The Invisible Hand of the Free-Market Touched Me in My Private Sector

In a previous post of notes and musings on egoism (which is the un-PC term for individualism) I made the claim that the concept of a free market devoid of reasonable government regulation was a misunderstanding of the economic system Adam Smith proposed and championed. To quote Barry C. Lynn in Harper's:
There is an undeniable beauty to laissez-faire theory, with its promise that by struggling against one another, by grasping and elbowing and shouting and shoving, we create efficiency and satisfaction and progress for all... Until recently, however, most politicians and economists accepted that freedom within the marketplace had to be limited, at least to some degree, by rules designed to ensure general economic and social outcomes. ("Breaking the Chain")

Let me start by saying the current economic crisis is not a failure of the so-called free-market because we don't have a free-market. As I read it the current crisis began due to a combination of fraud, improper CEO payment incentives (i.e. pay based off a certain sales number or contractual obligations that are divorced from overall company health and benefit), and corporate welfare. In other words government intervention is as much a contributing factor to the housing and credit bust as deregulation.

This isn't a Republican or conservative argument--Republican capitalism is often equatable corporate welfare. They talk about being free-market, but party voting record speaks otherwise. Most so-called capitalists aren't free market either. Like the politicians they buy off they talk the talk, but you'll almost always notice that, when push comes to shove, they're more than willing to take a government handout. Preferably with few strings attached.

By corporate welfare I mean laws and regulations that give either give certain companies a de facto monopoly over a particular market and licensing and regulation that loads the dice in favor of pre-existing corporations, thus relieving themselves of competion. Bailouts are the most extreme form of it. An example is the sugar import industry in America. American fruit growers lobbied to have a tariff placed on imported sugar so that they're product would be cheaper and more enticing. That's why our sodas are sweetened with fruit syrup and why foreign produced Coke tastes so much better than their domestic counterpart.*


A historical example is the savings and loans scandals of the 1980s. As summarized by an online liberal FAQ:
In 1982, Savings and Loan lobbyists bribed Congress to quietly deregulate the industry. In effect, Congress promised to cover any losses if S&Ls made bad investments with their customer's savings, but also promised not to regulate or oversee these investments... Not surprisingly, fraud and abuse soon ran rampant in any institution that called itself an S&L. ("Myth: Deregulation Promotes Competition")

The lesson according to the FAQ is that deregulation allowed the fraud and greed, but that's only half true. Notice the part where the government promised to cover any losses. The promise of government intervention was as much to blame as deregulation. (Thank the gods of plutocracy that we learned our lesson about socializing the costs of financial sector fuck ups.)

Corporate welfare can be seen in the buildup to the current crisis through the Federal Reserves' money printing policies which was used to give lending institutions more capital to loan out, which gave banks the incentive to make even riskier loans. Short term profit became the name of the game--consumers, banks, and federal institutions were all players.

But as I've said before I don't think all government regulation and intervention is bad. Lynn writes on the anti-trust case against Wal-Mart:
From Adam Smith onward, almost all the great preachers of laissez-faire were tempered by a strain of deep realism. Most accepted that a national economy ultimately served a nation that had to survive in an often brutal world. So, too, did most accept that all economies are characterized by struggles for power and precedence among men and institutions run by men; in other words, that all economies are fundamentally political in nature. And so most accepted the need to use the power of the state—most dramatically in the form of antitrust law—to prevent any one man or firm from consolidating so much power as to throw off basic balances. The invisible hand of the marketplace, and all that derives from it, had to be protected by the visible hand of government.

So what are acceptable forms of intervention in my opinion? Anti-trust laws for one. Also to require corporate transparency to protect consumers from fraud. That last one is where deregulation did play a role in the current crisis. Banks were giving securities (those toxic assets we're hearing so much about now) much higher safety ratings than they deserved, leading consumers to believe they were taking a lower risk than they actually were. That's fraud.

Consumer protection agencies like the FDA are another. All of the health issues surrounding Chinese product in the last year are a good example of why products need to be inspected because companies, in pursuit of profit, will try to cut corners at the unwitting expense of the consumer rather than in their benefit. They do it by using unsafe but cheaper materials and allowing tainted products (like peanuts if you want to talk about American greed) to enter the market.

Government regulation and tariff powers are also crucial if we plan on being open to foreign markets while staying a viable economic power ourselves. American workers can't compete with countries who don't pay their labor a living wage. Trade with exploitative countries must be restricted so that domestic products can compete fairly. It isn't free-market at all to pit goods from slave labor against our own manufacturers.

As an end note it's important to recognize that the American consumer isn't blame free in all of this. Too many people have equated happiness and prosperity with cheap consumption and buying power. Wal-mart's and Target's (Yes, Target is big box, too) cheap, Chinese goods are easy on the pocketbook in the short-term, but they undermine our future. Our gluttony has left many jobless and deeply in debt.

*I had a debate with my mother about the above sugar example because she felt that American fruit growers' interests weren't something to be written off so easily. Though I see her point I disagree that sugar should be tarriffed so far above fruit syrup that almost no soda producer will use it (I think Jones Soda might use real sugar, but they're more of a niche market). My argument is that the consumer gets an inferior product when the benefit isn't all that great. There are others ways to make money off fruit and most fruit workers are, from my understanding, immigrants anyway, so most of the Americans that are losing out are only the industrial farming interests. Regardless, if you're product is inferior find a new way to make money, don't pass laws to force your crappy product upon me.

But to give an example of corporate welfare that isn't tied up in domestic vs. international interests we don't have to turn far here in Kentucky. Churchill Downs has used its lobbying power in Kentucky to keep casinos out for a long time. They even got themselves exempted from Louisville's smoking ban for a time, giving them an unfair advantage over local bars.