A Free Market Misunderstanding
The highway's jammed with broken heroes on a last chance power drive.
Everybody's out on the run tonight
But there's no place left to hide.
-Born To Run (Bruce Springsteen)
A popular view (and one promoted by many politicians) is that, in a free market system, power is held by the producers. Through this lens, capitalists are seen as antagonists and in need of government intervention and control. Thus, corporations such as Exxon-Mobil (XOM) and Chevron (CVX) are blamed for higher fuel prices, and firms like Citigroup (C) and Washington Mutual (WM) are held culpable for high rates of mortgage foreclosures stemming from the housing bust.
Such perspective is misguided. In a truly free market, consumers possess the ultimate power (Mises, 1949; Rothbard, 1962). Through their purchasing decisions, buyers provide critical feedback to sellers on what constitutes value. Customers, not producers, steer economic activity towards innovation and efficiency in a market system (Schumpeter, 1942). Producers who fail to deliver market value don’t get paid and are destined to fail.
Bureaucratic intervention distorts this mechanism. Although intervention is often portrayed as reducing industry influence, government interference and control often hands more power to producers. For instance, regulation can erect barriers that discourage prospective entrepreneurs who possess compelling value propositions from entering industries, thus protecting franchises of incumbent firms (Porter, 1980).
Moreover, regulation atrophies the decision-making process of buyers. For example, Federal Deposit Insurance Corporation (FDIC) insurance that backs the majority of U.S. bank accounts has blunted the critical assessment process necessary for customers to determine the financial health of banking institutions they patronize.
Reduced due diligence by buyers increases error in purchasing decisions.
Consequentially, society's scarce resources are misallocated as producers respond to distorted signals emanating from mistaken customer decisions.
Quite ironically, by seeking government-sponsored intervention and control over producers, consumers cede power that was originally theirs in a free market system.
References
Mises, L. (1949). Human action. New Haven: Yale University Press.
Porter, M.E. (1980). Competitive strategy. New York: Free Press.
Rothbard, M.N. (1962). Man, economy, and state. Princeton, NJ: D. Van Nostrand Co.
Schumpeter, J.A. (1942). Capitalism, socialism, and democracy. New York: Harper & Bros.
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According to Mises, we can all stop driving and using gas to teach Exxon a lesson. This is absolute rubbish. We can play around on the margins, but the choices are largely socially determined. The shape of our cities, the separation of work from school from home from shopping from entertainment, the kinds of transportation available, etc. all limit the scope of individual choice.
One cannot ignore individual choice, but one cannot make it sovereign either. To portray the producers as powerless victims in a world of atomistic individuals does not match any actual reality. Mises and Rothbard--like Marx before them--represent the victory of the ideologue over science and reason. Mises's statement that "The hangman, not the state, executes a criminal" is the height of sophistry.
Let me ask you a few questions: At what age did you "choose" to speak English? At what time did you choose the family you wanted to be born to? Did you really elect to become an American, or was it a birthright? Etc.
The truth of the matter is that people in this country, on average, spend 1% more than they make; they live on margin. Now the economy has had a margin call, its that simple. People wanted, and didn't mind, adjustable rate mortgages or neg-am loans because they just assumed they could refinance in a few years when the rate was due to adjust up. That is true, as long as the bottom doesn't fall out of the home pricing market. I'm tired of seeing the media parade across the screen all of these people who are crying "look what the mortgage broker and bank did to me." They claim no responsibility themselves. It shouldn't take a Mensa society member to figure out that if you make $50,000 a year, you can't afford a $750,000 home. However, we are Americans and we want it all right now. We've been spoiled and dillusioned that we somehow deserve and have a right to anything we want. This will hopefully be a learning experience.
The truth is that there is very little, if any "wiggle room" for fudging numbers or being creative with the books in a bank or with investments. The banking and securities industries are the most heavily regulated and audited. The Office of Foreign Asset Control, the Office of Thrift Supervisory, the U.S. Treasury, the Securities and Exchange Commission, and FINRA, among others all have strict rules, regulations, specific laws, and record keeping procedures that govern every move banks make from opening up a checking account to booking a mortgage, to recomending investments. In addition, each state in which banks do business also have to comply with state laws and departments of insurance.
I can assure anyone who thinks as you do, that banks are most certainly NOT loosly regulated or audited.
With all the financial engineering that goes on in banks and Wall St., and all the lies and distortions, how could any consumer figure out if the bank they patronize is safe or not?
It is easy to blame the masses themselves for the issues at hand. But this suggestion that FDIC has prevented consumers from piercing the veil of oligarchy that is our banking system borders on the absurd.
Partially true, but totally false. Parts of the industry are indeed regulated, the parts that are holding up relatively well, all things considered. Other parts, like derivatives, aren't regulated (or even measured) at all. And Greenspan promised the banks <i>carte blanche</i> on subprimes, in order to keep a shaky economy afloat. Now the bill comes due.
We've been here before. In the 80's, the S&L's were deregulated. Guess what the results were? It was not the govmint that gave triple-A's to obvious trash. It was the free market. But when ever there is a market failure, blame it on the govmint, even if the govmint's role was to do little or nothing.
I wish there was some possible way to get Austrians to turn from ideology even for a minute and look at history. There was a pre-keynesian economy, one much closer to the Misean ideal. And if you like the world that Dickens described, you will love Mises prescribes. However, those who are not fans of the workhouse may have some reservations.
You'e got to be kidding!! How many scandals and blowups must banks and Wall St. go through for you to understand the games that are played? Milken and junk bonds? Drexel? S&L? Options scandals? Steering IPOs to favorite investors? Conflicts of interests and kickbacks? Insider trading--remember Martha Stewart? Hiding losses in SPEs? BearStearns and Lehman saying they don't need any capital then rushing out to get some? That's just some of the games and the list goes on and on and on.
Jeff,
The following from Professor Sedacca exemplifies the lies and distortions of Wall St. and banks in general: “The case in point was when Lehman told the market that it didn't need to take write-downs and didn't need to raise equity. The week after this announcement it fired its CFO and raised capital it said it didn't need, in order to pay for write-downs it said it didn't have."
What the heck does Martha Stewart have to do with bank regulations? There is already oversight for what she did called "insider trading" regulations, for which she answered and was sentenced.
Which "conflicts of interest" and "kickbacks" are you refrencing specifically?
The bottom line is that this article is right on in its assesment of government regulation in a free market society. Ronald Reagan said it best when he said, "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.' " Does anyone here actually believe that more government regulation could prevent people from taking huge losses in the market? Facts, data, and expert opinion don't drive the market. Throughout history there are only two things that drive the market, fear and greed-in spite of the actual verifiable facts.
Would that be the same Ronald Reagan who ran up the national debt from $700M to $2.1T (That's "T" for "trillion")? The same RR who deregulated the S&Ls and then had to bail them out to clean up his mess?
Those who will not learn from history, are doomed to repeat it. We have had 30 years of promises, and now have a $9.4T debt. Only one president reversed that, and only for a brief period. When is reality permitted to break through the rhetoric? And where did I mention Martha Stewart, or most of the things you mentioned in your post.
I would argue that power is held by whoever is on the correct side of the supply/demand equation as it exists at the time. Kinda like how real estate swings from "buyer's markets" to "seller's markets".
And if markets remain free, they swing from slightly "buyer-controlled" to slightly "seller-controlled", which gives the common man opportunity.
Right? Pick your market, pick your location, research your costs and make your play. Invest where you find value, whichever side or product we're talking about.
Vibrant, healthy, transparent, honest markets are fertile ground for smart Americans to make their fortunes, at every level.
America's current trouble stems from unhealthy market manipulation on the part of govt officials, who made the mistake of listening to environmental pressure.
We shut down our domestic energy industry and paid our domestic food producers not to grow. We jacked up our manufacturing costs with excessive enviromental regulation and our manufacturers left the country.
Our largest export today is currency (the US dollar).
