on, are all formal laws.

But the "substantive laws" -- laws that tell us what to buy, how much to pay for it, and so on (such as tariffs, price controls) -- move us away from a free-market.

So ... I do not consider the original post all that ignorent at all. America does not have a free market -- we have an overabundance of substantive laws (eg, fannie may, freddie mac) -- and the free market is not responsible for the current problems -- the lack of a free market is.

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