My critique of unregulated markets does not stem from the fact that I long for a planned economy. Quite the contrary: I criticize the unregulated markets because their occasional failures revive the delusional far left theories that we all thought were put to rest a long time ago. And when the free market advocates ran out of defensive arguments and when the evidence shows how wrong they were, then they are exposed to and defenseless against the public furor that, especially after what we’ve been through in the past 5 years, has a justifiable tendency to overreact. People like myself, who criticize the laissez faire system, are routinely portrayed as socialists by those who are too lazy to think. But we all witnessed, over the past few years, that there’s a point where competition and innovation give way to inertia, abandon, hubris and self-delusion. If such factors could be measured numerically, a replica of a Laffer curve would be appropriate to describe the predicament, where X axis is a number of innovations and Y axis is social utility of such innovations. At some point the relationship between the two breaks down and becomes negative.
Many supporters of free markets don’t see a problem here. When crises, like financial crisis of 2008 happen, they view it as a system glitch that would be self-corrected if only the government minded its own business. Some of my readers surely think that I’m a closeted Commie (although I’m merely a Keynesian), but there were times when I thought Milton Friedman, like Clapton, was God! I am, however, also a person who is moved by empirical evidence and if I see that there are too many exceptions to a theory then I begin to question the validity of such theory. Right now I see that people are not rational; that markets do not always self-correct; that there’s not always equal access to information between the transaction parties; that people can use agents that are self-interested, etc. All of this is enough, at least to me, to pause before marveling at the virtue of free markets. Milton Friedman was lucky that during his lifetime the economic circumstances seemed to confirm the superiority of his economic theory. I’ll quote:
“Friedman was also the beneficiary of the postwar economic boom and of global economic conditions that readily resonated with his ideas. During the period between the late 1960s and the mid-1970s, ‘his ideas seemed irresistibly prescient, and those of his numerous opponents repeatedly wrong’. Friedman did not face a world where economic planning enjoyed ideological hegemony. In such circumstances, his free-market liberalism was of the moment and his receipt of a Nobel Prize in 1976 merely confirmed this.”
Some conservative thinkers, even back in the 1970s when the free-market capitalism was clearly proving itself to be a superior social and economic order, realized the long-term fragility of this theory. Friedrich Hayek, the author of the conservative bible “The Road to Serfdom”, understood it even during the heyday of laissez-faire ideas. He realized that in the absence of the Soviet Union and its planned economy as an example of what not to do, there has to be a moral foundation for capitalism’s values. But there was none.
Irving Kristol (the father of William Kristol who founded the conservative Weekly Standard magazine) too criticized market advocates for promoting materialism and for fighting an ideological war that has largely been settled and urged conservatives back in the 1970 to begin to build a moral basis for capitalism. He noted that the new battle should be fought around values, that is, social values.
Conservatives tried to do that in subsequent decades, but the alliance between social conservatives and free market advocates always had an artificial feel to it, like a marriage of political expediency, not of natural compatibility. The former believe that the human nature is wicked and must be somehow controlled or restrained (either by religion or by some other methods); the latter believe in human rationality and ability to make the right decisions. It’s like mixing oil and water. It’s breaking right now before our very eyes.
If conservatives are so afraid of collectivist ideologies and believe that those will never go away completely, they have to build a solid defense against them rather than mock them. One day accusing your opponent of being a socialist might not suffice. In the 60s, 70s and 80s, the existence of a real life collectivist experiment made it possible for conservatives to demonstrate their moral superiority with ease, but now that the Soviet Union is gone the burden of proof is on the conservatives themselves. I suggest that the first step to build such a defense should be to embrace regulations. Free market advocates are afraid that by embracing regulations they will somehow admit the imperfections of their ideology; thus they are incapable of looking at regulations as a tool that can come in handy when confronted by hardcore Commies. (Note: I, of course, don’t think that Commies are coming – conservatives do). The obstinacy with which conservatives cling to free markets ideology makes them weaker when facing opponents that under normal circumstances can be easily defeated. Their tactics and strategies seem tone-deaf and oblivious to widespread public anger, both on the right and on the left. The equivalent of such tactic on the left would be a complete denouncement of a capitalism system. But those kinds of far-left voices, while existing on the fringes, are forcefully rejected by the mainstream Democrats who merely advocate a regulated capitalism and a modest increase in taxes, not a collectivist utopia. Keynesianism can be a salvation, not an inhibitor. If socialism, the real socialism comes to America, ironically, it will be the Democrats that are best equipped to fight it, not the Republicans.
I cannot stress this enough, so I will repeat myself. After you accuse me of being a socialist know this: I’m trying to help the supporters of free markets. If the foundation of their ideology is weak, we all risk sliding into an alternative social order. If you can’t demonstrate that your system of belief is superior you only have yourself to blame if the assortment of Commies will have a stronger case (and public opinion) on their side. That is a major reason I support a stronger regulatory environment – not because I’m anti-business or anti-capitalist – but because I want to protect market participants from inadequate behavior that can discredit their philosophy and expose them and eventually the public to a harmful outcome.
5 thoughts on “Why laissez-faire advocates are wrong to resist regulations.”
Keynesianism can be a salvation, not an inhibitor” Are you serious? Is it a religion that has to sold with warnings of fire and brimstone d@#*ation? If you want a school off economics that explains a soft science in a way that actually appeals to reason and common sense check out the Austrian school of Economics. Free markets all day everyday! And we don’t make excuses for them.
I’m quite serious. I’m familiar with Austrian School of Economics and I’m unimpressed. The thing with the “Austrians” is that their theories are impervious to empitical evidence. All about them is pure theory and in theory everything can always work perfectly. They are not moved when in practice things are not going as smoothly and they continue, zealously, to cling to their beliefs. Sort of like a religious cult that you accused Keynesians of.
I wrote about Austrians briefly before here:
I think with time you will reassess your dogma. Like you I did admire Milton Friedman and free marketeers when I was in college. But then reality set in.
1. Milton Friedman was not an Austrian. He was fine with 3% inflation.
2. Seeing as Fractional Reserve Banking has been standard for centuries; the business cycle hasn’t had a chance to be stopped through the elimination of artificially expanded money supplies.
1. Friedman was more moderate than the Austrians, that’s true. But even he was proved to be mistaken by the current circumstances. I just wanted you to put things into perspective on how extreme the Austrians are.
2. I’m not sure what you mean by Fractional Reserve. If you mean the requirement of banks to keep reserves at the Fed then it’s a fairly recent invention (since 1930s). Before that we had plenty of opportunity to expand business cycle without artificially expanded (or contracted) money supplies.
3. As an Austrian devotee you surely familiar with the recent Krugman/Wikipedia kerfuffle. I just want to quote Krugman for you: “That is my experience with the Austrians: whenever you try to pin them down, they insist that you fail to understand their profound ideas. And they have indeed been predicting runaway inflation for years now; it’s interesting that they can neither explain why they were wrong nor admit that this poses a problem.” So, how do you explain the lack of inflation and if you can’t how do you reconcile that with your theories?