WEBVTT NOTE 18. How Free Is the “Free Market”? 1 00:00:00.000 --> 00:00:02.960 18. 2 00:00:02.960 --> 00:00:05.840 How Free is the Free Market? 3 00:00:05.840 --> 00:00:10.040 January 21, 2008. 4 00:00:10.040 --> 00:00:15.200 See if you can spot anything wrong with the following claim, a version of which seems 5 00:00:15.200 --> 00:00:20.800 to appear in a book, magazine or newspaper every few weeks for as long as I've been 6 00:00:20.800 --> 00:00:25.200 reading public commentary on economic matters. 7 00:00:25.200 --> 00:00:30.900 The dominant idea guiding economic policy in the United States and much of the globe has 8 00:00:30.900 --> 00:00:34.640 been that the market is unfailingly wise. 9 00:00:34.640 --> 00:00:41.380 But lately, a striking unease with market forces has entered the conversation. 10 00:00:41.380 --> 00:00:46.800 The world confronts problems of staggering complexity and consequence from a shortage 11 00:00:46.800 --> 00:00:52.640 of credit following the mortgage meltdown to the threat of global warming. 12 00:00:52.640 --> 00:00:59.720 is suddenly being demanded from unexpected places. Now a paragraph like 13 00:00:59.720 --> 00:01:05.640 this one printed in the New York Times opinion section on December 30th 2007 in 14 00:01:05.640 --> 00:01:12.240 an article called The Free Market, a false idol after all, makes anyone versed 15 00:01:12.240 --> 00:01:18.720 in economic history crazy with frustration. Just about every word is 16 00:01:18.720 --> 00:01:24.880 is misleading in several ways, and yet some version of this scenario appears as a basis 17 00:01:24.880 --> 00:01:32.480 of vast amounts of punditry. The argument goes something like this. Until now, we've 18 00:01:32.480 --> 00:01:38.600 lived in a world of laissez-faire capitalism, with government and policy intellectuals convinced 19 00:01:38.600 --> 00:01:44.260 that the market should rule no matter what. Recent events, however, have underscored the 20 00:01:44.260 --> 00:01:52.260 are the limitations of this dog-eat-dog system and reveal that simplistic ideology is no match for a complex world. 21 00:01:52.260 --> 00:02:05.260 Therefore, government, responding to public demand that something be done, has cautiously decided to rein in greed and force us all to grow up and see the need for a mixed economy. 22 00:02:05.260 --> 00:02:19.260 All three claims are wrong. We live in the hundredth year of a heavily regulated economy, and even fifty years before that, the government was strongly involved in regulating trade. 23 00:02:19.260 --> 00:02:33.260 The planning apparatus established for World War I set wages and prices, monopolized monetary policy in the Federal Reserve, presumed first ownership over all earnings through the income tax, 24 00:02:33.260 --> 00:02:37.700 of Business, presumed to know how vertically and horizontally integrated businesses ought 25 00:02:37.700 --> 00:02:44.940 to be, and prohibited the creation of intergenerational dynasties through the death tax. 26 00:02:44.940 --> 00:02:50.660 That planning apparatus did not disappear but lay dormant temporarily, awaiting FDR 27 00:02:50.660 --> 00:02:56.220 who turned that machinery to all-around planning during the 1930s, the upshot of which was 28 00:02:56.220 --> 00:03:02.480 to delay recovery from the 1929 crash until after the war. 29 00:03:02.480 --> 00:03:08.800 Just how draconian the intervention is ebbs and flows from decade to decade, but the reality 30 00:03:08.800 --> 00:03:12.280 of the long-term trend is undeniable. 31 00:03:12.280 --> 00:03:19.880 More taxes, more regulations, more bureaucracies, more regimentation, more public ownership, 32 00:03:19.880 --> 00:03:24.320 and even less autonomy for private decision-making. 33 00:03:24.320 --> 00:03:29.500 The federal budget is nearly three trillion dollars per year, which is three times what 34 00:03:29.500 --> 00:03:33.140 What it was in Reagan's second term. 35 00:03:33.140 --> 00:03:38.260 Just since Bush has been in office, federal intervention in every area of our lives has 36 00:03:38.260 --> 00:03:44.660 exploded, from the nationalization of airline security to the heavy regulation of the medical 37 00:03:44.660 --> 00:03:49.700 sector to the centralized control of education. 38 00:03:49.700 --> 00:03:54.980 With free markets like this, who needs socialism? 39 00:03:54.980 --> 00:04:00.780 So the first assumption that we live in a free market world is simply not true. 40 00:04:00.780 --> 00:04:04.080 In fact, it is sheer fantasy. 41 00:04:04.080 --> 00:04:08.580 How is it that journalists can continually get away with asserting that the fantasy is 42 00:04:08.580 --> 00:04:09.740 true? 43 00:04:09.740 --> 00:04:14.700 How can informed writers continue to fob off on us the idea that we live in a laissez-faire 44 00:04:14.700 --> 00:04:20.340 world that can only be improved by just a bit of public tinkering? 45 00:04:20.340 --> 00:04:25.920 The reason is that most of our daily experience in life is not with the Department of Labor 46 00:04:25.920 --> 00:04:29.540 or Interior or Education or Justice. 47 00:04:29.540 --> 00:04:35.580 It is with Home Depot, McDonald's, Kroger's and Pizza Hut. 48 00:04:35.580 --> 00:04:42.820 Our lives are spent dealing with the commercial sector mostly because it is visible and accessible, 49 00:04:42.820 --> 00:04:48.320 whereas the depredations of the state are mostly abstract, and its destructive effects 50 00:04:48.320 --> 00:05:00.320 We don't see the inventions left on the shelf, the products not imported due to quotas, the people not working because of minimum wage laws, etc. 51 00:05:00.320 --> 00:05:09.320 Because of this, we are tempted to believe the unbelievable, namely that government serves the function only of a night watchman. 52 00:05:09.320 --> 00:05:14.480 and only by believing in such a fantasy can we possibly believe the second 53 00:05:14.480 --> 00:05:19.000 assumption which is that the problems of our society are due to the market 54 00:05:19.000 --> 00:05:25.520 economy not to the government that has intervened in the market economy consider 55 00:05:25.520 --> 00:05:30.800 the housing crisis the money machine called the Federal Reserve cranks out 56 00:05:30.800 --> 00:05:35.740 the credit as a subsidy to the banking business the bond dealers and the big 57 00:05:35.740 --> 00:05:45.540 It is this alchemic temple that distorts the reality that credit must be rationed in a 58 00:05:45.540 --> 00:05:49.260 way that accords with economic reality. 59 00:05:49.260 --> 00:05:55.620 The Federal Reserve embarked on a wild credit ride in the late 1990s that has dumped some 60 00:05:55.620 --> 00:06:02.580 $4 trillion in new money via the credit markets, making expansion of the loan sector both inevitable 61 00:06:02.580 --> 00:06:05.380 and unsustainable. 62 00:06:05.380 --> 00:06:10.580 At the same time, the Federal bureaus that manage and guarantee the bulk of mortgages 63 00:06:10.580 --> 00:06:13.620 have ballooned beyond belief. 64 00:06:13.620 --> 00:06:19.500 The popularity of subprime mortgages is the tip of a massive but buried debt mountain, 65 00:06:19.500 --> 00:06:25.180 all in the name of achieving the American dream of home ownership through massive government 66 00:06:25.180 --> 00:06:27.180 intervention. 67 00:06:27.180 --> 00:06:32.940 Say what you want about this system, but it is not the free market at work. 68 00:06:32.940 --> 00:06:39.400 Indeed, the very existence of central banking is contrary to the capitalist ideal in which 69 00:06:39.400 --> 00:06:44.580 money would be no different from any other good, produced and supplied by the market 70 00:06:44.580 --> 00:06:48.880 in accord with the moral law against theft and fraud. 71 00:06:48.880 --> 00:06:55.040 For the government to authorize a counterfeiter-in-chief is a direct attack on the sound money system 72 00:06:55.040 --> 00:06:57.040 of a market economy. 73 00:06:57.040 --> 00:07:07.040 Let's move to the third assumption, that government intervention can solve social and economic problems with global warming at the top of the heap. 74 00:07:07.040 --> 00:07:14.040 Let's say we remain agnostic on the question of whether there is global warming and what the cause really is. 75 00:07:14.040 --> 00:07:19.040 There is still no settled answer to either issue, despite what you hear. 76 00:07:19.040 --> 00:07:28.040 The very idea of putting the government in charge of changing the weather of the next 100 years is another notion from Fantasyland. 77 00:07:28.040 --> 00:07:34.040 The point about complexity counts against government intervention, not for it. 78 00:07:34.040 --> 00:07:43.040 The major contribution of F. A. Hayek to social theory is to point out that the social order, which extends to the whole of the world, 79 00:07:43.040 --> 00:07:50.360 is far too complicated to be managed by bureaus, but rather depends on the decentralized knowledge 80 00:07:50.360 --> 00:07:54.500 and decisions of billions of market actors. 81 00:07:54.500 --> 00:08:00.240 In other words, he gave new credibility to the insight of the classical liberals that 82 00:08:00.240 --> 00:08:05.680 the social order is self-managing and can only be distorted by attempts to centrally 83 00:08:05.680 --> 00:08:07.800 plan. 84 00:08:07.800 --> 00:08:12.340 Planning ironically leads to social chaos. 85 00:08:12.340 --> 00:08:16.620 You don't have to be a social scientist to understand this. 86 00:08:16.620 --> 00:08:22.020 Anyone who has experience with public sector bureaucracies knows they cannot do anything 87 00:08:22.020 --> 00:08:28.380 as well as markets, and however imperfect free markets are, they are vastly more efficient 88 00:08:28.380 --> 00:08:32.140 and humane in the long run than the public sector. 89 00:08:32.140 --> 00:08:38.200 This is because free markets trust the idea of freedom generally, whereas other systems 90 00:08:38.200 --> 00:08:43.320 Humans imagine that men in charge are as omniscient as gods. 91 00:08:43.320 --> 00:08:47.160 In one respect, the New York Times is right. 92 00:08:47.160 --> 00:08:51.100 There is always a demand for economic intervention. 93 00:08:51.100 --> 00:08:56.780 The government never minds having more power, and is always prepared to paper over the problems 94 00:08:56.780 --> 00:08:58.720 it creates. 95 00:08:58.720 --> 00:09:05.000 An economy not bludgeoned by powerful elites is the ideal we should seek, even if it has 96 00:09:05.000 --> 00:09:09.160 has a name that is wildly unpopular. Capitalism.