The failure of the absolute free market system

Great Debates
1

It seems to me that the recent events involving the demise of Lehman Brothers and Merrill Lynch (in addition to slightly older events like the demise of Bear Sterns, the government stepping in to rescue Fannie Mae and Freddie Mac, and much older stuff like LTCM, etc) have shown that an absolute free market (with zero or negligible government intervention/oversight) would be a failed system.

Such a system has shown itself to not be a viable system to run a country, since it is prone to meltdowns, which, barring government intervention would lead to Great Depressions every couple of decades. Not a system anyone would want to live in.

Of course, the US is not an absolute free market, and has quite a bit of government intervention/oversight, and that seems to be the best combination for a livable society.

I’m wondering if there still are free market absolutists out there, and what they think of how the recent (and not so recent) events relate to their ideology.

Of course, the real issue is not between zero oversight and total control. The question is: what is the level of oversight/regulation/intervention that is optimal for the best functioning of society (i.e. growth, without disastrous meltdowns)?

It seems that many people (esp. on the Right), think that “the fewer government regulations the better”. Have such people come to rethink those attitudes in light of the recent crisis?

On a related note, many have questioned whether the government should be in the habit of rescuing these companies, since it sends the wrong signal, namely that private companies can take huge risks and, if they are “too big to fail” Uncle Sam will bail them out with taxpayer money. I agree with this.

I think that the government should be more in the business of setting up the rules of the game, and enforcing those rules, rather than bailing out companies that are about to fail. Maybe one such rule would be that no company can be allowed to become “too big to fail”, i.e. so big that its collapse would damage the entire economy.

If, on rare occasions, the government does step in, it should be done in a way that is as painful as possible for the company being saved, e.g. the government lays out the rules of the bail-out such that, if the company survives long term, it pays back all taxpayer money (with interest) that was used in bailing it out (maybe this is what they already do, though I’d be surprised if they did)

2

Oh, they definitely exist, although I have no idea of their numbers. I get into arguments with them now and again, mostly on the Internet. “Free market fundamentalists” is how I think of them; the market is always right, restricting or controlling it always wrong, the market can solve all problems, if something is wrong with the market it can only be because it isn’t free enough. That sort of person.

They did have a strong influence on the occupation of Iraq; they tried to reshape it into their free market paradise, stripping away as much of the government’s economic control as they could and discouraging non private sector attempts to rebuild Iraq as much as they could. In their faith, they felt that the Free Market would do a better job reconstructing Iraq, and businesses from all over the world would flock to their remolded Iraq. Oddly enough, it turned out not many businesses were interested in investing in a war devastated anarchic hellhole.

That seems like it might be a good idea. Refusing to bail them out and letting the chips fall where they may, no matter the cost to society free market fundie style doesn’t strike me as a good idea, however.

3

Be careful not to lump everyone who wants a freer market than you do into that category. The fact is that sometimes the market IS right. Sometimes the market CAN solve problems that government can’t. Sometimes things DO go wrong because the market isn’t free enough.

There’s a middle ground between anarcho-capitalism and a planned economy. Almost nobody lies on either extreme. I happen to think that government shouldn’t bail out banks that are getting swallowed as a result of their predatory lending. There SHOULD be a real consequence for being so evil, and that consequence should be that your company dies and you never get the chance to ruin people’s financial livelihood again.

4

I never said otherwise. I was specifically referring to the people who think that the market is ALWAYS the answer, and the government NEVER is. The sort of people who claim that the Market will always solve a problem, even if it never has solved it in the past and they can’t explain how it will; they just know that the market will solve all problems, if it’s just free enough. The economic version of the sort of people who refuse medicine in favor of prayer because they know God will save them if they have faith enough.

5

So, being a true believer, with facts to back up your innuendo, I’m sure that you will have no problem giving us plenty of examples where the lightly regulated market (common sense free trade), produced worse results than one strictly regulated by the government.

I await your examples.

6

First, the FMs aren’t an argument against the free market, they were quasi independent companies, the worst of both worlds. I don’t think anyone defends what they were.

Second, this idea that free market = anarchy is silly. Having a free market relies on a government. Property rights, corporations etc are legal fictions, and necessary for an economy worth a damn.

As you say, no company should be allowed to become “too big to fail”. Once it becomes that it’s a case of heads we win tails the taxpayer loses.

In general, it seems far more transparency is needed. No one wants to lend money because they can’t figure out the state of the borrowers finances. I shed no tears for companies engaging in risky practices, they made billions when the going was good, now they’re going under. Cry me a river. The problem seems to be other companies can’t figure out who the risk takers are, so companies reliant on easy cash face meltdown, even if their finances are sound.

I’m no expert though :wink:

7

Yeah…the “corporate personhood” thing always baffles me (damn you Chief Justice Waite!). If a corporation has “freedom of speech”, they should also be subject to a “death penalty”.

8

The Daily Telegraph argues that this is a necessary correction and not a failure of the free market at all.

9

Yeah. They say that about the Black Death, too.

10

Cite?

11

What, you think letting a company fail ONCE is okay? That some OTHER company should get the chance to ruin people’s financial livelihood, perhaps even the very same person’s livelihood?

The consequence for predatory lending should be government regulation. Greed is not always good.

12

Actually, to support his point, he needs to provide an example where any regulation (light or otherwise) provided better results than absolutely zero regulation (not just light “common sense” regulation, zero regulation). Examples of this might be a little hard to come from, I can’t think of an example of absolutely zero regulation.

I’m not sure why examples of light versus heavy regulation have anything to do with this, it seems the poster has already agreed that balance is necessary (although I expect where that balance is may be something you differ on).

13

Here:

14

:rolleyes: First, since I apparently didn’t repeat myself often enough, I wasn’t TALKING about any middle of the road free market. I was talking about the people who don’t want regulations at all. You know, the sort mentioned by the OP. And second, you’ll have to define “light” and “heavy” regulation before your question is even answerable.

Quite true, but there are people who deny that. Who think that government regulation is by definition evil, and that the whole system would regulate itself.

It’s not that hard; either go back to before the regulations were written for that enterprise, or look at places where the government in question looks the other way and lets people ignore the regulations. What happens ? Disaster after disaster. Poisonous medicines, rotten food, collapsing buildings, massive pollution, and on and on.

15

I do not accept the premise of the OP in the least because it makes the common assumption that a “free” market is the same as an “unregulated” market which I do not accept.

Equalling freedom with lack of regulation is false and it is a straw man. F. Hayek, in The Road to Serfdom (a book I heartily recommend) explains it very well. He is 100% for free market but explains what he understands by “free market” and it has absolutely nothing to do with regulation. A free market is absolutely compatible with government regulation and he makes that point very clear.

So let us put that straw argument to rest. It is false, it is misleading, it is simply not true. A free market is not in contradiction with a regulated market.

A free market is one where regulations affect all actors equally and where anything that can be bought and sold can be bought and sold freely under the same conditions for all actors.

A heavily regulated market where regulation afects all actors alike and they are free to buy and sell without restriction on prices and quantities is a free market.

A market where the government sets limits on prices and/or quantities is not a free market.

A market where there is housing rent control is not a free market even if there were no other limitations.

A market where housing codes require buildings to comply with certain safety and other regulations is a free market if those conditions apply to all builders equally.

A market where the price of a certain commodity depends on the use it is intended for is not a free market because the price is regulated.

16

Impractical. Some companies like automakers are, by necessity, large and capital intensive. Other companies like General Electric are actually conglomerations of smaller, often unrelated, companies.

Maybe a better rule would be better lending practices and more enforcement.
As **sailor **pointed out, a free market is not incompatable with regulation. I would caution those who are for regulation that it is not a magic wand. Has Sorbanes Oxley benefited anyone other than the armies of accountants and consultants and complaince experts who now must monitor and enforce it?

17

I do.

Mind you, I’m sympathetic to those who lives are adversely impacted – or even ruined – by these wrongful choices. I’m also in favor of helping these people out in prudent and responsible ways. However, it is not the government’s responsibility to ensure that each and everyone of these companies succeeds. Heck, the government has a hard enough time running its own affairs; should we honestly think that it’s capable of saving all these other companies from failure? And if the owners of a company know that the government will always be there to bail them out, should we not expect that a large number of these people will exploit that system?

18

Part of the problem with FMs were that the market knew the government was backing those loans. That’s socialized risk. That’s not “the free market” as anyone uses the term.

I’m a “free market absolutist” in the sense that regulation is a fiction. Regulated behavior doesn’t vanish. Tax laws? --people cheat on taxes. Drug laws? --black markets. People, ultimately, will do what they want. All the government can manage is to distort their natural incentives. This is what “regulation” achieves.

It really depends. In some markets, there’s just no perverse incentives. In others, there are overwhelmingly perverse incentives. The government should probably intervene to the extent that it can turn perverse incentives into normal incentives, without intruding on other freedoms.

No. If anything, the government’s refusal to bail out more companies gives me some hope that some people still know what the hell they’re doing.

What if the rule is, “I will bail you out if you fail?”

Let’s look at it from a somewhat philosophical perspective. If you are talking about regulation, you are talking about distorting natural incentives (that is, incentives that would exist absent any regulation). This means you are encouraging behavior that wouldn’t normally be encouraged under a free market, or discouraging behavior that wouldn’t normally be discouraged. In the latter case, you are punishing people for deviating from your standard. If the punishment fits the crime, so to speak, we will have cases where it is a matter of indifference whether someone follows your regulation or not. In order to properly discourage activity, the risks of violation must be disproportionately worse than the benefit of following your regulation. In other words, you must be prepared to sufficiently distort natural incentives. When you consider what this actually requires, you may find yourself adopting a “lesser of two evils” perspective. Scribbling down some words on paper (“making law”) is not the same thing as actually distorting preferences. You must be prepared to enforce those laws and punish violators. As you might be able to imagine, in some cases it is more costly to regulate than it is to simply deal with the “problems” in the first place.

19

You created a strawman and then attacked it. Nobody is a fundie free market economist, so the fact that you can prove fundie economics wrong isn’t very impressive. Even the “absolutists” mentioned in the OP never match up to your description of them.

20

That’s got nothing to do with the article I mentioned. And your cite wasn’t written by the Daily Telegraph.

Now, do you have an actual cite? Or are you just spinning?