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Snip-It From The Big Picture

Barry Ritholtz’s Big Picture blog which I usually find to be highly entertaining and informative yesterday had a post that was somewhat infuriating, in which Ritholtz intimated that the free market is what failed us in this crisis. The following is the back-and-forth that ensued. Note that in the argument I represent Andy, and they represent Dwight. In the comments about the post, I replied:

This whole conception of a so-called “flawed economic philosophy” is absolutely ridiculous. Never in the history of the world has there been a truly free-market capitalistic system. Pre and during industrialization, the US was far closer to being free-market without a Federal Reserve, and tons of other areas of government intrusion in the markets.

The fact of the matter is that since we have a central bank that has a monopoly on the money supply and which somehow believes it can determine the perfect interest rate all or most of the time, the foundations of our banking system are inherently not free. There was a time where Greenspan felt this way himself, as was evidenced in his paper on the gold standard during the 60s. No true free marketeer would ever attempt to become the lead central banker however.

He sold out his values, as have millions of Americans since the development of the Federal Reserve, the income tax, social security, welfare, medicaire, FDIC insurance, and the imposition of various subsidies and tariffs. We forgot that it was the capitalist system that brought us the prosperity that we have squandered away as the state has become more and more intrusive. To characterize what we had during the Greenspan period as an era of total deregulation and free markets run amok is disingenuous.

Ritholtz had the following to say in response:

BR: You are tilting against windmills — as long as one nation has a central bank, no other nation will get rid of theirs. If your argument is that there is no free market capitalism as long as there is a Fed, well, that’s an extreme position, one that wont be tested in the real world.

Read the Panic of 1907 with the Creature from Jeckyl Island to understand exactly why we have a Federal Reserve. Its a highly flawed system, but its one that is extremely unlikely to go away anytime soon.

While his point is fair that practically, it is quite hard to imagine the US ever getting rid of its central bank, there are ways to constrain the banks’ ability to tamper with the credit supply (i.e. have some kind of commodity-based standard), or to impose some kind of regulation on the bank to keep their interest rate constant. This of course is not in the interest of the government because the power to control the monetary supply is a great one and also because inflation serves their constituents well in that it aids debtors (most Americans) and helps creditors.

Others had the following to say regarding my post:

“@A Mellon: Just so I am clear – we should go back to emulate the pre and industrialized “pure capitalist system that brought us prosperity” where there were no child labor laws, squalid living conditions, no worker protections, and brutally long worker hours? Is that ideal system we’re talking about? If so, I’ll pass, thanks………

Slavery was great for the titans of capitalism too (and played an enormous role in building this country). Should we return to that as well?”

Also: “A word about the glorious 19th century free market:
In the year 1864 more people died in train “accidents” than from civil war combat. YES the year was 18 SIXTY FOUR! That was at the height of the civil war.
Railroads saved money by nailing iron strips over wooden rails. These strips had a bad habit of coming off just when a train was going over them. The “iron snakes” as they were called would then cut up the seats and the people. And the bridges were such wonders of engineering; They would test them by putting a train on them after construction. They held and everything was great until a heavily loaded train would crash through into a river or ravine. The papers had great copy. One bridge failure caused a rare, honest railroad executive to commit suicide. And let’s not forget those modern coal and wood stoves to keep the pasengers comfy. When a train crashed into the caboose of another as often happened, all the stoves upended and the passenger cars became ovens which cooked the trapped passengers. Add to this the head on crashes because more profit minded railroad magnates used one track with side spurs for trains going in either direction further complicated by the fact that american cities kept their own “clocks” so we had different times all over the country, the boiler explosions, brake failures, disconnected passenger cars on a mountain side rushing to certain death and people began to clamor for GOVERNMENT action. This is at a time when free enterprize railroaders had purchased most of our illustrious senators and congressmen so the the GOVERNMENT was granting ( nice word. ain’t it?) right of ways all over the whole goddamned country to railroads without paying a penny.
So spare me the “free market” bullshit. Many of us are very comfortable because of a bunch of greedy, insensitive, cruel and rapatious ancestors. The free market had nothing to do with it. Go ahead, honor your asshole greatgrandpappy. It won’t hurt him at all.”

My response was as follows:

Burton Fulsom, an economic historian has written pretty extensively on the era and notes that there were those who were political entrepreneurs and those who were market entrepreneurs. Those working on the Transatlantic Railroad were subsidized extensively by the government, and the government policy which paid more for the more track that was laid incentivized them to make their tracks longer (which would probably explain the crappier material being used for parts of the tracks). The trains were also forced to go on steeper grades because of the increased lengths of tracks built. James Hill on the other hand did not seek any government help and built a far better track at a lesser cost and generated more revenue. When the other railroad tycoons all asked for loans from the government, Hill did not need to. Rockefeller and Hill were both attacked by those who were supported by the government in their enterprises because they made greater revenues by selling their better quality products at cheaper prices because they had to to compete. All regulations advocated by the political enterprepnuers ended up leading to crappier products and more poorly run enterprises. As for AGG’s comment on the poorer working conditions, the unions did their jobs in terms of seeking a better life for their workers. However, as recent times show us, they overstepped their bounds to the point where their actions sowed the seeds of destruction for the enterprises. It should be noted though that the superior businessmen like Ford and Rockefeller paid those who were most innovative and produced the most revenue very handsomely, and paid their workers in general higher rates than others in their respective businesses because it made sense from a business perspective to treat their workers well.

These are specific arguments, but the fact of the matter is that regulation has always been created to protect certain interests. There are also always unintended consequences to them. The Keynesian solutions however are not right. I believe only the Austrians have a conception of how a truly sound economy should function.

There was pretty much a lack of a response to that. I guess I either angered or confounded them enough. But there was an even more fundamental debate that came out of this, as one of the commenters said:

It just annoys me to see many of us still worshipping the false god of unfettered free markets. Human nature has never been, and never will be, ideal. SMART laws and regulations (enforced by smart, honest people) will always be necessary, however imperfect they may be as long as that’s the case.

My response was as follows:

It should be noted that there is a distinction between smart laws and regulations that restrict fraudulent or illegal behavior, and laws and regulations that attempt to hamper the markets. This is a fine distinction. We need laws and regulations to ensure that people’s property is protected, and that if genuine fraudulence occurs, those who perpetrate the fraud go to jail. On the other hand, the government’s actions now of buying up crappy assets with taxpayers money, bailing out companies that would fail in a free market, subsidization and banning of short sales for example are all examples of the government trying to fight against the laws of economics. These laws are not justifiable and further restrict the ability of market participants to act as they otherwise would. In the long run, all efforts to fight market forces will fail, as the New Deal showed. Keynesians had it wrong and Austrians had it right.

This is a fundamental problem with the interventionists. They fear a free market but they have never really seen one. They do not see that the regulations they produce end up unfairly hurting some but protecting others. There is a fine distinction between protecting people from fraud or having their property plundered, and hampering the ability of the market to perform.

Anyway, I thought it was an interesting debate at least.

Categories: Uncategorized
  1. Robert
    December 15, 2008 at 4:35 am

    Dwight Schrute: “The Schrutes consider children very valuable. In the olden days, the women would bear many children, so we would have enough laborers to work the fields. And if it was an especially cold winter, and there weren’t enough grains or vegetables, they would eat the weakest of the brood. [Laughs] They didn’t eat the children.”(From the ‘Take Your Daughter to Work Day’ episode.)

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