The second edition of the Rule of Freedom: the Manifesto of the Sovereign Community has been published. The full volume is now available for free here.
I think tearing down the state would be one of the best things humanity could do for itself. I know most people disagree, but I wonder if that is partly because they don’t know much about spontaneous order.
One of the main reasons we still have the state is humans have a bias toward needing to feel in control. We believe not only that we can control our surroundings but that we should. Control means order, right? The more control we have–over the whole world, ideally–the safer we are. The theory of spontaneous order demonstrates the shortsightedness of this argument (as does the incredible damage the state has done to the world since its inception).
Spontaneous order is one of the most powerful forces in the universe, but most people do not know it by name. Spontaneous order, or self-organisation, has been used to explain the expansion of the universe and the movement of celestial objects, the evolution of life on earth, the formation of snowflakes and crystal structure, the activities of cells, ant colonies, beehives, flocks of birds, language, culture, markets and cities. It is the order, contrary to what we tend to expect, that arises when we stop trying to control things and let them be. A single ant could not direct an ant colony; a beehive is not run by a committee of bees. Likewise, central planning fails miserably while free people build wealth for themselves.
When people are freed from whoever is constraining or oppressing them, the norm is not rioting and Hobbes’ war of all against all. It is people peacefully cooperating to do what they agree is important. Look at what happens during revolutions. Look at what happens during wars. When all law and order break down, to the extent they can, people often work together, because they need each other. Spontaneous order is the phenomenon that explains it. Never mind humans; when anything, particularly life on earth, is left alone by outside or artificial constraints, it tends to flourish.
As far as we know, the idea dates back to ancient China. Here is something Laozi said over 2000 years ago.
The more laws and restrictions there are,
The poorer people become.
The sharper men’s weapons,
The more trouble in the land.
The more ingenious and clever men are,
The more strange things happen.
The more rules and regulations,
The more thieves and robbers.
Therefore the sage says:
I take no action and people are reformed.
I enjoy peace and people become honest.
I do nothing and the people become rich.
I have no desires and people return to the good and simple life.
Statism is just one idea for organising society. The state is very good at fulfilling its purpose: concentrating power in the hands of a few people: once kings and courtiers but now politicians, top bureaucrats, heads of the security apparatus and corporate clients. But it is not good at leaving people alone to reach their potential.
When we are free, economies thrive, because individuals are far more empowered and responsible. Science and technology speed ahead. The most free and open complex societies in history are the ones that made all the most important advances in knowledge and the arts—not China in its days of oppression but in its days of openness. Not in today’s Middle East with its corrupt dictatorships but in the Middle East that advanced mathematics, astronomy and medicine and saved all the books the Europeans had thrown out as blasphemous. Not that Europe; the Europe since the beginning of the Enlightenment. But not the Europe of today, either, with its seemingly endless regulations, bureaucracy and welfare state. Europe used to consist of many small states with little power to regulate their societies. As Hans-Hermann Hoppe puts it,
Contrary to orthodoxy, then, precisely the fact that Europe possessed a highly decentralized power structure composed of countless independent political units explains the origin of capitalism—the expansion of market participation and of economic growth—in the Western world. It is not by accident that capitalism first flourished under conditions of extreme political decentralization: in the northern Italian city states, in southern Germany, and in the secessionist Low Countries (Netherlands).
People all around the world have so much wealth in their communities that, if they could own and transform however they like, could lift them out of poverty. Instead, they either do not have freedom to own and defend their property so they cannot use it, or are told not to work for themselves but to come and pick up a cheque so they can remain part of the wider economy. Their potential is still there, though. The benefits of freeing people from artificial constraints demonstrate the amazing power of spontaneous order. It is something voluntaryists and other freedom-minded people should help others understand better in order to make their case.
“Corporate capitalists don’t want free markets. They want dependable profits, and their surest route is to crush the competition by controlling the government.” – RFK, Jr.
It is often claimed in “progressive” and “liberal” circles that we need more regulation to curb the influence and power of big business. This belief is based largely on a misconception as to the origin, purpose and result of regulations.
During the period between the end of the American Civil War and roughly the 1890s, business in the US tried to cartelise but found it could not. In general, cartels can only control a market when force is introduced. During this period, every attempt to form a cartel and raise prices led to new competitors that realised they could undercut the cartels. In response, big business began lobbying the government to pass laws “in the public interest” (as all laws are claimed to be) that would enable them to keep competitors out. It worked. (Find a large amount of research on the subject here.)
Today, regulations and other laws protecting business include corporate personhood, accounting standards, safety standards, environmental standards and intellectual property. In addition, there are subsidies (“corporate welfare”), amounting to perhaps $98b a year, selective tax breaks and contracting. In each of these categories, government and industry have made a variety of laws enabling large firms to eliminate competition. As such, they are a kind of tax taken from consumers who would pay lower prices and entrepreneurs who would be able to make their livings doing what they want. The tax is given to business owners who would be forced to lower prices or improve services in a free market. The Small Business Administration in 2005 estimated the total cost of these regulations at $1.1 trillion.
Accounting standards are widely considered necessary to prove a firm is not cooking the books. But in the absence of state regulation, concerned investors would find a way to insure against this possibility with audits. An example of the enormous and unnecessary complication of accounting standards is the Sarbanes-Oxley Act, passed in the wake of the Enron accounting scandal and failure. The Act made accounting more complicated. Implementing it costs a firm millions of dollars. Millions of dollars is pocket change for a big corporation, but prohibitively expensive for new and small businesses that could otherwise rival them. As a result, fewer businesses are created, and wealth and power are concentrated in the larger firms. We now have a complex tax code that could not be implemented by less than a team of accountants. The same is true of the legal code. The modern legal code was designed so that teams of high-priced lawyers can get away with murder and people without money see no justice.
Sarbanes-Oxley is, of course, but one law in a sea of other laws. Those who say the 2008 financial crash was caused by a lack of regulation may do well to realise there were thousands of lines of financial regulations already. They often cite the repeal of parts of the Glass-Steagal Act as the only incidence of deregulation they can think of, but this change did nothing to enable banks to make bad loans. A look at the facts indicates very clearly that regulation was the main cause of the bubble that caused the massive destruction of wealth for all but those whose ties to the state got them trillion-dollar bailouts.
Negative externalities, which seem to be the reason people beg the government to get involved in the market, are easily externalised in a statist society. The same big corporations pollute and break the law repeatedly. They are sued by the government, they pay the government, which means it gets another legal donation from an interest group, and then they are allowed to continue business as usual. The lawsuits are a bone thrown to voters and the corporations shake them off like lice. But they give the appearance that justice has been done. The corporations nonetheless retain all the benefits they get from the state in the form of legal personhood, subsidies, tax loopholes, intellectual property and regulatory barriers to competition. The state does not protect us against negative externalities.
Intellectual property enables firms to monopolise virtually anything they create. Consider the effects of IP laws in the pharmaceutical industry. Kevin Carson explains that drug patents are unnecessary to recoup expenses and develop the most effective drugs.
First of all, there has been a dramatic shift away from fundamentally new kinds of blockbuster drugs, because it’s much more cost-effective to put money into tweaking the formulas of drugs whose patents are about to expire just enough to qualify for repatenting them—so-called ‘me, too drugs.’ Second, a great deal of the basic research on which drug development is based is carried out at government expense in publicly-funded universities. Around half of the overall cost of drug R&D is taxpayer-funded. And in the United States, under the terms of legislation passed in the 1980s, the patents on drugs developed entirely at taxpayer expense are given away—free of charge—to the drug companies that produce and market them. Third, most of the actual R&D cost for developing drugs comes, not from testing the version of a drug actually marketed, but from securing patent lockdown on all the other major possible variants.
Generic drugs do not get developed, or get banned as soon as they are, because they are competition. The poor people who need them most do not get them. Intellectual property, Carson concludes, is murder.
We can divine the purpose of regulation from its results. We now have giant, multinational corporations straddling the Earth, with no government willing or able to oppose them, with the exception of a few populist, anti-imperialist holdouts. Large corporations’ alliance with the state has enabled the two to control natural resources and all manner of other markets. Consumers thus have fewer choices and higher prices than in a market freed from regulation. But freedom is always preferable to laws and regulations imposed by the state. Freedom allows economies and the arts to flourish. It means scientific advances and technological innovation. And it forces responsibility on those able to handle it while still allowing for us to help each other.
The solution to the control of markets by cartels is to free them. That would make customers the true regulators. If they decry a firm’s practices, they can stop buying from it and start buying from its competitor. If you abhor business, you are free to start and join one of the thousands of cooperatives in the world or simply produce and give to your neighbours. But demanding more regulation to prevent big-business malfeasance is akin to shooting oneself in the head to cure one’s headache.
The Rule of Freedom: The Manifesto of the Sovereign Community (the book) is now available as an ebook from Amazon here.
The book discusses all the subjects dealt with on this blog but in greater detail, with more examples and full references. Any feedback you have please write on this post or on the book’s Facebook page here. Enjoy!
I have written elsewhere (here and in chapter 30 of my upcoming book) on this subject but here is a post committed solely to dispelling the myth “the free market” caused the crash of financial markets in 2008. I hear the lies repeated every day, even by my political economy professor: the reason the banks made such risky bets was there was no regulation and no oversight of the sector. The truth is, regulation was rampant.
Let us start with the Federal Reserve. The Fed is hardly ever mentioned as a cause of the crisis. Artificially-low interest rates (1%) encouraged artificially-high risk taking for certain sectors, including construction and lending to people who could not afford to buy homes. Fed policy increased the supply of money (look out for inflation) with the result that more dollars were created between 2000 and 2007 than had been created in the rest of the history of the United States. (It has done so again in the years since.) House prices rose.
They rose the most in California, where various laws made it impossible to develop the land, creating artificial scarcity and driving up home prices. But they rose in other localities too, in most cases because of similar restrictive building laws. 90% of the land in Nevada is owned by the federal government, so instead of a free market, the availability of land for building depends on the government’s approval of each use of it. Less than 10% of the land in the US is actually developed, but under the guise of preserving nature (a handout to environmentalists), the government protected land near residential areas and thus raised the price of it. As a result, many places saw a housing boom artificially brought on by government, whereas other places saw no boom at all. Thomas Sowell explains.
A fundamental misconception of the housing market existed both during the boom and after the bust. That misconception was that the free market failed to produce affordable housing, and that government intervention was therefore necessary in order to enable ordinary people to find a place to live that was within their means. Yet, the hard evidence points in the opposite direction. It has been precisely where there was massive government intervention, in the form of severe building restrictions, that housing prices skyrocketed. Where the market was more or less left alone, places like Houston and Dallas, for example, housing prices took a smaller share of family income than in the past. (The Housing Boom and Bust, 24)
The booms that did result, however, were, like many local problems, misperceived by an officious federal government as a national problem, requiring national-level intervention.
Easy access to housing began under the Clinton administration. Fannie Mae and Freddie Mac, government-backed but publicly-traded corporations that would be bailed out if necessary (a formula for moral hazard if ever there was one) also pushed to expand mortgage loans to people with bad credit under Bill Clinton. Bill Clinton’s Secretary of Housing and Urban Development, Andrew Cuomo
made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis…. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded ‘kickbacks’ to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.
(Here are three more people to blame, in case you are interested.)
Democratic Congresspeople were reluctant to demand any oversight of Fannie, a campaign contributor. Fannie and Freddie guaranteed loans to people who were bad credit risks. These government-sponsored enterprises held about $5 trillion in mortgages. The Fed lent money to the banks at near 0% interest because, well, it could create money without hurting the people making the decision to do so.
At least as important regarding the subprime mortgage meltdown is the fact that owning homes had become the political cause du jour. Not everyone has to own a house to live; but if people are given houses, whether or not they can afford the mortgages, they might vote for the people who made it possible. The desire to introduce coercion into a market is always for the benefit of the coercer. Sometimes it benefits the constituent, and sometimes it leads to one of the most costly financial crashes in history. The Community Reinvestment Act (CRA) was meant to eliminate racial inequality in availability of credit. If banks did not lend to minorities in high enough numbers to satisfy the authorities, they could be crushed by lawsuits. (Remember, poor people were already being stung by local land use restrictions that raised housing prices. The CRA would enable them to get credit for something they might have been able to afford in a free market.) Instead of leaving interest rates to the market, politicians found it politically expedient to help minorities buy homes. It makes sense: if one can finally buy a home, one’s standard of living appears to have risen, and rising living standards get politicians reelected. Lending standards loosened.
Bear Stearns said the mortgages were sound. The three rating agencies (a state-protected oligopoly), you remember, the ones that said the mortgage-backed securities were great when they were garbage, served to reinforce the popular lending-to-everyone policies. Tax codes encouraged overinvestment in housing. To blame lack of government oversight for the crash is to get things backwards. The banks did what the government wanted them to do: hand out more and riskier loans. Those who talk of deregulation as a cause of the crisis fail to point to a single episode of deregulation, aside from the repeal of one clause of the Glass-Steagal act, which did nothing to enable banks to make bad loans. To say the banking sector was deregulated is to ignore or misunderstand the many regulations in place that helped cause the crisis.
One study finds that federal outlays for banking regulation—the laws big banks supposedly fear so much—increased from $190m in 1960 to $1.9b in 2000 and $2.3b in 2008. The US has 115 regulatory agencies. Funding to the Securities and Exchange Commission under George W. increased sizeably, with the result that its staff increased by one quarter. The number of rules businesses needed to follow rose. There may be an ideal regulatory agency or system, but it has nothing to do with what what the agencies actually do. These ones did what the politicians wanted: encouraged banks to make home loans to people who could not afford them, and solved a problem that did not exist, namely a nationwide lack of affordable housing. The result was disaster. Either government cannot be trusted to oversee corporations because it has been corrupted by them, or else it cannot be trusted because it is so incompetent. Either the fox is guarding the henhouse or the headless rooster is. More layers of regulations added to the existing system are not likely to help the public.
Moreover, it may be a mistake to call the crash a failure of regulation. Again, the corporations did what the government told them to, and people responded to incentives that monetary and lending policies created. Whenever we consider a policy a failure, we need to question whether it is indeed a failure or whether the goals and eventual outcomes went just as planned. After all, the crisis has ended up further enriching the rich, through bailouts and stimulus.
The securities and investment industry contributed $53m to congressional and presidential campaigns in 2008. (They have not slowed down since then.) Then, they stood back with their hands out and received more than a trillion dollars for their generosity. The bailout bill was defeated at first, but legislators, in their inimitable way, searched for a new way to pass the bill. They got more Congresspeople on board by sprinkling horsetraded favours in with the bailout money. (Something similar happened when Ronald Reagan bailed out big banks in 1983.) Special interests got what they wanted, legislators got what they wanted—win-win!
The argument the government made at the time was that these firms were “too big to fail”. In other words, their failure would mean the collapse of many more firms and the economy itself; therefore, they might need to be rescued. But the fate of Lehman Brothers, with more than $600b in assets, is instructive. It seemed too big to fail; yet, when it did fail, its assets that were worth preserving were bought by other firms. Keeping firms on life support discourages investment, encourages wild risk taking and drains money from those firms who are, in fact, productive and allocates it to those who have proven they are not. Promising to bail out failed firms created the moral hazard that enabled this crash.
Along came a large (more than 400-page) bailout bill, which anyone who opposed or even wanted to debate would be labeled as wanting the economy to fail. The government now owned hundreds of billions in bad debt, which meant instead of letting the companies pay for their own foolish bets, the taxpayers would. The case of the 2008 crisis and the recession was one of socialism for the rich. And democrats, who think that they have choices, were presented with two presidential candidates who agreed on the bailout and stimulus bills.
I am not an economist, but I do recommend the book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods. Obviously, one book is not definitive, and all books I have read on this subject make good points. This one cogently argues the government’s role in the debacle was enormous. Its author is from the Austrian school of economics. The Austrian school predicted the crash (not to mention those of 1929 and 2000) based on evidence and basic economic principles. Either way, it is obvious that “the free market” and lack of regulation did not exist to cause this crisis. It was caused by the alliance of big business and big government, of a political system that rewards liars and thieves.
Many people, Occupy Wall Street protesters most vocally, blame the corporations for the crash. But corporations were doing what the government told them to. They blame corporations for accepting the bailout money. But if someone had trillions of dollars to give you, would you say no? That money only existed because it had been stolen from taxpayers in the first place.
And though some people—those who watch the news—think things are getting better, they are not. There will be no economic recovery, as the ruling class has already stolen it.