Have any noted "free market, deregulation" advocates changed their tune?

Since the Reagan years we have heard a lot from the free market advocates. They want deregulation and “government off their backs”. “Let the market set the rules.”

Since the financial meltdown, which I attribute a lot to lax regulation and greedy “free marketers” run wild, have any noted economists or advocates come out publicly and reputed the views that they formerly espoused?

It’s like a business plan that failed and ended up in bankruptcy costing the investors a lot of money. Have any of the people that devised the plan said anything to the effect that, “We had it all wrong and it failed”?

Are we still at the point of denial or is it still someone else’s fault?

Deleted because it didn’t actually address the question.

Well, Treasury Secretary Henry Paulson himself seems to have thrown a few tomatoes at the deregulation concept:

Mostly, though, the dittohead line seems to be that it was really all the Democrats’ fault for making the government issue housing loans to irresponsible poor people via the Community Reinvestment Act of 1977. You’re not likely to see any serious admissions of error out of those folks.

Yeah, most free market/deregulation types are saying that the current problems are because of government and regulation, and had THEY been listened to, this whole crisis would either have been averted or reduced in seriousness.

I think you are confusing economic theory with layman understanding of the free market. I cannot imagine economists suddently changing their mind, unless for some reason economic theory hinged on this one empirical fact of investment banking in such-and-such a form being sound (which, of course, it doesn’t).

In economics, what constitutes a free market is rather technical and has nothing to do with the non-existence of “regulation,” whatever that means. An economist is not going to automatically sneer at a law just because it is a law. Legislation can account for externalities, can aid in the creation of what would otherwise be missing markets, can hide markets so there are missing market pairs which are more efficient, etc. Where economists might disagree is to what extent something is a missing market / externality / etc, and what the best way to handle it is, but it would take the destruction of mathematics to destroy the promise of the free market.

Outspoken laymen typically do not have such nuanced opinions, and tend to express opinions like law=regulation=not free, which has pretty much never been the intent of investigating economic behavior for the purpose of understanding or bettering our lives, so here again I’m not sure how this particular fact of banks failing would change their minds.

I’ve never understood the OP’s argument. There is, and has been since the 1930s an enormous amount of regulation of the financial markets.

To hear him and others like him talk, one would think that the financial world was a lawless society, devoid of any oversight, with tumbleweeds rolling by.

I won’t go into all of the details, but the idea is overstated at best. There were and are many regulations that banks were supposed to follow. Some did and some didn’t, but most all have gotten into trouble.

The HUGE problem; not more or less regulation, is the fact that we operate under a free market system with a huge asterisk; that being that the government won’t let any large segment get too uncomfortable, so we get into bailouts.

Bailouts don’t jive with free markets. I understand that something has to be done in this situation, but we either have to take a large step toward socialism (which we seem to be doing) or to let people suffer for a few years to get the free market back at the right base.

Since no politician will risk their job to do that, we will head toward socialism.

In other words, the OP wants to blame deregulation on the current problem. What world do you live in that promised growth forever and ever for all time, bullshit from politicians notwithstanding?

Deregulation simply means more freedom. Freedom to succeed and freedom to fail. But Americans are sheep. We spend money when we succeed and demand socialism when we fail. Sheep. Freedom dies with applause…

Well, the replies so far were focusing on the “advocates” of the OP’s “economists and advocates” question. But you make a good point: those who know what they’re talking about won’t flip so easily. But then, those with deeply held beliefs won’t either.

When I was in grad school, during a lecture by some free market egghead who was going on about this stuff, I raised my hand, being the ignorant student that I was, and said something like, “I think I get what you are saying but none of it accounts for the criminal mind.”

The guy stopped in his tracks and mumbled something. I said something like, “what you are espousing is great if everyone is thinking honorably but the fact is that there are people out there with criminal minds and will always look for ways to exploit the system for their personal gain at the expense of what is fair to the masses and that makes me question whether your theories are valid. There is no accounting for the criminal mind.”

The stooge just moved on and never answered.

All that being said, the real criminal minds aren’t walking into banks with a note, a ski mask and a gun. They are working from the inside, wearing nice clothes, living in big houses, getting their names in the paper, living high on the hog and ripping everybody off. They skate.

The “party line” for these people is that it is never the market’s fault; the problem is always due to insufficient deregulation or badly conceived/implemented deregulation.

They invariably claim that all the past crashes/crises were due to bad regulation. If only the market had the ideal set of regulations, no financial crisis would ever happen again. What they fail to see is that no matter what the regulations are at any given time, the free market, if it is sufficiently free, will find some wiggle room to concoct fancy schemes to make a lot of money, which invariable lead to pyramid-like schemes that bring the system down, like the $60 trillion credit default swap market (and LTCM and others before it).

And even if there are optimal regulations that would allow the market to function smoothly without occasional meltdowns, I don’t see why that market would be considered ‘free’. If the government had come in and disallowed lending to people who can’t afford it, even if that worked, why should the government dictate that? Shouldn’t the free market come to an equilibrium with the right number and types of people getting mortgages? If someone wants to give out loans to people who can’t afford them, if they want to take that risk because they have a good handle on the risk, they should be allowed to. The ones whose risk models are bad will fail and the ones whose risk models are good will succeed. That would be how a free market operates. Having the government come in and tell people “you cannot make this transaction because it is too risky” is not free market. And if people claim that that is what was needed to avert this meltdown, then they are admitting that the free market is not viable. We need regulation that goes beyond ideal free market regulation levels.

Criminals respond to incentives, too (economic behavior). Otherwise there would be no concept of “deterrence.” Now you might say that we do not have the proper [dis]incentives in place for those with a great deal of wealth or power, but that’s different from saying that they’re somehow outside of economic theory.

Libertarians and anarcho-capitalists consider the current crisis to be a vindication of their economic theories. They blame fiat currency in general. One specific criticism I’ve heard is that the Fed kept interest rates so low that they were outpaced by inflation, which made rational economic choices almost impossible.

I don’t have the requisite knowledge to evaluate these and other arguments. However, I think it’s telling that those who want less regulation blame government intervention in the market, while those who want more regulation blame a lack of government intervention in the market. Depressingly, I suspect that 99% of the people who have an opinion on the matter are too ignorant to know what they’re talking about, but think otherwise.
You can browse around herefor a laissez-faire take on the current situation.

I would like to understand this more, because it sounds interesting. But I’m struggling. Is there any way you could try and put it differently to give me another crack at it?

The most succinct summary of one of my posts I’ve ever read. :smiley:

I’m sorry, but I am terribly long-winded and use twisted, irritatingly complicated sentences to express what others see as simple ideas. I would happily clarify, if you picked something in particular.

But then, what was their explanation for the BIG crash of 1929? When we truly had no regulation?

“Some did and some didn’t”? In other words, by your own admissions, there were banks (and other institutions) not following regulations. In other words, the financial system was improperly regulated. That sounds like a HUGE problem to me.

Yes, regulation isn’t just about imposing new legal restrictions; it’s also about effectively enforcing the restrictions that are already in place. But clearly, whether it was that we didn’t have enough legal restrictions or that the existing restrictions weren’t properly enforced, or both, the regulation was inadequate.

More freedom to break laws, more freedom to take unwise risks with other people’s money, more freedom to make up financial instruments that few people understand so it will be harder to evaluate risks…

Anybody who wants unlimited “freedom to succeed and freedom to fail” with their own money can find it at the blackjack tables in Vegas. Nobody’s entitled to put other people at unacceptable levels of risk just to increase their own freedom. The national financial system serves important economic functions for the country (and the world) as a whole, and individuals shouldn’t be allowed to over-rev it to the danger point just so they can increase their freedom to gamble.

IdahoMauleMan, I interpreted erislover as meaning that basic economic theories about market regulation have not changed as a result of this meltdown. Some pro-deregulation economists may have misread the financial situation and failed to see the bust coming (and if you don’t know who they are, economist Dean Baker will be happy to tell you), but it wasn’t as though they were disagreeing about fundamental laws of economics.

That said, there do seem to be some economic theories (e.g., “rational choice theory”) that tend to advocate deregulation more than others (e.g, “behavioral economics”), and I think the current meltdown might prod some economists in the former camp to modify their views somewhat. But as erislover says, we’re not likely to see any road-to-Damascus moments here among serious economists, because none of what is happening violates the fundamentals of mainstream economic theory. All economists always agreed that badly regulated markets could suffer serious boom and bust cycles; they just disagreed about to what extent and in what ways US financial markets might be badly regulated.

If I’m reading this right, then fine, let the market regulate. However, now we are at the point that the institutions that are the foundation of our economy are asking for welfare from the government. It’s the old deal, if you owe the bank $1 million and you can’t pay you have a problem. If you owe the bank $1 billion and you can’t pay the bank has a problem. (That’s been Donald Trump’s MO for years.)

So are you willing to let the house of cards fall and let everyone take their hit including a long term depression? Or do you want the government to step in and mitigate the crisis?

It’s like game management at the Natural Resources Dept. Do you want the deer and the coyotes to drive each others populations in severe peaks and valleys or do you want to manage it so that they can exist in some kind of equilibrium by regulating hunting? Pick your poison.

America’s Great Depression, by Murray Rothbard. (Full text.)


OK. Let’s stick with your 2nd paragraph for now.

First sentence:

In economics, what constitutes a free market is rather technical and has nothing to do with the non-existence of “regulation,” whatever that means.

I would like to learn more about this. Could you throw out some definitions of what ‘rather technical’ means? For example, does a technical free market include things like laws designed to protect parties from coercion or fraud, for example? As well as an infrastructure and remedies to pay for them, since courts and prisons and such cost money? Does it include restrictions on trade with foreign entities that a sovereign state considers dangerous?

Those were the first things that popped into my head as I read it, but I have no idea if that is what you meant, or not. If there is more to it than that, could you illustrate a few things for me?

Third sentence:

Legislation can account for externalities, can aid in the creation of what would otherwise be missing markets, can hide markets so there are missing market pairs which are more efficient, etc

‘Missing markets’ and ‘missing market pairs’ sound like interesting concepts. But I don’t know what they mean. If you could throw out some examples I would appreciate it.

Do ‘externalities’ in your sentence above mean things where costs may be borne by non-willing participants, such as pollution from a factory in Ohio blowing over Pennsylvania? Or does it mean something else?

Last sentence:

Where economists might disagree is to what extent something is a missing market / externality / etc, and what the best way to handle it is, but it would take the destruction of mathematics to destroy the promise of the free market.

I think I get the first part (up to ‘handle it is’) but I don’t understand it after that. If you could try again I would be most appreciative.

Thanks for the response.

Thank you!