The world is a complex place and any simple description of it will be incomplete, but I think it is fair to say we are the subjects of an artificial system of theft and oppression that continues to make the world harder to live in.
Look at the sources of power in the world. Look at government, corporations and the media. Laws written for rich people have created a system where it is necessary for us all to sell our labour to the owners of businesses. They own the land, the factories, the offices, the infrastructure. We need to earn money to survive and the best and sometimes only way to make money is to work for a large corporation. We make money for the people who own and run the corporation and they give us back some of it. Next, the government takes its share, claiming it needs it for roads, schools, hospitals, pensions and security, and gives as much as it can (for example through contracts) to corporations. It does not give people a choice to keep that money, decide what to do with it themselves and get what they need through mutual aid (helping each other) like they used to. Some people work their whole lives making others rich and still end up penniless. Why? Because they didn’t work hard enough? Because they were evil in a past life?
The media tell us to consume. The remaining money we have earned, the last bones we have been thrown, we are encouraged to spend on things that make us feel rich: nice houses, cars, furniture, decorations, restaurants, two-week vacations and fancy coffee. Consumers spend their lives working for corporations and giving most of their money back to them. Instead of pursuing their dreams, they work hard in order to spend hard.
I understand people who do not do anything about it. Politics can be pretty boring. I disagree with people who say you should pay attention to politics even if you are not interested in it. You should not be compelled to pay attention to the news and what it tells you the people in power are doing. If they do not have your consent, they should not spend your money or pass laws over you. Moreover, most of the people who expect you to follow politics pay attention to the wrong things. They watch party nominations and election results and contribute to political parties and candidates who never make any real changes. But the media tell us those are the important things. That is how we can make a difference. There are no alternatives, except competing warlords or some USSR/North Korea nightmare. The system works. Stop questioning the system.
Enormous power is thus concentrated in the hands of only a few thousand people, most of whose names you and I have never heard before. A few million or so more wield power on the national level in different parts of the world with some autonomy (think the generals in Egypt) but they have mutually beneficial relationships with members of the upper ranks of the global elite. Look at what the elite do with their power. In the old days, a king would send soldiers somewhere and thousands of people would die. They had power over small parts of the world. Nowadays, power has become global, and as such the crises it leads to have gone global as well. Look at all the (supposedly unintended) consequences of all the wars the US government has been leading, all the people who have been tortured and killed, or who lost their homes and their livelihoods, and continue to do so even after the foreign militaries have left. And yet, consider who has got rich from those wars. Look at the economic carnage from the last financial crisis. Look how many people lost their jobs, homes and all their money, all around the world. And yet, the people who caused it actually made more money from it. And they tell you not to worry, because there will be an economic recovery. Do you believe them? Where is the justice?
Finally, “education” tells us what to think. I’m sure you can think of reasons why the system we live under is the best possible system. You learned it in school, and if you learned it in university like I did (political science major), you have even more reasons why it works best. We need leaders because without people making our decisions for us, society would collapse. We need rich people because without them, who would start businesses for us to work in? We need police to protect us from all the bad people around us. We need hierarchy: all societies have hierarchy, right? All other ways of living go against human nature. Don’t think too much about it: watch TV instead.
As far as I can tell, most people are neither interested in understanding the system nor willing to take the risk of fighting it. Again, I understand and I don’t judge. I just think they should understand it better than they do. If they choose to do something to change it or to change their circumstances, that is their choice and I will support them. I warn you, however, if we do not fight back, one day it will be too late.
“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.
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.
When, after many battles past,
Both, tired with blows, make peace at last,
What is it, after all, the people get?
Why! Taxes, widows, wooden legs and debt. — Samuel B. Pettengill
Your money is going toward killing people you do not know. The War on Terror, Operation Enduring Freedom, Operation Iraqi Freedom, the War on Drugs, the drone wars… Can we awaken from this nightmare yet? Can we at least stop paying for wars that are bankrupting us? Unfortunately, as with everything governments do, we do not have a choice.
The full costs are hard to count. Modern governments finance wars with debt, which means we will be paying for many years to come. When we are shown the costs of wars, we usually only see the direct budgetary costs. As such, it is widely reported that the wars in Iraq and Afghanistan have cost about $1 trillion. Though a truly enormous figure in itself, the one trillion statistic obscures the money the warmakers cannot account for, the costs of treatment and pensions for soldiers, compensation to the families of the over 6000 US troops killed (not much compensation for Iraqi or Afghani families, though) and debt financing. The war in Iraq almost definitely made oil prices rise by at least $10 a barrel. The actual figure for the costs of the war may well be over $3 trillion. Three trillion dollars. Barack’s first defense budget came to $685.1b, which means it grew, and hit $708.3b for 2011, which means it is growing. Oh, and $20b has been spent just on air conditioning, but wars in the desert will require that. It is also going toward military bands, but only to the tune of a billion dollars a year.
A keynesian might say that this money has been well spent because it has stimulated the economy. No, it hasn’t. It can’t. It has dragged down the economy with higher debt, higher oil prices, higher costs to veterans, fewer jobs, higher interest rates and trillions of dollars diverted from the productive sector of the economy to the destructive government sector. The wars exacerbated the economic crisis in which the US is still entangled. But if even keynesianism worked, how do we account for the money that is missing?
In October 2009, the Inspector General of the US Department of Defense released a report that exposed various “significant deficiencies” in Pentagon balance sheets from fiscal years 2004 to 2008. The Department of Defense has never been audited. But by examining the various internal audits that have been carried out, along with the opaque system of contracting, the report uncovered more than $1 trillion in unsupported account entries.The Senate Finance Committee wrote a report a year later that took the Pentagon to task for its “total lack of fiscal accountability” for “leaving huge sums of the taxpayers’ money vulnerable to fraud and outright theft.” Fraud and theft are typical of all governments; but not all governments can raise and waste a trillion dollars and not have to face the guillotine. And since a democracy’s only real way to hold anyone at all to account is elections, the unelected bureaucrats at the departments have little to fear.
One example of this wastage is the $6.6b in cash the Pentagon for some reason thought it wise to fly in a plane over to Iraq. It has presumably been stolen, but who knows? How could any organisation, especially one that is barely accountable to anyone, account for all the trillions of dollars it goes through? It is too big and too opaque to audit. The role of special interests in taking your money to spread war is well documented. (Here is a primer.) If you need an example of profligate handouts to war contractors, consider this: even after the scandal of the missing trillion dollars, the Pentagon requested another trillion to operate the fleet of Lockheed F-35s. Where do they get all this money from? They steal it from the private sector through taxation. Do you know how many hospitals that money could build for war victims? How many people we could educate with that money? Can the government ever stop spending and let us try?
In War Is a Racket, Major General Smedley Butler begins “[War] is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.”
Only insiders benefit, of course, and they make big money. As such, they have a major interest in keeping wars going and lying to everyone about why they must. According to Butler, at least 21,000 new millionaires and billionaires were made in the United States during the first World War.
How many of these war millionaires shouldered a rifle? How many of them dug a trench? How many of them knew what it meant to go hungry in a rat-infested dug-out? How many of them spent sleepless, frightened nights, ducking shells and shrapnel and machine gun bullets? How many of them parried a bayonet thrust of an enemy? How many of them were wounded or killed in battle?
Out of war nations acquire additional territory, if they are victorious. They just take it. This newly acquired territory promptly is exploited by the few — the selfsame few who wrung dollars out of blood in the war. The general public shoulders the bill. And what is this bill? This bill renders a horrible accounting. Newly placed gravestones. Mangled bodies. Shattered minds. Broken hearts and homes. Economic instability. Depression and all its attendant miseries. Back-breaking taxation for generations and generations.
He goes on to outline the financial interests that guided pre-WW2 Allied policy from supporting to opposing Japan, and how the costs of war and expansion are borne by taxpayers. Foreign involvement from 1898 saw the origin of the debt crisis that the US is struggling with today. Smedley details the enormous earnings of various corporations from WW1, some of whom produced things that were never used. Aside from the probable fact that today’s wars are more costly and more groups have their hands out, little has changed.
The main imperialist powers will naturally be the richest ones. States with liberalised economies have strong economies. Oppressive states do not have free economies and thus have trouble sustaining wars. Only a state with a strong economy could afford to keep a powerful military machine going indefinitely. The US went through Vietnam and survived to learn nothing from it; the USSR lost the war in Afghanistan and collapsed.
Military powers continue to spend countless sums developing new weapons that make killing easier and more efficient. The contractors make big money, with Lockheed Martin coming out on top, pocketing $36b from the US government in 2010 alone. Though the government contracting business is a somewhat opaque process, we see big corporations making tens of billions from governments who like war as a way to suck the people’s money from them and enlarge their own budgets. They ostensibly aim at eliminating civilian casualties, but in the wars they fight, insurgents, terrorists or whoever your enemy is blend with civilians, and the proportion of civilian casualties to bad guys has not gone down. Pilots still bomb or gun down people on the ground from thousands of feet in the air and get called brave heroes by the politicians benefiting from the war.
So inside the US, the current imperial power, is very liberal, and as such its economy is strong. However, because it is able to project its power, it does so, to disastrous effect for large parts of the rest of the world. The American people believe in the freedom the US has internally and want the best for others, so they are easily won over to illiberal wars by promises to free the people of their dictator. But the differences between the countries the US (and now NATO) goes to war with are not moral ones. The rich countries simply have the power to project themselves into other people’s affairs, they can get away with it because only voting keeps them in check (and foreign policy does not hold voters’ attention), and the countries they pick on are so weak—Afghanistan, Iraq, Libya, Somalia, Yemen—they could not possibly put up a real fight.
Libya is a case in point. Barack did not ask Congress for permission to go to war, even though he is required to do so according to the Constitution. (I like the US Constitution but it does not seem to be much more than a piece of paper anymore.) Barack’s people said the war would last “days, not weeks”, and it lasted six months. The interveners’ original mandate was a no-fly zone to protect people that was soon expanded without authorisation from the Security Council to picking sides, assassination and regime change. On May 13, after nearly two months of fighting, Defense Secretary Robert Gates announced that the war had cost $750m. It doesn’t seem like a lot for an organisation that spent $3t on Iraq, but then that figure is an official government figure and probably includes only the costs of bullets, missiles and fuel, not the planes themselves, the salaries of the soldiers, the money for the rebels, the post-conflict reconstruction (if there is any), and whatever else we do not know about. And the interveners were quick to recognise the rebel forces as government, which means a) there was no consultation of the people (so at least the decision was democratic), b) the world will be expected to look away when the rebels, now the good guys, commit atrocities, and c) the rebels will be pliable to the demands of foreign governments (which will presumably mean no-bid contracts to their oil friends). Is this self-determination for the Libyan people?
That said, for the sake of fairness, the war is over and Qaddafi is gone, which might be the best outcome we could have expected, and some credit must go to NATO. Even though this post condemns war, it seems to me wise to judge events on their eventual outcomes. If Libya becomes much freer and more prosperous as a result of NATO intervention, it may have been worth it. If history is anything to go by, Libya will not be much better off after Qaddafi.
All these invasions send a clear message to states like North Korea that have or are developing nuclear weapons: keep them. Nuclear weapons are a highly rational statist enterprise. It is fundamentally out of the question to attack a country with a nuclear weapon because it might use it. So North Korea, Iran and whomever else the US and Israel talk tough about, hold on tight to your nukes if you want to hold on to your regime.
Only spending by an organisation with an unlimited budget could have produced the nuclear bomb. North Korea could never have built such a bomb from scratch. Only a democracy could. Only a democracy has the money and the ability for scientific openness, and yet the ability to appropriate billions of dollars (in 1940s money) for secret projects. And for the incalculable sum spent on research and development to gain an advantage in killing others, the advantage often does not even last until the end of the war, because another state can steal secrets or develop its own special killing machines.
You do not benefit from war. You only lose. Imperialists benefit, as they get to control more and more territory; military hardware firms benefit from generous contracts; civilians, soldiers and so on do not benefit. Unfortunately, those people are mostly sheep. Every society has a few “deep thinkers” and a large number of “sheep thinkers”. Sheep thinking not only limits our imagination; it could have enormous consequences. In Nuremberg Diary, Gustave Gilbert recounts a conversation he had with Hermann Goering, Hitler’s second in command, who revealed a deep understanding of the ability of the elites to control the sheeplike masses.
Why, of course the people don’t want war. Why would some poor slob on a farm want to risk his life in a war when the best that he can get out of it is to come back to his farm in one piece?…But after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy or a fascist dictatorship or a parliament or a communist dictatorship…. All you have to do is tell them they are being attacked and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same way in any country.
History shows innumerable examples of the public’s approval of or even pushing for war. So often the elites throw the war into the open because of some high political squabble and make everyone think they need to go to war. As the idea of war mixes and churns in political discourse, in the media and in the minds of the people, it soon becomes a given that we must go to war. After all, we are under attack.
We can be so clueless when it comes to what governments are capable of. Never mind that the state has only token incentive to do what its constituents want. Regarding many of their demands, it simply cannot. Citizens want governments that create wealth (or prevent its destruction). How do they think wealth is created? Governments cannot fix the economy, as if it were a motorcycle. They cannot grow the economy, as if it were a garden. An economy is a complex mass of interactions that no one person, organisation or clique could oversee with any dependability. Attempts to intervene into the economy by a few technocrats is to presume they somehow know what is right (and will actually do what is right) better than the people peforming all those interactions.
Commentators who are slightly more realistic call governments “stewards” of the economy. When they praise the stewards of the economy, they usually mean that the government’s policies have not wrecked the economy, or at least that their most deleterious effects have no yet struck enough people to give the press an obvious candidate for blame. Let us first examine inflation.
John Maynard Keynes once said “[t]he best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Since central banks have positioned themselves as the saviours of the economy, inflation has eaten away at savings with painful results.
Inflation is caused chiefly by an increase in the money supply. As the supply of money increases, demand for it falls and more money is needed to buy fewer goods. Central banks increase the money supply. Inflation is not automatic, nor is it inevitable. It is a response to a realisation that there is more money in circulation. So prices rise over time. But the people who get the money when it is first circulated will be able to spend or invest it before it trickles down and lowers the cost of money overall. In the US, because of the Federal Reserve system, the people who get the money first when the central bank prints more of it are bankers, those banks that make up the Fed. The Fed creates money but not value, which is the true measure of economic growth. Since its inception in 1913, the Federal Reserve’s inflationary policy has left the US dollar at 2 cents of its previous value. (http://mises.org/daily/5269/The-Great-Myth-of-the-Inflation-Cure) And yet, its apologists claim that the Fed fights inflation. Printing money is always done in the name of “the greater good”, that statist chimera, but really it benefits the banks who are the first recipients of the money before prices begin to rise and catch up to the money supply. When the state prints money, bankers win, and everyone else loses. (Read Murray Rothbard’s The Case against the Fed for a fuller explanation.)
Others say that inflation is good policy because if the value of people’s money is decreasing, they have an incentive to spend, which keeps the economy growing. Deflation can be a huge problem (though it is not necessarily) but a constant money supply means the value doesn’t change (or at least would probably change only very gradually). That makes it easier for everyone to know what to expect. They can allocate their resources accordingly. Central banks cannot simply control inflation, saying that it will be exactly 2%. It might get out of control, and it sometimes does. A little government intervention goes a long way–almost always in the wrong direction. How could anyone advocate consumption over savings in these days of unsustainable retirement funds? People will need to learn how to save again if they want their standards of living to rise; but saving is meaningless if inflation will consume your nest egg. But the best argument against inflation is that the government has no wisdom or right to reduce the value of your savings or tell you what to do with your money and when.
Governments also like to plan. Many statists who consider the Soviet Union a foolish project that was bound to fail nonetheless advocate some form of economic planning. Economist James K. Galbraith wrote in Harper’s a few years ago that the government needs once again to plan. “What the government needs most today is to regain an independent capacity to think. The government needs a way to imagine the future that is not dominated by lobbies or even by Congress so long as Congress is dominated by lobbies. Planning is a process: thinking, coordination, action. What is the long-term national interest? What specific targets must be met? What is the best way to do it, and who plays what role?” This argument contains several questionable premises. First, it makes the old assumption that government information and wisdom is superior to that of people on the ground, you know, the ones actually doing the work. But the performance of state-run businesses and strict regulations before the 1980s was a joke compared to that of the private sector after privatisation and deregulation. Prices fell, innovations rose, and the taxpayer was no longer on the hook for failed government corporations. We can only imagine how people’s potential would be liberated in a free market.
Second, governments have no capacity to escape the clutches of lobbies. Not only do they provide the money politicians need to get elected, and are thus heavily rewarded after the election, but many lobbyists become politicians and vice versa. Lobbies are not just in bed with the government; they are the government. That means that any appearance of detachment from lobbies will be an illusion, until a revolution occurs.
Third, we need to get beyond this thinking about “the national interest”. There is no national interest, because every nation is made up of people who disagree about the right policies, who will all be affected differently by them. All policies produce winners and losers, with special interests taking home most of the prizes. We do not need nations, or national economies, or national governments. These things are inventions that only benefit those who exploit nationalism for their own gain. All people have self interest, which could easily be at odds with national interest, that they are not allowed to pursue if their money and labour is going toward the national interest. The national interest is in fact a codeword for the national government’s interest, which could easily be at odds with that of the people themselves. The people might want to spend their money on a wide array of electronic devices, the treatment of a variety of diseases, and their startup businesses. What if the government says we should be spending it on desktop PCs, AIDS and state-run monopolies? It will take away people’s money to pay for those things, then take away their freedom to get what they really want. If you don’t like the plan, you still have to follow and pay for it. How could that be right?
Planning is fine on a low level. We each have specific knowledge that we can use to make our lives richer. A free market permits prices to emerge from the sum of people’s localised knowledge. Government does not have that knowledge, so it cannot take personal situations into account when planning. Planning thus sacrifices the individual on the altar of “progress” or “the public good”. Many small plans work, and one big one does not. Trying to steer markets would only work if those on the bottom were not individuals with individual ideas and plans for their own lives. It would also be necessary to predict changes. That was hard enough during the Great Depression; now the pace of change and the number of black swans out there is unprecedented.
Families, kibbutzes and monasteries live according to “from him according to his abilities to each according to her needs”. Many cooperatives do so to a lesser extent as well. Planning can work when it is done voluntarily. Forced equality, or coercive communism, like in the USSR, does not work. It is not the communal nature of things that fails but the coercive side. And all government is coercive.
Finally, government “investment”, or deficit spending, is meant to kickstart a lethargic economy. Does it really work that way? Keynesians seem to believe that whatever enormous spending the government undertakes is investment, which is superior to consumption, at least if done strategically. But if the people have their own money, they can consume and invest, and consumption itself is buying from people who invest. Why is government investment better than private investment? Government spending is so terribly inefficient that I am surprised there are any Keynesians left in the world. One reason it is so inefficient is moral hazard: I don’t care what happens to money that isn’t mine. Private investors, on the other hand, are scrupulously careful with their money because it is theirs.
Paul Krugman is an interesting example of such thinking. I tend to agree with his analysis of the problems he discusses, but do not understand his prescriptions. They seem naïve, as if he is not listening to himself. For instance, when he argued in May that foolish and self-interested elites caused the economic problems we have with us now, he seems to believe that we need better elites on the ballot paper. How would that help? The new elites would have the same incentives and pressure groups because they would occupy the same seats. What we need is not new elites, or more people voting for them (I do not understand what difference that would make), but a complete overhaul of the system. If no one has coercive power over the entire economy, there will be no one to wreak havoc on it, only people working in their own spheres of influence, who generally help economies grow by acting in their self interest.
One problem with modern economies is that the people are so used to government intervention, to calling for help every time things go downhill, which of course can mean painful losses of jobs, savings, houses, and so on, they will call on the government to save them. The government persuades them that it is the economy itself that needs saving, which might mean bailing out banks and automakers; they know nothing about economics and take the bait. But government intervention into large, modern economies tends to enrich the already-rich by paying off special interest groups, and future generations are saddled with ever-more debt. When the time comes to wean the people off government life support, such as in economies experiencing hyperinflation or post-communist states, the most effective method is “shock therapy”, the forcing of discipline on a government so that it cannot borrow or print more money. But people are impatient, and the immediate effects of shock therapy are painful. Such is the way, too, when someone living beyond his means finds out he cannot pay his credit cards.
If Keynesians had their way, the government would spend and spend until it created the next bubble, because “in the long term we are all dead”. Unfortunately, there is no logic in this statement, as our children and their children will either benefit from our wisdom or pay for our mistakes. Bubbles have much to do with government manipulation of interest rates and printing money, and the boom bust cycle is nearly always exacerbated by government intervention.
What are some of these “public goods” that we need central planning and massive investment for? Do you think universities and libraries could not exist without government? Tell that to Andrew Carnegie, a private industrialist who, after single-handedly reducing the price of steel by nearly 90%, donated millions of dollars of his own money to universities and libraries. Tell it to John D. Rockefeller who, after reducing the price of heating oil by nearly 90%, established colleges in the American South for freed slaves, and donated money for public health, science and the arts. James J. Hill and Cornelius Vanderbilt not only built railroads all over the US but reduced fares considerably, and Henry Ford reduced the price of automobiles enormously. (These people all contributed to a period of deflationary expansion, which some uneducated anticapitalists will tell you is impossible.) These and many more such men are known today as the robber barons, while people who take your money without asking are called democratically-elected leaders. Look up the philanthropy of Bill Gates, Warren Buffett and the Waltons, too, and then tell me they are bad people.
But even so, why is it inconceivable that we should pay market prices for universities and libraries? We do for a lot of other government services, like recreational facilities, which by the way can and do operate for profit too. I mean, don’t people understand that, if you get back the money in taxes you used to pay for these things, you can pay for them? And at least then we would have the choice. And sure, we are not completely rational actors, but free markets tend to provide us with enough choices that prices go down and quality goes up. If it is true of food, clothing, housing and other essentials, why is it inconceivable for health care, education and security?
We do not need government intervention into the economy. Freeing markets entirely of the encumbrances of laws designed either to help the poor or benefit interest groups will free the people’s creative energies and their potential in ways we can only begin to imagine.
The government has done good things, right? Well, how do we know what would have got done if the people paying for those things had not had all that money? Sure, we wouldn’t have as many space ships or nuclear weapons as we do today, but we might have found cures for various diseases, new technologies that consume less energy, and other things people want. Nearly all discoveries and innovations that have helped ordinary people have come from private individuals, usually working without government subsidy. The computer was developed by the state, but no one would have one today except the government had it not been allowed to trickle down to the private sector. The enormous innovations that have improved every aspect of the computer, including lowering its prices, would not have come about to anything like the same extent without the private sector. Modern science is often cited as an outcome of government funding, but a mere glance at history reveals governments prosecuting scientists like Galileo with controversial views and scientists since the beginning of science working without government support. There seems to be a modern belief that the reason for all progress since the beginning of the state system is the state, and that we could not have evolved the good life without it. But that proposition begs the question, assuming that the progress society has made is the right kind of progress, and relies on the counterfactual that there would have been less “progress”, however defined, without the state. Let us challenge those beliefs in this post.
Some statists seem to expect government to protect them from any and all dangers. Never mind that it cannot; it will not even try. Take the issue of child car seats. As Steven Levitt explains, the facts on child car seats were available, but government did what was popular and would feed a special interest—creating a law forcing children under 2 to use car seats—instead of reading them. How many children died for votes?
Another example of the backfiring of the call for government to save the day (the Nanny State) relates to the law governing the use of cell phones when driving. The law said that cell phones could not be used while driving unless using a hands-free device. But as Chabris and Simons explain in the Invisible Gorilla, the problem is not with our hands. Studies found that people talking on the phone while driving were far more likely to have crashes than those who were not, regardless of where their hands were. The problem is that any talking on a phone (as distinct from talking to someone else in the car) is a major distraction. Now, we have a law that does not protect anyone except the people who make hands-free devices, a new special interest group that will fight like stray dogs to keep the law in place.
And protection of big business is the only reason I can conceive why the US government would outlaw the sale of raw milk. (See some amazing stuff about it here.) Government protects corporations far more than it protects you from them. Democrats who call for legal action against companies like Monsanto do not seem to understand how many laws there are behind Monsanto already. If you want government action to take down big corporations, how about getting rid of the intellectual property laws that create monopolies? Intellectual property enables the owner to mark prices up far beyond what they would be were they subjected to competition. Today, we even have corporations owning strains of rice! How ridiculous. This is a perfect example of the bankruptcy of the argument that corporations are too powerful because the government is too weak. Governments could easily break this monopoly if they wanted to. They have a monopoly on the legal use of force. Patenting rice is impossible without the collusion of government.
How many people will die because a “free trade” agreement between India and the EU hobbles Indian firms developing generic drugs? This law, this distortion of the free market masquerading as free trade, will render almost impossible the buying of cheap drugs for diseases such as HIV for those most vulnerable to them. Kevin Carson explains that drug patents are unnecessary to recoup expenses and developing 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 because they are illegal, because they are competition. The poor people who need them most do not get them. Intellectual property, Carson concludes, is murder.
I wonder if politicians ever read the legislation they vote on or the reports written for them by bureaucrats, or if they just consult interest groups they are courting to make laws. How could they read all that, anyway? They would need a hundred hours a day of reading to make informed decisions on everything they vote on. Commenting on the renewal of the appalling USA PATRIOT Act, Julian Sanchez of the Cato Institute says, “at most they might get a ten- or fifteen-minute briefing, with no notes and no staff, the idea that they meaningfully understand what is being done much better than the rest of us is actually wishful thinking.”
When the government promises to protect consumers, watch out. There are already laws and market mechanisms to deal with things like collusion and price gouging. If the government or the free market were doing their jobs, we wouldn’t need extra government “protection”. When the government promises it will tackle these things, it uses vague language to widen its scope and take arbitrary actions. Economics professor Gary Galles describes this dangerous situation.
Effective social cooperation can only be built upon clear rules that constrain government arbitrariness as well as abuses by others. But potential government prosecution for violating an essentially undefined law leaves every decision’s legality subject to the whim of a judge or executive-agency functionary, exercised after the fact. No one can know what actions are safe from prosecution. And combining arbitrariness with huge potential punishments is an open invitation to government abuse.
It can then selectively punish businesses, and is unlikely to find any of its campaign contributors guilty. “Why would the president make a public show of toughness using an approach and terms that fail basic standards of logic, fairness, and constitutionality? Because it gives him power without responsibility.” How could oil companies counter the accusation that they are charging too much? How could the government prove that oil companies’ prices are “too high”? The tough stance on the supposed Big Oil robber barons buys votes from citizens who think that gas prices are high because oil companies are gouging them. Oil prices are influenced by many factors, including the wars in Iraq and Libya, the OPEC cartel (governments of oil-producing countries colluding to limit supply and thus raise prices), government restrictions on oil exploration and drilling, conflict between parasitic national governments and indigenous people in the Niger Delta, rising consumption and the expectation of even more, inflation that pushes down the exchange value of the dollar and thus raises the price of imported oil, and not least gas taxes. But when Ben Bernanke and Barack Obama blame others (“speculators” and the evil Arab are often the culprits), consumers eat it up.
We do not need government to protect us from corporations when free markets provide the best incentive to behave responsibly. The example of the Tylenol recall of 1982 is instructive to any business hoping to remain successful over time. Someone had laced some bottles of Tylenol with potassium cyanide, killing seven people. Johnson and Johnson, the parent company of the manufacturer, had a very clear belief system, the main component of which was that customers came first. There was no debate in the office, no need to weigh short-term gain against customers’ dying. Johnson and Johnson spent $100m recalling and replacing all Extra-Strength Tylenol. They have been profitable since then. Where was government? Not only was it superfluous, it never found out who spiked the pills. It is good that we have some kind of organisation that examines food and drugs to keep the public safe, but why does it have to be governmental? There are no medical researchers and consumer watchdogs anymore? Why does there have to be only one, controlled by the fickle hand of government? What if they miss something, accidentally or deliberately?
It is wrong to believe that corporations do literally anything they can to increase their bottom lines. They do what their shareholders want, and shareholders can and do introduce policies, voted on at shareholder meetings, that curb the power of the corporation to, say, pollute the environment. At least as importantly, corporations have to do what their customers want. If customers want the corporation to stop polluting, and boycott the corporation until it does, the corporation will either change or lose business, and maybe go out of business. Consumer activism works. Corporations have got the message already, which is why many of them are far more ethical than the simplistic picture painted by anti-corporate activists. I have friends who believe in the stereotype that big corporations are evil, but they own laptops, fly in planes, use Google 50 times a day, drink Bacardi and Coke and wash with ten different Procter and Gamble products. What, specifically, is evil about any of the huge companies that provide you with the services you live by? Corporations provide what people want, and they create wealth. If people who buy from them think they are evil, they should stop buying. Have a complaint? Tell Consumer Reports and RipoffReport.com. Get the word out. Buy from their competitors. But don’t resort to the violence of the state to take down a corporation whose actions you disagree with. If corporations get away with murder, it is only because unprincipled consumers do not know or do not care.
Thus, if you do have a problem with a company, try a boycott. A boycott is a market mechanism for action against businesses if ever there was one. And there are plenty of success stories. Other forms of activism can accompany boycotts. One might try to blacklist someone who owns, works for or buys from a corporation that we do not like; in other words, do not let them in your store. Segregation in the southern US was exposed as immoral not when the national guard was called in, but before that, when students in Nashville sat quietly at segregated lunch counters where they were not allowed. The violence perpetrated against them by racist bystanders and the state worked in their favour, and they captured enough hearts and minds to win desegregation. Simple acts of civil disobedience can frequently go much further than calling on the state to impose our goals on others by force.
The government has no role in a free market. Economist Dani Rodrik argues “Modern markets need an infrastructure of transport, logistics, and communication, much of it the result of public investments. They need systems of contract enforcement and property-rights protection. They need regulations to ensure that consumers make informed decisions, externalities are internalised, and market power is not abused. They need central banks and fiscal institutions to avert financial panics and moderate business cycles. They need social protections and safety nets to legitimise distributional outcomes.” But let us consider what he seems to take as given. Some public investments have been made in infrastructure, but now investors and businesses are large enough that they do not need governments to invest in those things anymore. Do we really need government logistics companies when there are a dozen large and many more small international logistics companies? Contracts and property rights might be better protected by private law. Regulations do not ensure that consumers make informed decisions, that externalities are internalised and that market power is not abused. Consumer information does not come from government: it comes from consumers’ own research, sharing of information through forums like RipoffReport.com and word of mouth. That is how it has always spread, and there is no reason to believe government knowledge of the current state and future direction of a market are superior to those of the people on the ground. Central banks and other fiscal institutions (Freddie and Fannie perhaps?) obviously do not avert financial panics and moderate business cycles; in fact, they probably contributed significantly to the most recent market meltdown (see part 1), and to most of the previous ones as well. Governments create moral hazard by being the lender of last resort to everyone from people who cannot pay their mortgage, who should not have bought a house in the first place, to the biggest banks in the system, which received hundreds of billions in tax dollars (and whose executives still got their bonuses) because they were well connected. And I don’t know what it means to “legitimise distributional outcomes”, but if people were not taxed so much they could create their own safety nets. Then Rodrik says that democracies “are still our best safeguard against arbitrary rule.” Democracy does not protect against arbitrary rule: all government is arbitrary rule. The best way to avoid arbitrary rule by others is to avoid government.
Other economists predicted the current financial downturn (Austrian economists prominent among them), and governments did not. The same governments who think digging deeper into the same hole will get you out of it do not listen to the Austrian school however, the school that predicted not only the 2008 meltdown but the Dotcom and 1929 crashes as well (see here and here). Why would they not listen to them? Because governments do not seek wisdom; they seek shovels.
Many people are certain of what crashed the economy in 2008. They call this culprit “the free market”. But what do they think the free market is? How do they think it made the economy collapse? Well, these people will tell you, it’s deregulation. If they say that, ask them to point to specific instances of deregulation of the financial sector. In fact, the banking sector was and is highly regulated. They may not be very good regulations, and of course big banks are largely to blame for the meltdown, but there was no free market. Given actions like the pressure from the 1990s from the federal government to expand mortgage loans to people of lower income, which contributed to the crash and the massive US household debt, what do they think the government should do? Did these same anti-free market people applaud the trillion-dollar bailouts and stimulus packages because they though the government would rescue them and make everything better? Do they think the government will ever rescue them and make everything better? These are people who need to learn what the free market is.
The free market is when there is no force in the economy. Laws and taxes are force: things you must do if you want to avoid violence. A free market might be likened to a bazaar: people trading for what they want however they decide, going by uncomplicated rules that everyone already agrees on.
A truly free market would have no regulations that threaten violence against people who do not comply with rules. It would have no licenses that could be denied without fees or bribes to bureaucrats. It would have no minimum wages that prevent unskilled workers from finding employment. It means no laws protecting corporations, so that business operators could not hide behind legal shields. And it means no backing up of patents or intellectual property by courts. Many statists find the idea of a free market frightening. They see it as a ticket to monopolies, crashes, the concentration of wealth and the spread of poverty. This section explains why the free market works better than government intervention to help the poor and create a more equal society, why it eliminates monopolies and minimises crashes, and why believing a government can fix an economy, or even make a decent pencil, is mistaken.
divide and moderate market power by denying special protection and privilege and opening competition to a wide assortment of both entrants and methods. Only where potential threats to corporate monopolization are precluded by force of law — through, among other impediments, ‘safety’ and ‘consumer protection’ standards — can today’s ‘captains of industry’ ascend to market dominance.
Speaking on high food prices, he continues,
It is too often assumed that the behemoth conglomerates populating the landscape of corporate capitalism wince at regulations supposedly aimed at health and safety. These rules, however, routinely function to outlaw the farm stand down the street, the small, local producer who can’t afford to jump through the arbitrary and unjustified hoops put up by the political class.
Why does it work? Here is Professor Edward Wayne Younkins:
Progress requires the use of information that exists only as widely dispersed knowledge that each person has with respect to his own circumstances, conditions, and preferences. Such tacit, locationally specific knowledge is only useful if people are free to act upon it. A free market permits prices to emerge from the use of people’s localized knowledge. These prices contain more and better information and result in better decisions than what can be achieved under a regime of central planners. Limited government and decentralized markets permit more freedom and foster more prosperity than do state-dominated and centralized bureaucracies.
The free market is superior to central planning regarding the uses of localized information and in combining those uses into an efficient system of production and consumption. Markets spread ideas, encourage the constant search for improvements, and evolve through trial and error, experimentation, and feedback. Markets produce a positive, emergent order.
And why is it better than government intervention? Adam Smith’s invisible hand is about the virtue of human action not to design a better world, not to make the poor better off, not to solve environmental problems, but action that is selfish, but produces outcomes that do build a better world and make the poor better off and solve environmental problems. Harry Browne, former leader of the Libertarian Party of the US, said “the free market will give the best minds in the world an incentive to devise profitable methods (that we can’t even imagine today) by which the free market can perform functions we might think now can be performed only by government. That isn’t a ‘vague anarchism’; it’s a reasonable belief that free human beings are much more creative, productive, and efficient than government.”
Let us take this time to address some of the myths about the free market. Critics say that the free market leads to monopolies. The fact is, however, that a free market abhors monopolies. In 1879, when John D. Rockefeller’s Standard Oil controlled 90% of the US’s refineries (all purchased through more or less ethical means), the remaining oil producers attempted to avoid working with Standard Oil by constructing the first long-distance pipeline. Rockefeller’s dream of controlling oil supplies by controlling the railroads did not work, and gave birth to a useful, monopoly-busting innovation. Admittedly, Standard Oil bought a small stake in the pipeline and continued to control most oil transport in the region. Customers did not complain much, however, as Standard Oil kept prices low and quality high. If it had not, oil would not have been the cheap, alternative fuel of its day that it was. After all, another rule of the free market is that overcharging by any firm gives rise to competitors or substitutes. (Perhaps that is why international competitors soon emerged and began to ship oil more economically to Russian and European markets.) The antitrust suit against Standard Oil was not brought by its customers or a concerned public but by its competitors. (Read more here.) The rhetoric that alleged a criminal conspiracy worked in the end, but the unethical business practices did not take place on the free market but when competitors demanded the state strongarm a successful business.
Competition from other parts of the world (and other parts of the US) arose when oil was discovered outside Pennsylvania. To break Standard Oil’s stranglehold, the new oil men, bankrolled by financiers who knew the venture could be profitable, developed a new, safer type of oil tanker. Because of the risk of spills and explosions, the Suez Canal had been closed to oil tankers. However, with this new innovation, oil could be safely transported around the world, and prices could remain low.
Alternatives to oil exist. We just need more time to understand better how to exploit them. Take the electric car, another great example of a monopoly-breaking innovation that promised to end (well, reduce) dependence on oil, but which was ended by a powerful lobby group and a pliable government. Monopolies are made possible when government steps in to protect business. If business is left to itself, anyone else can and will enter the market. Look at Microsoft. It was charged with attempting to monopolise the software industry. Such charges seem irrelevant (and hilarious) today: no one could monopolise the software industry. (Find more on monoplies here.)
If new entrants can provide something cheaper, or something better, or just something different, the company might get established and might undercut the larger corporations and might thrive in doing so. As far as I know, it has always worked that way in the past when there have been no government-imposed barriers to entry and one firm has tried to monopolise.
Government subsidies are more protection and are unnecessary to those with good business sense. James J. Hill grew up in poverty but used his entrepreneurial skill to make the Great Northern Railroad. In 1893, when the government-subsidized railroads went bankrupt, Hill’s line was able both to cut rates and turn a substantial profit.
After the government of New York had granted Robert Livingston and Robert Fulton a monopoly on steamboat traffic for thirty years in 1798, Cornelius Vanderbilt ran a steamboat between New Jersey and Manhattan in defiance of that monopoly, undercutting the monopolists by charging only one-quarter the fare. After the steamboat monopoly law was overturned, fares dropped across the board. (See here.)
During the early days of capitalism, big business and government were comfortably in bed with one another. Laws favoured privately-owned monopolies. Obviously, this was not a free market. But Marx and others began to complain about what they called a free market anyway. I don’t know why they thought state coercion made markets free, but that was their mistake. Activists began to argue that government should be used to curb the power of corporations. Let’s have more laws, they said, laws that give governments a greater hand in the economy. But the marriage of big business and government did not end. New regulations continued to be written by corporate elites. In 1935, economist and later United States senator Paul Douglas observed, “Public regulation has proved most ineffective. Instead of the regulatory commissions controlling the private utilities, the utilities have largely controlled the regulatory commissions.” (Find references to the large amount of research on the subject here.)
Let us jump forward in time. What are the causes of the more recent crisis? Risk taking? Speculation? Greed? Do these explanations actually explain anything? We can be a bit more specific. The Federal Reserve is hardly ever mentioned as a cause of the crisis. Artificially low interest rates (1%) encouraged artifically 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. House prices rose. Fannie Mae and Freddie Mac, government-backed 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. Democratic congresspeople were reluctant to demand any oversight of Fannie, a campaign contributor.
-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 environmental protesters), the government protected the land 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. (Thomas Sowell, The Housing Boom and Bust.)
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.
Here are some more reasons for the recent financial crisis. The Community Reinvestment Act 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. Lending standards loosened.
Bear Stearns said the mortgages were sound. Government-approved rating agencies, you remember, the ones that said the mortgage-backed securities were great when they were garbage, were protected from competition by government regulations, and they served to reinforce the popular lending-to-everyone policies alive. 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.
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 need 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 regulations 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.
(I am not an economist, but I do suggest 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 simply argues very cogently the government’s role in the debacle was enormous. Either way, it is obvious that “the free market” and lack of regulation did not exist to cause this crisis.)
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, and 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. 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. 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.
Along came an enormous (more than 400-page) bailout bill, that 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 means that, instead of letting the companies pay for their own foolish bets, the taxpayers would. Thank you, our wise protectors. The case of the 2008 crisis and the recession that followed has nothing to do with a free market. There was no free market. There was only 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.
So why would we think the free market brought on all these troubles? How could anyone think we live in a free market? Mainly because everyone says we do. It is the same reason we believe the government represents the collective will of the people: because they say they do.
The free market boogeyman is always blamed for economic ills, when, as Austrian school economists (most of whom predicted the 1929 stock market crash, the bursting of the dotcom bubble and the subprime mortgage meltdown) can tell you, crashes become more likely when government meddling in the economy runs wild. The free market should be given a chance before it can be blamed for anything. When something goes wrong, like a stockmarket crash, the people, who do not understand its causes, make the following equation. Something happened. Something must be done. The government understands what happened. The government will do what needs to be done. After all, they work for us. This thinking is obviously riddled with logical fallacies. Take 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. Government regulation almost always favours the big players because the big players have the government in their back pocket. Like voters, small businesses have no leverage over governments.
There are also many myths around deregulation. When libertarians talk about deregulation, they do not mean what I have heard the Skeptical Libertarian call “the Republican method of rearranging the chairs on the Titanic.” Deregulation should mean ending government monopolies, including on the making and enforcement of rules, because it tends to concentrate wealth rather than redistribute it, which in turn creates elites that can control the government. It is sad that so many people view regulations as largely good when they usually prevent healthy competition, block people’s freedom to trade with each other and raise prices. The airlines are but one example. Until 1978, the Civil Aeronautics Board controlled entry, exit and prices in the airline industry. Prices were high, and flights were less efficient in the sense that fewer seats were being filled. Now that airlines can compete on price, and new airlines can enter the market, fares are much lower and more seats are filled on each flight. (Find more here.) That is true deregulation: taking the power away from a few big corporations and giving it to the market. There are still many regulations standing in the way of a free market for air travel, such as barriers to foreign competition, protection of Boeing and Airbus and laws that govern how much airports can charge. But the process that began in the late 1970s has made it possible for the rigid and inefficient controlled market to give way to improvements in several areas of the industry, with consumers benefiting most.
Then there is market failure. Market failure is basically when the free market produces inefficiencies in the allocation of goods and services. Market failure is usually followed by public overreaction and a call for government to intervene, again, to “do something”. Politicians see every such incidence as a way to win votes by appearing to do something big, while not necessarily addressing the root of the problem, and provide a handout to a special interest group or two. Because government responses are usually far more inefficient than market failures, they are government failures (though they are frequently disguised as market failures). But even when government could do something about a problem, it is wrong to assume that the private sector could not. In fact, a lot of market failure is government failure, as many supposed market failures such as externalities and non-competitive markets could be solved by a reduction in government regulation. Many economists see market failure as an untapped market. Plastic bags are bad for the environment? How could you make money off that? The potential is usually there with a little imagination and a less realistic ceding of government power.
There is still no free market. Like before the crash, the government is interfering with the economy in all kinds of ways, and is of course not bringing about the recovery it promises to. I do not know if constant intervention into every area of economic life is simply a way to reward the big players who contribute the most money to political campaigns, or if it is based on delusions that people like Ben Bernanke have that they can somehow save the economy. There is no evidence they can.
Political risk holds back investment. The term was once used only for places like Africa and Latin America where it was feared that a wayward government would nationalise or seize the assets of foreign investors, or just arbitrarily raise corporate taxes by 50%. But with its enormous debt, its trillion-dollar handouts to giant corporations and its seemingly arbitrary regulations, the US has become a political risk. Lee Doren of How the World Works suggests that the reason why businesses are not investing and hiring right now is that “they are scared. They have no idea what politicians in Washington are going to do. They are treating the economy like a little kid’s chemistry set.” (Here is an example of a small business owner holding back because of uncertainty—a little sentimental, but telling nonetheless.) Most businesses benefit most from stable political climates where the government’s moves are predictable.
-But politicians love to make themselves feel important while finding a way to please a special interest. That is why, instead of surrounding themselves with Austrian or even Chicagoan economists, they find people like Paul Krugman and Joseph Stiglitz, people who ignore the enormous government hand in the financial crisis and have the nerve to fault the free market. Such people, like government scientists, are essential to the modern state, because they clothe the actions of the state in jargon about multiplier effects and quantitative easing, making economic growth seem more complicated than it is, and concealing the truth from the average person.
These are the experts who tell politicians to stimulate the economy through massive spending, so that politicians can decide whom, across the whole country, to give hundreds of billions of dollars to. I question the thinking behind that, not only because I do not trust a politician to fix the economy, not only since every time they give money to well-connected interest groups they make the playing field less level, but mainly because governments at the moment are so far in debt they are beginning to collapse under its weight.
They suggest controling interest rates, instead of letting the market do so. Then, they tinker with the rules of the economy by introducing all kinds of new laws to make it more competitive or more equal or smarter or whatever promises central planners think they can fulfill toward an economy that no small group of elites could possibly run. They might make things more complicated or more expensive, which could be fatal to a new business. If they want to help small businesses, lawmakers should reduce the size of the tax code and eliminate operating licenses and license fees. (See some of the more ridiculous ones here.) They are a government’s way of retaining the power to deny a business, any business, from operating without a fee, or as it is called in a dictatorship, a bribe. More importantly, though, they keep small businesses out of markets where they could pose a threat to the big businesses that provide generous retirement funds for politicians, bureaucrats and lobbyists.
There is no such thing as “too big to fail”. The trillion-dollar bank and insurance bailouts of 2008 and onward indefinitely are justified by the excuse that, if the banks fail, credit markets freeze and no one will be able to borrow to invest. That is unlikely. Banks are merely intermediaries between those who have money to lend and those who want to borrow. There is always some other way to get money if you need it, such as venture capitalists and angel investors. And letting big companies fail does not send markets into turmoil: Enron’s collapse sent barely a ripple through the stockmarket.
The legal corporation is itself a product of government, a legal fiction, like government itself. One of the greatest threats to a free market is the legal treating of a corporation as a person. It is not a person; it is made up of people. If a CEO orders a person that works for him to dump chemicals into a river, the people harmed by that dumping should have the right to defend themselves against the person who made the order. Law does not have to end without a state; it can be made better. People like the idea of putting sanctions on people who commit crimes, so there is no reason to believe it would not happen without a state. As it stands, they cannot stop the behaviour. They can only hope the government will make the corporation pay. But when corporations pay, whose pocket is lighter? The employees might be forced to accept lower salaries, the customers higher prices. The CEO barely feels a thing. The legal corporation is thus a shield, a way for people to avoid responsibility for their crimes. Corporate personhood protects people who should not be protected. It should end.
We can also safely abolish the Federal Reserve System. Not only has it contributed to most of the bubbles and financial crises of the past century, it is the basic cause of inflation. Its origins should tip us off as to whom benefits from its existence. The Fed was created in 1913 behind closed doors by bankers and their political sponsors. It has, ever since, served to enrich bankers and impoverish the people. How does it impoverish the people? A central bank cannot create value, or goods that are worth buying, but it can print paper, which goes first to bankers. The bankers now have more money to spend. When they spend it, the wider economy gradually adjusts to the greater supply of dollars and inflation sets in. Inflation eats away at savings. Now that your dollars are worth less than they were, you feel forced to spend. Some people say that is good because spending keeps the economy going. I say you should be allowed to decide when to spend your own money.
We are so afraid of deflation that we are willing to put up with inflation as a lesser evil. And yet, falling prices can just as easily be a sign of prosperity. Prices fell in the US between its independence from Britain and the Federal Reserve Act of 1913, for instance, when the economy went from agrarian to the greatest industrial power in the world.
Laws and regulations are not usually good for the economy or for consumers. Most of them benefit the few at the cost of the many. We have seen how above. In extreme cases, government intervention kills. What are the effects of laws on the free market? Well, what is the difference between a legal business and a criminal organisation? Just one law. Both are filling a demand. But one is forced into the violent underground, and reaps big profits, because what they supply is illegal. For some reason, be it a naïve belief that prohibiting something means ending demand for it, or a favour to an interested party such as a rival producer, lawmakers have created an enormous black market comprising 15 to 20% of world GDP no one can control without a huge number of guns. And the more they try to fight suppliers, if demand does not change, they will spend more public money and kill more people. Find more on black markets on my other blog.
We need to stop being afraid of profit. Profit is the incentive that starts and grows businesses. When people profit, they create goods and services we like, they create jobs, they bring themselves out of poverty and into wealth. People who make their money, however many billions, by giving us what we want do not have an obligation to “give back”, as they have already given. There is nothing greedy or immoral about profit. It is only immoral if you take it without the consent of the other party (like taxes). Starting a business is hard, hard work, and the risk of failure is high. And yet, the wonderful people who succeed are the people who have given us all the wonderful things we take for granted. Entrepreneurs are vastly unappreciated and overpunished in our world.
Furthermore, it is because businesses need to profit that the most powerful check against corporations is the power of the dollar. If you believe that a corporation is bad, you do not have to buy from it. When enough people stop buying from a business, either it changes or it goes bankrupt. The government, on the other hand, is a monopoly you are forced to obey. It cannot go out of business because it does not rely on market forces but violent forces. If government were a business operating in a free market, it would have been hurled out of business long ago by firms that do what their customers want (security, jobs, environmental protection, you name it) more effectively and efficiently.
I laugh when I hear someone say that, of the largest “economies” in the world, half or more are corporations. Corporate power is very different from those of government. Corporations cannot take your money; they can only ask for it. Corporations are often blamed for suckering you out of your money, but one might argue that anyone who gladly pays taxes has been suckered; and at least with a business, you are allowed to resist. What could big business do without the power of government behind it? The reason big business is problematic is because it can corrupt the state and lobby to use laws to force unethical behaviour.
Some people fear that corporations, as they too have lots of money, would develop their own weapons. But why would they? There is no instance in history of a corporation whose product is legal growing in size and taking on the coercive properties of a state, only ones where it has used existing state apparatus of violence to coerce. Business cannot use force. It can only persuade. And of course, no organisation or social system could ever completely do away with fraud, trickery and stealing. But the government not only allows those things to continue, it engages in them on a massive scale. I think we are better off without its protection.