January 22, 2008

Free Markets

Cameron recently sent me an article entitled The Free Market Fairy by Joe Gregorio at BitWorking. Gregorio casts the Free Market as a mythical beast summoned by conservatives and classical liberals to solve any problem.

About the only thing that seems reasonable in this article is Gregorio's statement that I, Pencil by Leonard Read is a great introduction to the concepts and power of free markets.

Gregorio goes on in the next paragraph to claim: "the Free Market Fairy was the justification for taking a chainsaw to lending regulations in 2003 which precipitated the housing bubble, subsequent collapse, resultant credit crunch, and impending recession." Unfortunately, the Paul Krugman article he links to, while it mentions a chainsaw wielding event, neither names specific regulations, nor outlines how their elimination precipited the subprime market bomb. What Krugman does reveal that the event took place "on June 3, 2003 — just about the time subprime lending was starting to go wild". In other words, according to Gregorio's own source which he claims demonstrates that deregulation caused the subprime fiasco, Krugman reveals that subprime lending was already out of control. In fact there is reason to believe that some legislation, such as the "Community Reinvestment Act" and a long history of bailouts exacerbated subprime lending by requiring that banks lend to riskier people and providing a sense that if things went really wrong, the banks would be bailed out from their bad investments. Thus, by encouraging bad loans and minimizing the consequences of bad loans, the incentive to give bad loans increased.

As an aside, Krugman berates Greenspan:

"Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”"

But of course, what Greenspan is saying is true in the long term. Business do sometimes rip-off their customers, which is why buyers need to be alert and not just accept everything businesses tell them. However, if a business routinely deceives its customers into buying bad products, the word will get out and that company will die. Which is precisely why the government should not bail out banks that made bad loans. Bailing out bad businesses only encourages those bad practices and keeps bad businesses alive. In other words, while it is not true that all businesses operating in a free market are angelic, it is true that market forces push them to make make good products and deal honestly with consumers.

Gregorio then goes on to say that the free market has been claimed as a solution to 4 problems: healthcare, education, global warming, and the free market. Because healthcare is the only situtation Gregorio even attempts to comment on at greater depth, I'll discuss it later. As for the other 3:

Free Market for Education

I see no reason why the free market is not an appropriate solution to education problems. As even Gregorio admits, the forces of a free market maximize cost effectiveness, that is quality per dollar. Part of the problem with the current system it has only limited incentives to be cost effective and provide quality. Because public schools are so much cheaper than private schools and almost everyone has to pay for them anyway (via taxes), they will always have a majority of our children. As such, public schools are not very accountable for their quality, as most parents are unwilling or can't afford to spend hundreds or thousands of extra dollars just to find higher quality. A free market education system would provide a more even playing field for all schools and allow parents to vote with their dollars much more effectively. Furthermore, if one wishes to add some government guarantee that all children get an education, subsidy vouchers can easily be introduced to the system.

Free Market for Global Warming

Although global warming is a bogus problem, as I have argued in previous articles ([1] [2] [3] [4]), it is interesting to note that later in his article, Gregorio extolls the free market as a worthy toll in the governments toolbox that works well in conjunction with some regulations. As far as I am aware, all supposed "solutions" to global warming that appeal to the free market are of this mold. For example, the Kyoto Protocol and John McCains "carbon credit" systems are essentially the establishment of an artificial, government made, carbon emissions market where a limited right to pollute can be bought and sold. A more libertarian solution also requires government regulation to work in tandem with a market system. This other solution recognizes that pollution is the off-loading of pollutants into a carrier (stream or atmosphere) which then carries the pollution into or through property owned by other citizens, who then have a right to sue for compensation, thus attaching a real cost to such dumping, providing incentives to minimize it. However, neither is seen as simply solved without government by some mystical free market force.

Free Market for Slavery?

Here, Gregorio claims that Ron Paul suggested that Free Markets would have fixed slavery. As evidence that Paul made such a suggestions, Gregorio links to this article. This claim is not found in the article. What the article explains Ron Paul as claiming is that the solution to slavery would have been "simply shell out some cash, buy the slaves, and set them free." It isn't even clear from the article if Ron Paul was suggesting this as a government funded solution or a private funded solution.

In other words, this is a horrible example because almost no (or maybe even none at all) actually make this claim. Even arguing that Ron Paul claims free markets can solve slavery seems to be a bit of a stretch.

A Magic Fairy

Gregorio continues, arguing that free markets are magical because they fit the 3 hallmarks of magical devices. I'm pretty sure this criteria for a magic device is either obscure or entirely made up by Gregorio, as I have never heard of it before, he provides no citation, and a Google search comes up with his article first and then a bunch of irrelevant links.

Outside Physics

Gregorio tries to argue that the free market opporates outside of phsyics and is therefore magical. It seems to me that this is rather absurd because a free market is not physical phenomenon. Free Market theory is essentially the study of social interactions involving transfers of ownership and production of value.

Outside Science

What Gregorio really means here is that he believes free markets have repeatedly failed. However, this is not as clear as Gregorio would like to think. Even in the US, while most of our commodities are traded more freely than in most other nations, nearly all our markets are regulated to some extent. Therefore, the classic attempt by many modern liberals and socialists to observe that "market x in the US isn't doing so hot" ergo "free markets don't work" doesn't follow for 2 reasons. First, markets have boom/bust cycles. Second, most markets in the world aren't really free.

Additionally, Gregorio probably picked one of the least free markets in the US as an example: health care. Almost everyone agrees that market forces have been vastly distorted both by a disconnect between consumers and cost, and massive government regulation. Anyone ever heard of the FDA? Medicare? Medicaid? SCHIP?


Gregorio attempts to finish his proof that a free market as understood by many is a magical device by arguing that it is often believed to be morally right. This really is a bunch of nonsense. People described various policies and social systems as good and bad from all different kinds of political viewpoints every day. People do this because they see an idea as making the world better or worse and assign a value of good or bad accordingly. Gregorio's rhetoric simple tries to cast this in legitimate activity in a negative light for a subsection of people.

Stop the Magic

Of course, as Gregorio claims, the Free Market is an amoral force. However, two aspects of free market are things we would generally consider to be good. First, the prerequisite for a free market is that people are free to exchange their property as they wish. Second, the forces of a free market encourage better growth than any other economic system by maximizing the freedom to act as one wishes and the freedom to collect benefits for work that others value.

Gregorio than compares free markets as amoral forces to physical forces, such as gravity. I don't know about you, but I like gravity. I think I might even describe it as "a good force", because I like not flying or floating off into space. Oops, I guess I believe in the "magic" of gravity. :o

The Tool User

Here Gregorio argues that a free market is a government tool and that the government can and should add regulations to free markets to instill morality into them. Of course, he ignores such important questions as, whose morality we should instill in markets, and that the more a market is regulated, the less free it is.

Another thing Gregorio seems to assume is that the government is the moral and forming expression of a culture, and therefore if it is moral to say, care for sick people, that the government must do it. This is another key disagreement between conservatives and modern liberals. Modern liberals, who really are generally socialists, tend to believe that the government makes a society and that what a society should do should be done by government. Conservatives believe that government is an institution of society that provides a distinct set of services (essentially, the protection of individuals right from violations by other citizens (internal violations) and other nations (external violations)). Society to a conservative is a larger and much looser group of people living freely together, organizing for common causes, etc.

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