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Free Markets Newspeak as Opium for Regulators

Free Markets vs. Fair Markets: Freedom from accountability behind the smokescreen of "free market" rhetoric.

News Recommended Books Recommended Links  Invisible Hand Hypothesys: The Theory of Self-regulation of the Markets John Kenneth Galbraith Hyman Minsky The efficient markets hypothesis
New Lysenkoists: Useful Idiots from Chicago School of Market Fundamentalism and Milton Friedman The Idea of Dynamic Stochastic General Equlibrium Small government smoke screen Critique of neoclassical economics Rational expectations scam Financial Humor Etc

There are no free markets in America, any more than there is free lunch. The game was always fixed and FED plays the role of the ultimate shill for the TBTF. The past thirty years have been an orgy of greed with common sense shoved aside for the sake of uncommon expediency. Americans became infatuated by arcane formulas and dense incomprehensible mathematics to the point that they forget simple arithmetic. 

The term "Free market" is a codeword for the rule of the banks and was propagated by economists who were on their payroll. With Clinton's gang (who sold Democratic Part to Wall Street) being the most destructive (Rubin, Summers, etc).  Before then Chicago school was the key academic gang doing bidding for financial oligarchy.

The last thing people need is such a "free market", but they can definitely benefit from a "fair market".  Corruption is a huge problem in the USA especially on the level of large companies.  The latter often can even changes the laws to allow actions they desire, but that are currently prohibited. Citigroup is a perfect example here.

In reality a lion share of US economy is centrally planned. Government provide private firms with the research results. Large firms that dominate the US economy are centrally planned hierarchical organization. Military industrial complex is centrally planned with Department of defense as the coordinator. Financial industry is coordinated by Fed, which dictates in perfect GOSPLAN fashion the short term rates.

Along with members of  Chicago School of Market Fundamentalism  such as Friedman, who in his senior years became completely corrupt Trojan Horse of financial oligarchy (may be compensating for poverty he experienced large part of his life), Paul Samuelson was probably the most prominent neoliberal free market stooge, or, as some people, say  bastartized Keyes to fit deregulation dogma. And even supposedly democratic economic commentators in reality are not under more scrutiny: I was glad to see Hudson’s smack down by-and-large neoclassical economists such as  Krugman, who in his usual polemic style expressed disdain to people who dare to criticize Samuelson (and previously attacked John Kenneth Galbraith, in comparison with whom he is really an intellectual pigmy; Galbraith did understand that any economics is in reality political economy, the notion that evades Krugman with his love for pseudo mathematical masturbations -- it would be better to him to learn Excel that to pretend that he knows something about differential equations).

Models that are detached from the reality (and which like in case of Krugman, does not take into account the level of error in initial data; only compete idiot can assume that inflation is measured exactly not with at least 30% average error) in a serious way may “say something” to us, but what they say may be right, wrong, or “not even wrong”. Unfortunately many economic models fall into this category and the underling simplifying assumptions that make it possible to construct them are often forgotten. They are scarcely more relevant than the model that shows that the solution to our crisis is to raise skirt hemlines.

Economics should demand more data validation before taking models seriously, the way that other disciplines do. That is Hudson’s point that Krugman completely missed with his attachment to over simplistic mathematic models based on mathematics which he does not even understand (Krugman is a very poor mathematician, who never managed to take into account the quality of data into his models; this is a grave flaw)

Neoliberal economists like Paul Samuelson and Summers paints a false picture of what the classical economists envisioned as free markets. Actually they envisioned markets free of economic rent and taxes to support an aristocracy or oligarchy. As professor Hudson noted:

It may be time to look once again at what Larry Summers and his Rubinomics gang did in Russia in the mid-1990s and to Third World countries during his tenure as World Bank economist to see what kind of future is being planned for the U.S. economy over the next few years. Throughout the Soviet Union the neoliberal model established “equilibrium” in a way that involved demographic collapse: shortening life spans, lower birth rates, alcoholism and drug abuse, psychological depression, suicides, bad health, unemployment and homelessness for the elderly (the neoliberal mode of Social Security reform).

This is all about rent-seeking and prop trading, not banking as financial intermediation that facilitates commerce and capital investment. Look at the ascendancy of FIRE (rent-seeking) in percentage of GDP in relation to actual productivity that increases real assets in the economy instead of moving the chairs on the Titanic. And you need look no further than the current $140 Billion US “financial institution” bonus pool. In 2009, the ENTIRE US GDP did not grow by a  $140 Billion. In fact, this $140 Billion itself exceeds actual US GDP growth several times. Yet, $140 Billion in “rent” is being extracted from the economy for the benefit of “financial institution” executives. The same executives who engineered he current financial crisis. When rent-seeking behavior drives a significant part of GDP, it’s no longer a bug, it’s a feature.

On 5/21/2010 Linda Beale in her article Richard Abrams: debunking free marketarianism wrote:

Richard Abrams: debunking free marketarianism

I've often written here about the problems of the naive, black-or-white view of economics that has been fostered by the Chicago School and Milton Friedman acolytes who talk of "free markets" as though markets exist in vaccum tubes unaffected by the social, cultural and legal context around them. Debunking that "free market myth" is important, because without understanding the mythology of it most ordinary Americans will continue to be misled and fooled by those who devise and enact policies that affect our everyday lives. From "tea partyers" to Congress, from "the national association of manufacturers" to the US Chamber of Commerce, the "free market" is spoken of with almost reverent tones as though the market works on its own, as though businesses always do everything better than government, as though human liberty were intimately connected with letting mutlinational corporations set their own standards and make their huge profits without protections for the little guys along the way. Wrong, wrong, wrong--this pseudo-concept of free market has little to do with human liberty and lots to do with corporate profits for managers and shareholders. Time that ordinary Americans understood that.

So it is nice to see another academic talking sense on "free markets. See Richard Abrams, historian, on the Berkleley Blog (newly added to the progressive sites of interest blog roll), as he writes "Of ideology, recession and policy paralysis" (March 4, 2010). Here's a useful excerpt offering "a little history" of our romance with competitive capitalism (and our failures to recognize how uncompetitive corporate capitalism ordinarily is):

For a relatively short span of years in our country’s history, mostly in the middle third of the 19th century, governmental policy withdrew from large areas of economic activity that traditionally had been regulated, leaving it increasingly to the price-and-market system to control the distribution of most resources and rewards. That is, traditionally in the U.S., going back to the start of the nation and continuing well into the 19th century, government – especially at the state and local levels – closely regulated much economic behavior, including of course labor relations, employer liability, and even the price and quality of goods for sale. By the second quarter of the 19th century, government began pulling back, reducing its mediating role between buyers and sellers, and between employers and employees, and yielding to private contract as the main governor of such economic relationships. By mid-century, the American economy did in fact closely resemble the model of “free,” competitive enterprise; i.e., competitive capitalism did work relatively well in regulating most markets and producing something close to a fair and level field among buyers and sellers and other competing interests (but not labor).

But along came the Industrial and Corporation Revolutions. More than a century ago, that is by the last quarter of the 19th century, the transformative growth and mergers of large corporations sharply limited private-sector competition as an effective and fair regulator of markets. As the late dean of American legal historians (James Willard Hurst) put it: “The corporation was the most potent single instrument which the law put at the disposal of private decision makers. In making it available, the law lent its weight to the thrust of ambitions which reshaped not only the business of the country but also its whole structure of power.”

The populist and progressive movements of the late 19th and early 20th century rose in response to the changed structure of power in the country. That is, various commercial and producer interests called on government to intervene, to regulate, to redress the disadvantages that the transformation of the economic scene had brought upon them.

Still, it took almost another half-century before some of the more important economists came to acknowledge that oligopolistic rather than free competition had corrupted their models of the so-called free market system. One such belated acknowledgment came in 1936. That was when economist Arthur Burns, who would later become chairman of the Council of Economic Advisors for President Dwight Eisenhower and then chair of the Federal Reserve Board during the Nixon Administration, made the remarkable discovery that, as he put it: “The widening use of the corporate forms of business organization are bringing, if they have not already brought, the era of competitive capitalism to a close.” That was half a century after the Corporation Revolution had occurred. (It would seem that economists are slow learners.) WE, of course, having experienced the arrival of the megacorporation, and of the conglomerate and multinational corporation revolutions of the past 50 years – WE could have said to Mr. Burns, hey! you ain’t seen nuthin’ yet!

Remarkably, the dominant economic theorists of the past 35 years have continued promoting public policies as if “competitive capitalism” remains vigorously functional. As one dissenting economist (John Munkirs) wrote several years ago, “The enduring belief in the existence of competitive market-structure capitalism is partially explained by the fact that basic economic beliefs are religious in nature, and being so, are difficult to modify.” “Partially explained.” The rest of the explanation has to do with how well the theology serves powerful entrenched interests with privileged access to the media and to politicians. And that privilege has grown all the greater with the recent Supreme Court’s decision overruling more than 100 years of congressional and state legislation designed to limit the power of large corporations to influence elections, and awarding corporations nearly full First and Fourth Amendment rights as “persons.”

(along the same lines, you might also enjoy reading Mark Thoma's Proponents of a Failed Philosophy" in which he again shows that Fannie and Freddie and the CRA are not the source of the financial crisis, in spite of all the effort by GOP stalwarts to make them so.)

divorcedone:

The problem with the use of the word efficiency is as the word free when associated with market. What aspect of market as it relates to a purpose of having a market are we trying to make efficient? Efficiency has come to mean least cost to a resultant profit. It seems to serve a market well for a short term. Efficiency has come to mean expediency. An efficient market not only makes profit at the least cost, it does so in the least time. Efficiency has come to mean allocation. An efficient market is one closest to perfection in allocation. 

None of these efficiencies will automatically equate to efficiency of life because they are all in reference to market unto its self. I have not read anywhere – and if there is such I would certainly like to know – about the Chicago school presenting a model which presents the efficient market theory as synonymous with an efficient life other than to imply such. Show me the mathematical work that connects the two. 

Thus, I had a discussion today with one who was pointing out as a negative how much it will cost to put in the Cape Wind project and how much the electricity will cost. The argument was totally devoid of any issues related to efficiency of life and living.

kharris:

I think, but haven't thought it through yet, that incorporation represents a similar form of moral hazard as was seen in the development of "too big to fail" private firms. "Too big to fail" is simply another step in the progress toward seekers of private gain shedding the risk of failure. Corporations allow owners to reap profits, but protect owners assets from the claims of creditors. Recognition that some firms are "too big to fail" performs a similar function. In both cases, firms become bigger as a result of the development, which means the market is less one of price takers with no market power, more one of oligopolies with market power. That is power relative to consumers, new entrants to the market and government.

It seems that a good bit of the interaction between firms and various units of government has to do with firms trying to hold on to benefits while shedding costs, liabilities - responsibility of any kind. This is true of incorporation, anti-regulatory efforts, offshore headquartering, one-off liability limits for oil firms that spill... Add to the list as you see fit. If so, then arguments that regulation, taxation and the like are a deviation from the efficient results that markets would produce are simply wrong in many cases. Intervention is needed to put the cost of business activity inside the business, where theory says it should be.

kharris:

By the way, I think we have fallen into a bad linguistic habit. Adjectives and adverbs, when used objectively, should narrow the meaning of the modified word. "Free market" as it is used here and elsewhere, often simply means "market". If we are going to append "free" to "market" every time we say "market", we are just furthering somebody or other's propaganda.

We do not have and mostly do not want "free" markets. We want markets in which the state enforces contracts when private parties fail to honor them. We want the state to protect constitutional rights - including when those rights are damaged in business activity. Some of us want externalities to be internalized under law. Whatever the law is, right-thinking people should want it enforced, even if it limits market activity, to make the rules clear to all. All of those necessarily mean that markets are not free. Nor should they be.

Show me a "free" market and I'll show you a place where a guy without a gun doesn't stand a chance.

Greg

" We do not have and mostly do not want "free" markets. We want markets in which the state enforces contracts when private parties fail to honor them"........."Show me a "free" market and I'll show you a place where a guy without a gun doesn't stand a chance.

Exactly, which is why I try to use the term competitive market instead. A competitive market has rules, referees that enforce the rules and known consequences for failing to follow the rules.
---------------
Ben, I'm not sure I agree with you about Rand Paul. He makes some of the right noises at times but then he comes out and calls President Obama mean for criticizing BP for making a "simple mistake".

amateur socialist:

This comment sort of addresses another thing that have always bothered me about the history of free markets: The tendency of the largest participants to try to reach a critical mass that allows them to control pricing via artificial scarcity and manipulation. Whether you're talking about oil, transportation, silver, telecommunications or tulips there have always been attempts to manipulate pricing.

The central question it seems to me is - are these "free" markets actually all that efficient once you subtract out the overt and covert manipulation? Consider today's supermarket shelf - whether it's in a Randall's or Walmart there are significant barriers to entry for any new concept. Retailers more or less end up renting inches of shelf space to existing players; if new products want to reach consumers there are hefty up front fees and subsidies required just to get it on the shelf. This explains why there are 7-12 varieties of Chips Ahoy(tm) and Oreos(tm) etc but very little in the way of actual variety among vendors. Once the major players have their associated niches filled it doesn't matter how delicious your new cookie might be - you have to give it away for many months just to see if it will sell.

Cedric Regula

Truth be told, corporations don't like markets. They seek competitive advantage. If they do it by providing better products, we like it. Then there are all those other ways we don't like.

Funny part is if you win the game, you become a monopoly. That's why we have Sherman Antitrust. (banks are excluded of course)

But there was even a problem with that. In Japan they never worried about monopolies because they had an export orientation and believed there was plenty of competition offshore. Their mega corporations caused a lot of grief for even the largest US corporations when they decided to enter the US market in force. Now American corporations got smart ergo the rush to insert themselves as global middle men to China. (well, the Japanese did that first, and Europe followed),

P.S. We have a small independant grocer who sells cookies made by a local bakery. Expensive, but yummy.

Min:

kharris: "By the way, I think we have fallen into a bad linguistic habit. Adjectives and adverbs, when used objectively, should narrow the meaning of the modified word. "Free market" as it is used here and elsewhere, often simply means "market".

I don't think so. I think it means, "Sacred Cow market", something that cannot be criticized, something that dispenses goods and services in accordance with the Hand of Providence. It has nothing to do with whether it is free or not, except that the speaker has an interest in avoiding discussion about it.

Ben:

Folks,

Please don't confuse corporatism or crony capitalism with free markets.  It should be apparent all by now that the Ron Paul wing of the Tea Party Movement shares beliefs with Progressives that the current marriage between big business and big government is bad and dangerous.
 
Finding common ground on key issues will go a long way to fixing the system.


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[Jun 18, 2016] Greenspan Shocked Disbelief by Robert Borosage

Greenspan phony "Shocked disbelief" reminds classic "...I am shocked - shocked, there is gambling going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca. Compare with "... "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he said. ..."
Notable quotes:
"... "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," ..."
"... Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless banks to do reckless things. ..."
"... Private greed, not public good, caused this catastrophe: "The evidence now suggests, but only in retrospect, that this market evolved in a manner which if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely to have taken on the dimensions that it did. It wasn't until the securitization became a significant factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime loans, because remember that without securitization, there would not have been a single subprime mortgage held outside of the United States, that it's the opening up of this market which created a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities. ..."
"... But having admitted the failure of his faith, Greenspan could not abandon it. Credit default swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations were needed, because the markets "for the indefinite future will be far more restrained than would any currently contemplated new regulatory regime." ..."
"... The only Guantanamo that the United States has any business running is a concentration camp for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud the American people from their hard earned dollar. ..."
"... There are no free markets in America, any more than there is free lunch. ..."
"... So it wasn't the military-industrial complex that did us in after all . . . ..."
"... It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's sorry testimony before Congress. What has faith in something to do with enforcing the policies of fiduciary responsibility already on the books? All these so-called "experts" on capitalism are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily and criminally responsible for their actions, inept or not. ..."
"... If it looks like class warfare, as David Harvey, author of Neoliberalism, has stated, call it class warfare and act accordingly. ..."
"... it doesn't take a genius to understand that when financial instruments are created based on crap (subprime mortgages), that eventually problems will occur with those instruments. In fact, Greenspan and his cronies knew that, which is why they resisted these instruments being regulated by the SEC or even the CFTC. ..."
"... Sounds like the "maestro" hit a flat note in his orchestra of greed and deregulation. ..."
"... Did anybody even bother to consult the Math PhDs who created these instruments to run possible scenarios -- just in case? why bother when you know you can scare congress, the president and the treasury and ultimately the people into bailing your ass out of worldwide collapse? ..."
"... Shocked Disbelief is a ploy. When they were all riding high, they didn't give a crap. They were going to come out richer than hell anyway. ..."
"... Where's Ayn Rand when you need her? Give me a break Mr Greenspan. Never let history and reality get in the way of the big unregulated celebration of greed like we have had since "Saint Ronald Wilson Reagan", and the other "Free Market" "government is the problem" ideologues ..."
"... What about the 1994 Act of Congress that required the Fed to monitor and regulate derivatives? The Act Greenspan ignored? ..."
"... "...I am shocked - shocked, there is gambling going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca ..."
Oct 24, 2008 | truthout.org

by: Robert Borosage, The Campaign for America's Future

On October 23, former Federal Reserve Chairman Alan Greenspan testified before a House Oversight and Government Reform Committee hearing on the role of federal regulators in the current financial crisis.

It marks the end of an era. Alan Greenspan, the maestro, defender of the market fundamentalist faith, champion of deregulation, celebrator of exotic banking inventions, admitted Thursday in a hearing before Rep. Henry Waxman's House Committee and Oversight and Government Reform that he got it wrong.

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," he said.

As to the fantasy that banks could regulate themselves, that markets self-correct, that modern risk management enforced prudence: "The whole intellectual edifice, however, collapsed in the summer of last year."

Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless banks to do reckless things. Greenspan dismissed that goofiness in response to a question from one of its right-wing purveyors, Rep. Todd Platts, R-Pa., noting that subprime loans grew to a crisis only as the unregulated shadow financial system securitized mortgages, marketed them across the world, and pressured brokers to lower standards to generate a larger supply to meet the demand. Private greed, not public good, caused this catastrophe:

"The evidence now suggests, but only in retrospect, that this market evolved in a manner which if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely to have taken on the dimensions that it did. It wasn't until the securitization became a significant factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime loans, because remember that without securitization, there would not have been a single subprime mortgage held outside of the United States, that it's the opening up of this market which created a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities.

But having admitted the failure of his faith, Greenspan could not abandon it. Credit default swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations were needed, because the markets "for the indefinite future will be far more restrained than would any currently contemplated new regulatory regime."

Now hung over from their bender, the banks could be depended upon to remain sober "for the indefinite future." Or until taxpayers' money relieves their headaches, and they are free to party once more.


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Comments

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The only Guantanamo that the

Sun, 10/26/2008 - 23:37 - Captain America (not verified)

The only Guantanamo that the United States has any business running is a concentration camp for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud the American people from their hard earned dollar.

What they did dwarfs the damage caused to this country by 911, (no disrespect for the many innocents who died). However, here, every single citizen is a victim of fraud and corruption on a scale that was heretofore inconceivable. Greenspan, Bush and now Paulson have done more than Bin Laden and his hordes could do in a 100 years.

By the way, if you protest YOU wind up locked up for being un-American. What happened America ?

There are no free markets in

Sun, 10/26/2008 - 19:27 - pink elephant (not verified)

There are no free markets in America, any more than there is free lunch. The game was always fixed and Greenspan was the ultimate shill for the fixers. The past thirty years have been an orgy of greed with common sense shoved aside for the sake of uncommon expediency. Americans became infatuated by arcane formulas and dense incomprehensible mathematics to the point that they forget simple arithmetic. America wake up it was only a dream, and a bad one at that.

So it wasn't the

Sun, 10/26/2008 - 19:07 - Anonymous (not verified)

So it wasn't the military-industrial complex that did us in after all . . .

It's clear from comments on

Sun, 10/26/2008 - 15:40 - afrothethics (not verified)

It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's sorry testimony before Congress. What has faith in something to do with enforcing the policies of fiduciary responsibility already on the books? All these so-called "experts" on capitalism are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily and criminally responsible for their actions, inept or not. The truth is as plain as the nose on your face: Greenspan, the Federal Reserve, the investment banks, the Bush administration and several members of Congress unobtrusively acted to consciously and knowingly to rob the national treasury for the sake of capitalism's sacred cow: capital accumulation on behalf of the nation's political and economic elite. If it looks like class warfare, as David Harvey, author of Neoliberalism, has stated, call it class warfare and act accordingly.

We have heard statements

Sun, 10/26/2008 - 10:11 - DJK (not verified)

We have heard statements like "the mathematical models used for knowing the behavior of derivatives based on subprime mortgages were too difficult to understand", etc. But it doesn't take a genius to understand that when financial instruments are created based on crap (subprime mortgages), that eventually problems will occur with those instruments. In fact, Greenspan and his cronies knew that, which is why they resisted these instruments being regulated by the SEC or even the CFTC. And this is why they turned a blind eye to many of the rating agencies giving many of these instruments AAA ratings. I am sure that a real investigation will reveal numerous instances of fraudulent activity in conjunction with this debacle. Those perpetrators must be identified and brought to justice. While this will not fix our current problem, it hopefully should serve as a deterrent to those who would in the future attempt to again engage in such activities.

Well here you have it a

Sun, 10/26/2008 - 08:13 - Robert Iserbyt (not verified)

Well here you have it a confessional lie from the biggest fraud perpetrator in the history of American finance Why the markets ever listened to this criminal in the first place is evidence that our entire nation should be required to take a full year of real unfettered economics just in case they don't understand what is going on now. All the pundits on MSNBC and all the talking heads should be removed from the airwaves. The Bailout what will that do? the answer lies before you.

Sounds like the "maestro"

Sun, 10/26/2008 - 02:02 - Anonymous (not verified)

Sounds like the "maestro" hit a flat note in his orchestra of greed and deregulation. Come on, do you really think we are all so stupid to buy into the story that you couldn't predict a melt down knowing that those writing the subprimes held no responsibility for their actions? That's like giving a "get out of jail card" to someone who just created a felony! Did anybody even bother to consult the Math PhDs who created these instruments to run possible scenarios -- just in case? why bother when you know you can scare congress, the president and the treasury and ultimately the people into bailing your ass out of worldwide collapse?

I'm a former real estate

Sun, 10/26/2008 - 00:24 - two7five7one (not verified)

I'm a former real estate broker and my son is a mortgage broker. From about 2004 through the beginning of this "greatest financial crisis since '29", we frequently talked on the phone about the disaster which would ensue when the real estate value appreciation stopped, and people were no longer fueling the economy with money borrowed against their equity, and the sub-prime loan fiasco would end. We knew it would be disastrous, and both of us were astonished that neither the FED nor congress was willing to say or do anything about it. Anyone who has witnessed over the years the cycle of boom/bust/boom/bust in the real estate market knew that after eleven years of unprecedented "boom" -- '96 through '2007 -- the "bust" would be like an earthquake. Paulson and Greenspan and their ilk now denying that they suspected this is just is just their lying to protect the GOP which was benefitting from the booming economy. They should both end up in prison, with all of the GOP members of congress who have had their hands in the cash register.

Dance clown, dance. First

Sat, 10/25/2008 - 23:48 - mysterioso (not verified)

Dance clown, dance. First you were against the FED until you became head of the FED. Then you were for trickle down economics and letting the "system" regulate itself until you saw the inevitable destruction it caused. Dance clown, dance. You should be the first one sent to prison under the "Un-American activities act". The arrogance of your testimony before the committee was appalling. You honestly couldn't believe you were wrong !!!

Shocked disbelief, my foot.

Sat, 10/25/2008 - 23:35 - slw (not verified)

Shocked disbelief, my foot. Many of us predicted EXACTLY this outcome.

This is like telling the Fox

Sat, 10/25/2008 - 22:43 - topview (not verified)

This is like telling the Fox to watch the Hens and then walking away and trusting him to do the right thing. Government has to return to regulation and see that there is no hanky, Banky going on anymore. Monopolies have to be busted up, like the Communication industry's, the Drug industries and any other Corporations that control to much of the way the Country operates. No more Outsourcing any Government duties.

Shocked Disbelief is a ploy.

Sat, 10/25/2008 - 22:00 - radline9 (not verified)

Shocked Disbelief is a ploy. When they were all riding high, they didn't give a crap. They were going to come out richer than hell anyway.

Where's Ayn Rand when you

Sat, 10/25/2008 - 20:53 - anglohistorian (not verified)

Where's Ayn Rand when you need her? Give me a break Mr Greenspan. Never let history and reality get in the way of the big unregulated celebration of greed like we have had since "Saint Ronald Wilson Reagan", and the other "Free Market" "government is the problem" ideologues. We can spend trillions on war and corporate bailouts, but we can't have a single payer health system? We can't rebuild our infrastructure? Say it again- give me a break!

What about the 1994 Act of

Sat, 10/25/2008 - 20:41 - Jtmonrow (not verified)

What about the 1994 Act of Congress that required the Fed to monitor and regulate derivatives? The Act Greenspan ignored?

"...I am shocked - shocked,

Sat, 10/25/2008 - 20:29 - Anonymous (not verified)

"...I am shocked - shocked, there is gambling going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca

This would be the same

Sat, 10/25/2008 - 19:50 - dtroutma (not verified)

This would be the same "shocked disbelief" expressed by Willie Sutton's mother?

shouldn't Greenspan give his

Sat, 10/25/2008 - 18:06 - Anonymous (not verified)

shouldn't Greenspan give his salary and bonus back to taxpayers?

[Aug 05, 2015] The Sad Death of Free Market Pessimism

"...Optimists or propagandists?

Kristian Niemietz, whom Dillow cites as a free market type most critical of Malthusian pessimism says one thing the Sandwichman would endorse:

"In a conventional discussion, you pick up your opponent's arguments, and try to refute them. Ideally, this generates (intellectual) surplus value, resulting in growth (of knowledge and understanding). In a steady state discussion, you merely 'respond' by reiterating what you have been saying all along.""

Economist's View

Second Best said...

The question is why are so many rightists tolerated as the economic hypocrites they are? The markets they claim to believe in don't exist anymore for the most part, evolved into what they implicitly abhor as markets based in massive subsidies extracted from third parties forced to support them unwillingly.

Why is this any different from market distortions which can be caused by government policy which they explicitly abhor? What the rightists actually support is the ultimate hierarchy of permanent, accumulating, concentrated private ownership and control over all resources regardless of the economic outcome, other than that necessary to preserve and protect the private entity.

Sandwichman said in reply to Second Best...

In short: what conservatives believe in is hierarchy. Period.

With themselves at the top of the pile (whether in reality or fantasy).

Second Best said...

The question is why are so many rightists tolerated as the economic hypocrites they are? The markets they claim to believe in don't exist anymore for the most part, evolved into what they implicitly abhor as markets based in massive subsidies extracted from third parties forced to support them unwillingly.

Why is this any different from market distortions which can be caused by government policy which they explicitly abhor? What the rightists actually support is the ultimate hierarchy of permanent, accumulating, concentrated private ownership and control over all resources regardless of the economic outcome, other than that necessary to preserve and protect the private entity.

Sandwichman said in reply to Second Best...

In short: what conservatives believe in is hierarchy. Period.

With themselves at the top of the pile (whether in reality or fantasy).

Sandwichman said...

Optimists or propagandists?

Kristian Niemietz, whom Dillow cites as a free market type most critical of Malthusian pessimism says one thing the Sandwichman would endorse:

"In a conventional discussion, you pick up your opponent's arguments, and try to refute them. Ideally, this generates (intellectual) surplus value, resulting in growth (of knowledge and understanding). In a steady state discussion, you merely 'respond' by reiterating what you have been saying all along."

Would that Mr. Niemietz complied with his own prescription. I recall a correspondence with Niemietz (a cordial fellow) from a few years back in which I pointed out to him an unstated assumption that he had not supported with evidence. His reply? Of course he hadn't supported his unstated assumption with evidence -- it was SELF EVIDENT!

This is the inevitable trump card of the conservative optimist: the unstated, "self-evident" assumption that is unsupported by evidence. After all, who needs evidence when the truth of their assertions is self evident?

One might even suspect that in such discourse the less evidence there is for a proposition -- or the more evidence accumulated against it -- the more rhetorically "self-evident" the proposition becomes.

anne said in reply to Sandwichman...

Only because I just read this in the last few days:

http://neurotheory.columbia.edu/~ken/cargo_cult.html

1974

Cargo Cult Science
By Richard Feynman

In the South Seas there is a cargo cult of people. During the war they saw airplanes with lots of good materials, and they want the same thing to happen now. So they've arranged to make things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head to headphones and bars of bamboo sticking out like antennas--he's the controller--and they wait for the airplanes to land. They're doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn't work. No airplanes land. So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they're missing something essential, because the planes don't land.

Now it behooves me, of course, to tell you what they're missing. But it would be just about as difficult to explain to the South Sea islanders how they have to arrange things so that they get some wealth in their system. It is not something simple like telling them how to improve the shapes of the earphones. But there is one feature I notice that is generally missing in cargo cult science. That is the idea that we all hope you have learned in studying science in school--we never say explicitly what this is, but just hope that you catch on by all the examples of scientific investigation. It is interesting, therefore, to bring it out now and speak of it explicitly. It's a kind of scientific integrity, a principle of scientific thought that corresponds to a kind of utter honesty--a kind of leaning over backwards. For example, if you're doing an experiment, you should report everything that you think might make it invalid--not only what you think is right about it: other causes that could possibly explain your results; and things you thought of that you've eliminated by some other experiment, and how they worked--to make sure the other fellow can tell they have been eliminated.

Details that could throw doubt on your interpretation must be given, if you know them. You must do the best you can--if you know anything at all wrong, or possibly wrong--to explain it. If you make a theory, for example, and advertise it, or put it out, then you must also put down all the facts that disagree with it, as well as those that agree with it. There is also a more subtle problem. When you have put a lot of ideas together to make an elaborate theory, you want to make sure, when explaining what it fits, that those things it fits are not just the things that gave you the idea for the theory; but that the finished theory makes something else come out right, in addition.

In summary, the idea is to give all of the information to help others to judge the value of your contribution; not just the information that leads to judgement in one particular direction or another....

Reply Wednesday, August 05, 2015 at 11:58 AM

SomeCallMeTim said in reply to anne...

Thanks for posting this - I hadn't looked beyond a TL:DR version, which only went as far as the bamboo antennas.

Reply Wednesday, August 05, 2015 at 01:06 PM

Sandwichman said in reply to Sandwichman...

"An example of the fallacy claim appeared in an opinion piece by Kristian Niemietz, 'When Paternalism Meets Bogus Economics: The New Economics Foundation's 21 Hours Report,' published by the Institute of Economic Affairs, which bills itself as 'the U.K.'s original free-market think-tank.'"

http://lumpoflabor.blogspot.ca/2011/12/whats-wrong-with-case-against-shorter_15.html

Reply Wednesday, August 05, 2015 at 12:02 PM

anne said in reply to Sandwichman...

http://lumpoflabor.blogspot.ca/2011/12/whats-wrong-with-case-against-shorter_15.html

December 15, 2011

What's Wrong with the Case AGAINST Shorter Working Time? II

According to Niemietz:

"This is not 'new economics', but a rephrasing of the old lump-of-labour fallacy, the idea that the amount of work which is 'required' in an economy is somehow fixed and can be redistributed 'justly'…

"The case for work-sharing rests on a number of assumptions. Demand for working hours must be largely fixed; work must be easily divisible; and the work of one person must be a close substitute for the work of another person. When these conditions hold, an employer will be indifferent between employing A for 40 hours, or employing A and B for 20 hours each. But when the conditions are violated, then work-sharing imposes additional costs per working hour, and the quantity of hours demanded can decrease – the 'scale effect'."

The second and third assumptions attributed by Niemietz to the case for work-sharing are gratuitous. Work is divisible and workers are substitutable for one another in principle. What Niemietz is indirectly getting at with his two extra assumptions is the idea that reducing the hours of work will necessarily increase labour costs. That conviction is based on the unstated assumption that current arrangements of working time are optimal or at least closer to optimal than would be a more evenly-distributed arrangement of hours. He presents no evidence to support his optimistic assessment of the status quo.

-- Sandwichman

anne said in reply to anne...

Nicely argued.

SomeCallMeTim said in reply to Sandwichman...

So are axioms the second to last refuge of a scoundrel?


[Apr 07, 2015] Economists, financial markets and theory-induced blindness

Idea of theory-induced blindness
Institute for Financial Transparency

In Transparency Games, I get to talk about how economists, both academic and those working for the financial regulators, have theory-induced blindness when it comes to how financial markets actually work.

Theory-induced blindness is the application to economists of Upton Sinclair's line, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it." For economists, it is reflected in their inability to see what is actually happening in the financial markets when it contradicts their beautifully derived theory.

In talking about his idea of theory-induced blindness, Daniel Kahneman said

The mystery is how a conception that is vulnerable to such obvious counterexamples survived for so long. I can explain it only by a weakness of the scholarly mind that I have often observed in myself. I call it theory-induced blindness: Once you have accepted a theory, it is extraordinarily difficult to notice its flaws. As the psychologist Daniel Gilbert has observed, disbelieving is hard work.

The efficient market hypothesis (EMH) is the classic example of a theory that was widely accepted and, as a result, it became extraordinarily difficult for economists, both academic and those working for the financial regulators, to notice its flaws. Flaws that were revealed by the financial crisis.

EMH looks at the issue of how financial market prices reflect the available information. EMH has 3 forms; the strongest of which asserts that even information that is hidden from most market participants is reflected in the price. EMH effectively says that even in the absence of transparency, prices reflect what would occur if transparency existed.

For their original tests of the theory, economists chose the most transparent financial market in the world. A financial market which also just happens to have restrictions on insider trading. That market was the US stock market. Prices in this market confirmed the theory.

Unfortunately, the US stock market is currently a special case. This was clearly shown by the financial crisis when the market for private label mortgage-backed securities effectively froze and the price for these securities dropped significantly (think from the 80s to the 20s). The price for these opaque securities on Day 1 didn't reflect their underlying fundamentals. Fundamentals which due to a lack of transparency the buyers did not have access to. Rather, the price buyers paid reflected the maximum price Wall Street could obtain based on the story it told about the underlying fundamentals. Wall Street had an incentive to maximize the price because it pocketed the difference between the price it sold the securities at and the price it paid for the mortgages it bundled into the securities.

The financial crisis also showed that within the US stock market EMH did not hold for all stocks. In particular, it did not hold for bank stocks. Why? Given how they are paid, there is no reason to think that bankers would not try to maximize their compensation by hiding the losses sitting on and off their balance sheet. They could do this because, as the Bank of England's Andrew Haldane said, banks are black boxes.

One of the benefits of the Transparency Label Initiative™ is it addresses theory-induced blindness when it comes to the EMH. Specifically, it ensures there is the transparency in the financial markets that the theory assumes is there.

[Jan 03, 2014] Mixed Thinking about Markets

December 29, 2013 | Economist's View

John Quiggin:

Mixed thinking about markets: ... Chris Berg ... wants to argue that all the good things that have happened in the last two centuries are the product of the "market economy", and that we should therefore scrap our existing social arrangements in favor of radical reforms in which market forces are given free rein.
In reality, modern society is characterized by a mixed economy, in which large components of economic activity take place outside the market, within households or through publicly funded and provided services. Even within the private business sector, the majority of activity takes place within corporations whose internal operations are characterized by central planning, not markets.
All of this reflects the fact that a pure market economy doesn't work well. Rather than list all the problems which have led modern societies to constrain the role of markets (environmental pollution, inequality and so on), I'll focus on the one discussed by Berg, that of technological innovation. Information is what economists call a public good... And while it's possible to keep useful information secret for a while, it gets harder and harder over time. So, a pure market system often doesn't provide much of a reward to people who come up with new ideas.
All sorts of solutions to the problem have been developed. They include patents (a temporary grant of government-enforced monopoly), prizes and awards, and publicly funded research institutions such as universities. ...
Berg's argument is an example of a characteristic fallacy among advocates of market liberalism. Beginning with the fact that all modern societies are, in some sense, capitalist, they point to the successes of modern society to argue in favor of a particular version of capitalism (free markets, on the US model but taken even further) and against others that have been more successful in terms of human welfare (various forms of social democracy) or that might exist in the future. ...

[Aug 18, 2013] 'Why We Might Care About Inequality' by Tim Harford:

August 16, 2013 | Economist's View

Tim Harford:

...The idea of a free, market-based society is that everyone can reach his or her potential. Somewhere, we lost our way.

DrDick:

Frankly, you cannot help but lose your way when you are following an illusion (The idea of a free, market-based society is that everyone can reach his or her potential). Capitalism is simply a more efficient rent extraction process and massive inequality is the inevitable outcome.

anne:

->DrDick...

Frankly, you cannot help but lose your way when you are following an illusion (The idea of a free, market-based society is that everyone can reach his or her potential). Capitalism is simply a more efficient rent extraction process and massive inequality is the inevitable outcome.

[ Fine, then where is the escape if any is perceived? ]

bakho:

"The idea of a free, market-based society is that everyone can reach his or her potential. Somewhere, we lost our way."

There is no such thing. All markets are run by rules and regulations. The idea of a "Free" market has been sold to the public by Malefactors of Great Wealth.

They promote rules and regulations for their own personal aggrandizement under the guise of free market. The public has been sold. The public needs to wise up and recognize that all markets have rules and that the rules are not natural or "Free" but negotiated. A Free market is a market that is free from the masses demanding our fair share. A "Free" market is a market where the wealthy are Free to do to us as they please. Only when the people understand that we need a voice at the bargaining table for more egalitarian rules will the market work for the average person and not just the filthy rich.

cawley:

->bakho...

Well put.

In my experience, most proponents of a "free market" cannot even articulate what it means - certainly not in any way that relates to the real world. The ones that even try usually seem to have conflated the concept with a competitive market but seem unaware of the assumptions of a competitive market and their implications. Ask them how they resolve asymmetric or incomplete information (which includes fraud), externalities, barriers to exit and entry or monopolies, monopsonies, oligoplies, etc. and you get ... crickets.

A market is simply a human system and no human system can function without rules, i.e., regulation.

mrrunangun:

The era between 1945 and 1973 may turn out to have been an unrecoverable golden age based on a carryover of wartime solidarity overcoming intergroup tensions, legal protections for workers produced by the New Deal, and the destruction of the industrial capacity of our prewar competitor. As those features of the postwar era subsided, the US leaders failed to prepare the country for the loss of the increase in international competition and what the combination of export of technology to low wage countries coming into the global trading system would mean for American wages.

The spectacle of academic economists trying to convince everyone that the laws of supply and demand can be nullified by increasing domestic wages without protecting domestic products from foreign competition has been amusing. The idea that restoring the domestic tax rates and wage rates to what they were in the golden age when the MNCs did not have the opportunity to engage in international wage and tax arbitrage ignores the changes in international economic competition over the past 40 years.

hapa:

"The idea of a free, market-based society is that everyone can reach his or her potential. Somewhere, we lost our way."

mistaking consumption for participation; earning potential for fulfillment; utility for satisfaction; etc

Onomatopoeia:

"The idea of a free, market-based society is that everyone can reach his or her potential. Somewhere, we lost our way."

Remember, man was free and living in utopian bliss until the big bad government arrived, took away our freedoms, drove us into debt, taxed our labor, and created grave inequality.

And the only way to return mankind to his freedom is to follow libertarian principles of abolishing our safety nets, attacking global warming, cutting taxes for the rich, and abolishing the Civil Rights Act 1964.

Only then will mankind be free.

'There are Some Things You Don't Want to Leave Up to the Market'

Paul Krugman:

John Galt and the Theory of the Firm: ...Why should any large firm exist? ... We may live in a market sea, but that sea is dotted with many islands that we call firms, some of them quite large, within which decisions are made not via markets but via hierarchy - even, you might say, via central planning. Clearly, there are some things you don't want to leave up to the market - the market itself is telling us that, by creating those islands of planning and hierarchy. ...
The thing is, however, that for a free-market true believer the recognition that some things are best not left up to markets should be a disturbing notion. If the limitations of markets in providing certain kinds of shared services are important enough to justify the creation of command-and-control entities with hundreds of thousands or even millions of workers, might there not even be some goods and services (*cough* health care *cough*) best provided by non-market means even at the level of the economy as a whole? ...

The Myth of the Free Market The Role of the State in a Capitalist Economy by Mark A. Martinez

Amazon.com

John Hemington: Market Myths,(December 7, 2009)

The Myth of the Free Market by Mark A. Martinez is exceptionally well researched and written. It reads more like a text book than a casual reader and, as such, should be required reading for every senior high school student in America. It thoroughly demolishes the concept that free markets exist on anything larger than a local scale and cogently explains why free markets on a larger scale are probably not possible. Beyond high school, it should be taught in every MBA and graduate economics program so that those who manage the financial empire actually have some relevant information about how things really work and are better able to cope with day to day reality. It is high time that delusional thinking stop being the core operating mode in both the private and public policy sectors of our economic world.

Midwest Book Review (Oregon, WI USA) - See all my reviews

Is a completely free market truly the best way to do things? "The Myth of the Free Market: The Role of the State in a Capitalist Economy" is a scholarly economic guide exploring how the concept of the free market is flawed, as evidenced by the emergence of the current economic crisis and the slew of bailouts have come with it. Taking examples from history, "The Myth of Free Market" explains the issue and shows why the free market is best enhanced with principles from other systems.

The Road To Economic Serfdom

with 276 comments

By Peter Boone and Simon Johnson

According to Friedrich von Hayek, the development of welfare socialism after World War II undermined freedom and would lead western democracies inexorably to some form of state-run serfdom.

Hayek had the sign and the destination right but was entirely wrong about the mechanism. Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe. All industrialized countries are at risk, but it's the eurozone – with its vulnerable structures – that points most clearly to our potentially unpleasant collective futures.

As a result of the continuing euro crisis, European Central Bank (ECB) now finds itself buying up the debt of all the weaker eurozone governments, making it the – perhaps unwittingly – feudal boss of Europe. In the coming years, it will be the ECB and the European Union who dictate policy. The policy elite who run these structures – along with their allies in the private sector – are the new overlords.

We can argue about who exactly are the peasants, the vassals, and the lords under this model – and what services exactly will end up being exchanged. But there is no question we are seeing a sea change in the post-war system of property, power, and prosperity across Western Europe, just as Hayek feared. An overwhelming debt burden will bring down even the proudest people.

The ECB-EU approach will not of course return countries to reasonable levels of growth – the debt overhang is simply too large. The southern and western periphery of the eurozone cannot grow out of their debts under these arrangements, and so will stumble from stabilization program to stabilization program – just like Latin America did during the 1980s. This is bound to be acrimonious, leading to hostile politics, social unrest, and more economic crises.

The International Monetary Fund will do just what the EU and ECB asks to keep the charade in place. The old days when all member countries got nice presents from the euro zone are long gone; now it is all instructions and austere requirements. But enough resources will be provided to keep rolling everything over.

The top three French players – President Nicolas Sarkozy, Jean-Claude Trichet (ECB), and Dominique Strauss-Kahn (IMF) – seem to be enjoying themselves; presumably they think they will end up running things. More surprising is the reaction of other European leaders, who genuinely seem able to convince themselves that what they are doing makes sense – as opposed to being a series of crazed improvisations.

The market is telling them that their euro rescue schemes make no sense, and the market is probably right. Faced with the ugly reality of the loss of confidence in European finance and institutions, the Germans and even the normally sensible Swedish government are increasingly blaming "irrational" markets and speculators for homegrown problems.

The currently preferred messy solution of the EU leaves the world at risk of shocks like we observed this week. This particular iteration may blow over, but another will arise when there is backlash in Athens, Dublin, Lisbon, or – heaven forbid – Madrid.

Meanwhile, rational market participants are selling debt of risky nations, and getting out of the euro. The whole fiasco is now leading to a messy shift away from risky assets all around the world, and the cost to the world of such volatility is not small. Debt peonage looms for a wide range of countries that were recently thought immune to serious fiscal crisis, including the United States and UK.

It is inappropriate for the Europeans to subject the rest of the world to these large, chronic risks. Europe should also recognize how disorderly insolvencies end – it is never pretty. The 1970s crisis in Britain is the model for what may go wrong. Ongoing large strikes, populations disenchanted with all authority, and great economic disruption are inevitably the outcome. When the assets are very cheap, deep-pocketed investors from the US, China, India and of course Russia will swoop in for the crown jewels.

What should be done? It is time to look in the mirror and recognize the problem. Several nations in Europe are bordering on insolvency, and it is now pretty clear that we shouldn't just "bandage" that over for a few years with large aid packages.

To deal with this insolvency we need to restructure the debts of those nations. But this has to be done in a way that does not destabilize Europe's fragile banking system. And it needs to be credible enough so that once restructured, the troubled nations will be able to finance themselves easily.

Europe now has the 750bn package of assistance in place, and they should use it to fix the problem once and for all. The ingredients for a solution include:

Such a comprehensive package of measures would be painful, but it is the only realistic solution to this chaos. It would also restore some credibility to Mr. Trichet and the ECB, who, at this stage, appear captives the fiscal crises in the euro zone.

Unfortunately, there is no leadership today in Europe that could take such decisive actions, so Europe will only reform itself dragged kicking and screaming through successive crises until the current, and many ensuing, problems are resolved.

The UK and US need to prepare themselves for more storms. The United States will be in the more pleasant position as the world's safe haven, but this will only encourage America's profligate politicians to spend more and build more debt.

The UK will bear much more pain from euro devaluation and financial dislocation, all exacerbated by its own large deficit and debts. We might well see one more invasion across the channel, this time by bond vigilantes who question Britain's ability to rein in inflation as it builds too large debts.

At the end of this great tumult, Europe and the UK will have sound fiscal regimes. Debt will be defaulted on or inflated away, and nations will have dramatically cut spending.

Hayek's predicted demise of western society will prove correct, but welfare systems will prove the victim, rather than the mechanism, erased by a political and financial elite gone awry.

An edited version of this article appeared in the Sunday Telegraph (UK) this morning.

"Capitalism After the Crisis" and "Free Markets" Newspeak

Reader Don B pointed out a generally top notch piece by Luigi Zingales at a new publication, National Affairs, on how the financial crisis may change attitudes towards what he calls "democratic capitalism". Even though the article is thoughtful and well written, it does fall prey to a major bit of intellectual sloppiness that is common and I believe played a role in getting us into this mess.

First, some key elements of Zingales' argument:

The nature of the crisis, and of the government's response, now threaten to undermine the public's sense of the fairness, justice, and legitimacy of democratic capitalism.

By allowing the conditions that made the crisis possible (particularly the concentration of power in a few large institutions), and by responding to the crisis as we have (especially with massive government bailouts of banks and large corporations), the United States today risks moving in the direction of European corporatism and the crony capitalism of more statist regimes. This, in turn, endangers America's unique brand of capitalism, which has thus far avoided becoming associated in the public mind with entrenched corruption, and has therefore kept this country relatively free of populist anti-capitalist sentiment.

In fact, corruption and concentration of power are all relative; America has had a proud tradition of robber barons of various sorts. But Zingales stresses that the US has avoided, at least so far, having an entrenched upper class:

In a recent study, Rafael Di Tella and Robert MacCulloch showed that public support for capitalism in any given country is positively associated with the perception that hard work, not luck, determines success, and is negatively correlated with the perception of corruption. These correlations go a long way toward explaining public support for America's capitalist system. According to one recent study, only 40% of Americans think that luck rather than hard work plays a major role in income differences. Compare that with the 75% of Brazilians who think that income disparities are mostly a matter of luck, or the 66% of Danes and 54% of Germans who do, and you begin to get a sense of why American attitudes toward the free-market system stand out.

Some scholars argue that this perception of capitalism's legitimacy is merely the result of a successful propaganda campaign for the American Dream - a myth embedded in American culture, but not necessarily tied to reality. And it is true that the data yield scant evidence that social mobility is higher across the board in the United States than in other developed countries. But while this difference does not show up in the aggregate statistics, it is powerfully present at the top of the distribution - which often gets the most attention, and most shapes people's attitudes. Even before the internet boom created many young billionaires, in 1996, one in four billionaires in the United States could be described as "self-made" - compared to just one out of ten in Germany. And the wealthiest self-made American billionaires - from Bill Gates and Michael Dell to Warren Buffett and Mark Zuckerberg - have made their fortunes in competitive businesses, with little or no government interference or help.

Notice how the piece is already getting a bit slippery. The polarity is between "freedom" and "government interference or help." JP Morgan, the Rothschilds, the Japanese zaibatsu (save latecomer Mitsubishi) built long lived enterprises without government support; indeed, the Rothschilds could make or break governments. Even the Krupps, which later became inextricably associated with German rearmament before and during World War II, was an innovative steel-maker and was in the mid 1800s a supplier to multiple national armies, rather than dependent on German patronage. The idea that concentrations of power can arise due solely to competitive dynamics such as economies of scale, network effects is absent, and there is curiously no mention of the role of once more punitive estate taxes (readers are welcome to correct me, but I believe as recently as the 1970s, the top rate was 70%) in limiting intergenerational transfers of wealth in the US.

But the article had started getting on thin ice a bit earlier:

Capitalism has long enjoyed exceptionally strong public support in the United States because America's form of capitalism has long been distinct from those found elsewhere in the world - particularly because of its uniquely open and free market system. Capitalism calls not only for freedom of enterprise, but for rules and policies that allow for freedom of entry, that facilitate access to financial resources for newcomers, and that maintain a level playing field among competitors. The United States has generally come closest to this ideal combination - which is no small feat, since economic pressures and incentives do not naturally point to such a balance of policies. While everyone benefits from a free and competitive market, no one in particular makes huge profits from keeping the system competitive and the playing field level. True capitalism lacks a strong lobby.

That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one, though American capitalism has always managed this tension far better than most.

This section illustrates the sort of muddy headed thinking about "free markets" that is not simply annoying, but I believe played a much greater role in creating the conditions that led to the crisis than most realize. First, the sort of rules that Zingales argues are necessary for a "free and competitive" market, as in limiting power concentrations, are in fact directly contradict the sort of "free market" idea espoused by libertarians and staunch follower of Milton Friedman, which views government action of any sort save the bare minimum (defense and a court system) as "interference". That vision is in fact close to anarchy. So you have people using the same term to mean quite different things, but the zealotry of the "free market" fundamentalists means that people who use the same phrase to use something more moderate wind up seeming to endorse the more extreme version.

Second, Zingales' "pro market" versus "pro business" lobbying construct has broken down since the 1970s. Big businesses started an organized campaign in the Carter administration, arguing that regulation were interfering with their ability to innovate. The claim was utter rubbish. There was no evidence of a slow-down in innovation or invention. Moreover, a robust body of research showed that the big businesses that were calling for fewer rules were not innovators. Small and mid-sized enterprises are the locus on new ideas and procedures (indeed, there was a whole industry of books and consulting practices in the 1980s trying to help big companies figure out how to be innovative).

"Free markets" is an amazing bit of Newspeak. Unlike "free enterprise" which clearly implies that business in the beneficiary of more liberalized rules, "free markets" creates the illusion that everyone automatically benefits. Zingales unwittingly endorses that idea by offering a false dichotomy between "pro market" and "pro business" when business has taken up the "free markets" branding to promote deregulation, particularly in financial services, that led to the concentration of power than Zingales decries.

With that huge caveat, the article is still worth reading, and you will find it here.

(Economic) Freedom's Just Another Word for...Crisis-Prone Dollars & Sense By John Miller

This article is from the September/October 2009 issue of Dollars & Sense magazine.

In a period of slowing economic growth in many parts of the world, popular pressure for governments to act to fix the situation can be enormous. In responding to such pressure, it is vital that leaders understand the real causes of negative economic developments and undertake actions that will fix them rather than exacerbate them. If intrusive government regulation has contributed to an economic problem, it is unlikely that still more government regulation will cure it. If excessive taxes have stifled investment and entrepreneurship, increasing tax rates is unlikely to spur economic growth. If the monetary supply has been too loose or credit too easily available, lowering interest rates is unlikely to be the magic fix the public demands.

-Executive Summary, 2009 Index of Economic Freedom

In "Capitalism in Crisis," his May op-ed in the Wall Street Journal, U.S. Court of Appeals judge and archconservative legal scholar Richard Posner argued that "a capitalist economy, while immensely dynamic and productive, is not inherently stable." Posner, the long-time cheerleader for deregulation, added, quite sensibly, "we may need more regulation of banking to reduce its inherent riskiness."

That may seem like a no-brainer to you and me, right there in the middle of the road with yellow lines and dead armadillos, as Jim Hightower is fond of saying. But Journal readers were having none of it. They wrote in to set Judge Posner straight. "It is not free markets that fail, but government-controlled ones," protested one reader.

And why wouldn't they protest? The Journal has repeatedly told readers that "economic freedom" is "the real key to development." And each January the Journal tries to elevate that claim to a scientific truth by publishing a summary of the "Index of Economic Freedom," an annual report put out by the Heritage Foundation, Washington's foremost right-wing think tank. But Heritage's index turns out to be a barometer of corporate and entrepreneurial freedom from accountability rather than a guide to which countries are giving people more control over their economic lives and over the institutions that govern them.

This January was no different. "The 2009 Index provides strong evidence that the countries that maintain the freest economies do the best job promoting prosperity for all citizens," proclaimed this year's editorial, "Freedom is Still the Winning Formula." But with economies across the globe in recession, the virtues of free markets are a harder sell this year. That is not lost on Journal editor Paul Gigot, who wrote the foreword to this year's report. Gigot allows that "ostensibly free-market policymakers in the U.S. lost their monetary policy discipline, and we are now paying a terrible price." Still, Gigot maintains that "the Index of Economic Freedom exists to chronicle how steep that price will be and to point the way back to policy wisdom."

What the Heritage report fails to mention is this: while the global economy is in recession, many of the star performers in the Economic Freedom Index are tanking. Fully one-half of the ten hardest-hit economies in the world are among the 30 "free" and "mostly free" economies at the top of the Index's ranking of 179 countries.

text version of image

Sources: International Monetary Fund, World Economic Outlook: Crisis and Recovery, April 2009, Tables A1, A2, A3; Terry Miller and Kim R. Holmes, eds., 2009 Index of Economic Freedom.

Here's the damage, according to the IMF. Singapore, the Southeast Asian trading center and perennial #2 in the Index, will suffer a 10.0% drop in output this year. Number 4 Ireland, the so-called Celtic tiger, has seen its rapid export-led growth give way to an 8.0% drop in output. The foreign-direct- investment-favored Baltic states of Estonia (#13) and Lithuania (#30) will each endure a 10.0% loss of output this year. Finally, the economy of Iceland (#14), the loosely regulated European banking center, will contract 10.6% in 2009.

As a group, the Index's 30 most "free" economies will contract 4.1% in 2009. All of the other groups in the Index ("moderately free," "mostly unfree," and "repressed" economies) will muddle through 2009 with a much smaller loss of output or with moderate growth. The 67 "mostly unfree" countries in the Index will post the fastest growth rate for the year, 2.3%.

So it seems that if the Index of Economic Freedom can be trusted, then Judge Posner was not so far off the mark when he described capitalism as dynamic but "not inherently stable." That wouldn't be so bad, one Journal reader pointed out in a letter: "Economic recessions are the cost we pay for our economic freedom and economic prosperity is the benefit. We've had many more years of the latter than the former."

Not to Be Trusted

But the Index of Economic Freedom cannot and should not be trusted. How free or unfree an economy is according to the Index seems to have little do with how quickly it grows. For instance, economist Jeffery Sachs found "no correlation" between a country's ranking in the Index and its per capita growth rates from 1995 to 2003. Also, this year's report cites North America as the "freest" world region, but it logged the slowest average growth over the last five years, 2.7% per year. The Asia-Pacific region, rated "less free" than every other region except Sub-Saharan Africa, posted the fastest average growth over the last five years, 7.8% a year. That region includes India, China, and Vietnam, among the world's fastest growing economies, which ranked 123, 132, and 145 respectively and were all classified as "mostly unfree." And there are plenty of relatively slow growers among the countries high up in the Index, including Switzerland (#9).

The Heritage Foundation folks who edited the Index objected to Sachs' criticisms; their claim, they say, is that growth is tied to changes in economic freedom, not the level of economic freedom. But even that claim doesn't hold up. Economic journalist Doug Henwood found that a rising index ranking from 1997 to 2003 could explain no more than 10% of GDP growth.

But even more fundamental flaws with the Index render any claim about the relationship between prosperity and Heritage's version of "economic freedom" questionable. Consider just two of the ten components used to rank countries: fiscal freedom and government size.

Fiscal freedom (what we might call the "hell-if-I'm-going-to-pay-for-government" index) relies on the top personal and corporate income tax brackets as two of its three measures of the tax burden. These are decidedly flawed measures. Besides ignoring the burden of other taxes, singling out these tax rates doesn't get at effective income tax rates, that is, how much of a taxpayer's total income goes to paying these taxes. For example, on paper U.S. corporate tax rates are higher than those in Europe. But nearly one-half of U.S. corporate profits go untaxed. The effective rate of taxation on U.S. corporate profits currently stands at 15%, far below the top official rate of 35%. And relative to GDP, U.S. corporate income taxes are no more than half those of other OECD countries.

Their third measure of fiscal freedom, government tax revenues relative to GDP, bears little relationship to economic growth. After an exhaustive review, economist Joel Selmrod, former member of the Reagan Treasury Department, concludes that the literature reveals "no consensus" about the relationship between the level of taxation and economic growth.

The Index's treatment of government size, which relies exclusively on the level of government spending relative to GDP, is just as flawed. First, "richer countries do not tax and spend less" than poorer countries, reports economist Peter Lindhert. Beyond that, this measure does not take into account how the government uses its money. Social spending programs-public education, child care and parental support, and public health programs-can make people more productive and promote economic growth. That lesson is not lost on Hong Kong (#1) or Singapore (#2). Both provide universal access to health care, despite the small size of their governments.

The size-of-government index also misses the mark because it fails to account for industrial policy. This is a serious mistake, because it overestimates the degree to which some of the fastest growing economies of the last few decades, such as Taiwan and South Korea, relied on the market and underestimates the positive role that government played in directing economic development in those countries by guiding investment and protecting infant industries.

Still More

Beyond all that, the Index says nothing about political freedom. Consider once again the two city-states, Hong Kong and Singapore, which top their list of free countries. Both are only "partially free" according to Freedom House, which the editors have called "the Michelin Guide to democracy's development." Hong Kong is still without direct elections for its legislators or its chief executive, and proposed internal security laws threaten press and academic freedom as well as political dissent. In Singapore, freedom of the press and rights to demonstrate are limited, films, TV and the like are censored, and preventive detention is legal.

So it seems that the Index of Economic Freedom in practice tells us little about the cost of abandoning free market policies and offers little proof that government intervention into the economy would either retard economic growth or contract political freedom. In actuality, this rather objective-looking index is a slip-shod measure that would seem to have no other purpose than to sell the neoliberal policies that brought on the current crisis, and to stand in the way of policies that might correct the crisis.

John Miller teaches economics at Wheaton College and is a member of the Dollars & Sense collective.

Sources: "Capitalism in Crisis," by Richard A Posner, Wall Street Journal, 5/07/09; "Letters: Recessions are the Price We Pay for Economic Freedom," Wall Street Journal, 5/19/09/; "Freedom is Still the Winning Formula," by Terry Miller, Wall Street Journal, 1/13/09 ; "The Real Key to Development," by Mary Anastasia O'Grady, Wall Street Journal, 1/15/08; Terry Miller and Kim R. Holmes, eds., 2009 Index of Economic Freedom; Freedom House, "Freedom in the World 2009 Survey," freedomhouse.org; Joel Selmrod and Jon Bakija, Taxing Ourselves: A Citizen's Guide to the Debate over Taxes, MIT Press, 2008; International Monetary Fund, World Economic Outlook,: Crisis and Recovery, April 2009; Peter H. Lindert, Growing Public, Cambridge University Press, 2004; Doug Henwood, "Laissez-faire Olympics: An LBO Special Report," leftbusinessobserver.com, March 26, 2005; Jeffrey Sachs, The End of Poverty: Economic Possibilities for Our Time, Penguin, 2005.

"Capitalism After the Crisis" and "Free Markets" Newspeak " naked capitalism

Reader Don B pointed out a generally top notch piece by Luigi Zingales at a new publication, National Affairs, on how the financial crisis may change attitudes towards what he calls "democratic capitalism". Even though the article is thoughtful and well written, it does fall prey to a major bit of intellectual sloppiness that is common and I believe played a role in getting us into this mess.

First, some key elements of Zingales' argument:

The nature of the crisis, and of the government's response, now threaten to undermine the public's sense of the fairness, justice, and legitimacy of democratic capitalism. By allowing the conditions that made the crisis possible (particularly the concentration of power in a few large institutions), and by responding to the crisis as we have (especially with massive government bailouts of banks and large corporations), the United States today risks moving in the direction of European corporatism and the crony capitalism of more statist regimes. This, in turn, endangers America's unique brand of capitalism, which has thus far avoided becoming associated in the public mind with entrenched corruption, and has therefore kept this country relatively free of populist anti-capitalist sentiment.

In fact, corruption and concentration of power are all relative; America has had a proud tradition of robber barons of various sorts. But Zingales stresses that the US has avoided, at least so far, having an entrenched upper class:

In a recent study, Rafael Di Tella and Robert MacCulloch showed that public support for capitalism in any given country is positively associated with the perception that hard work, not luck, determines success, and is negatively correlated with the perception of corruption. These correlations go a long way toward explaining public support for ​ America's capitalist system. According to one recent study, only 40% of Americans think that luck rather than hard work plays a major role in income differences. Compare that with the 75% of Brazilians who think that income disparities are mostly a matter of luck, or the 66% of Danes and 54% of Germans who do, and you begin to get a sense of why American attitudes toward the free-market system stand out.

Some scholars argue that this perception of capitalism's legitimacy is merely the result of a successful propaganda campaign for the American Dream - a myth embedded in American culture, but not necessarily tied to reality. And it is true that the data yield scant evidence that social mobility is higher across the board in the United States than in other developed countries. But while this difference does not show up in the aggregate statistics, it is powerfully present at the top of the distribution - which often gets the most attention, and most shapes people's attitudes. Even before the internet boom created many young billionaires, in 1996, one in four billionaires in the United States could be described as "self-made" - compared to just one out of ten in Germany. And the wealthiest self-made American billionaires - from Bill Gates and Michael Dell to Warren Buffett and Mark Zuckerberg - have made their fortunes in competitive businesses, with little or no government interference or help.

Notice how the piece is already getting a bit slippery. The polarity is between "freedom" and "government interference or help." JP Morgan, the Rothschilds, the Japanese zaibatsu (save latecomer Mitsubishi) built long lived enterprises without government support; indeed, the Rothschilds could make or break governments. Even the Krupps, which later became inextricably associated with German rearmament before and during World War II, was an innovative steel-maker and was in the mid 1800s a supplier to multiple national armies, rather than dependent on German patronage. The idea that concentrations of power can arise due solely to competitive dynamics such as economies of scale, network effects is absent, and there is curiously no mention of the role of once more punitive estate taxes (readers are welcome to correct me, but I believe as recently as the 1970s, the top rate was 70%) in limiting intergenerational transfers of wealth in the US.

But the article had started getting on thin ice a bit earlier:

Capitalism has long enjoyed exceptionally strong public support in the United States because America's form of capitalism has long been distinct from those found elsewhere in the world - particularly because of its uniquely open and free market system. Capitalism calls not only for freedom of enterprise, but for rules and policies that allow for freedom of entry, that facilitate access to financial resources for newcomers, and that maintain a level playing field among competitors. The United States has generally come closest to this ideal combination - which is no small feat, since economic pressures and incentives do not naturally point to such a balance of policies. While everyone benefits from a free and competitive market, no one in particular makes huge profits from keeping the system competitive and the playing field level. True capitalism lacks a strong lobby.

That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one, though American capitalism has always managed this tension far better than most.

This section illustrates the sort of muddy headed thinking about "free markets" that is not simply annoying, but I believe played a much greater role in creating the conditions that led to the crisis than most realize. First, the sort of rules that Zingales argues are necessary for a "free and competitive" market, as in limiting power concentrations, are in fact directly contradict the sort of "free market" idea espoused by libertarians and staunch follower of Milton Friedman, which views government action of any sort save the bare minimum (defense and a court system) as "interference". That vision is in fact close to anarchy. So you have people using the same term to mean quite different things, but the zealotry of the "free market" fundamentalists means that people who use the same phrase to use something more moderate wind up seeming to endorse the more extreme version.

Second, Zingales' "pro market" versus "pro business" lobbying construct has broken down since the 1970s. Big businesses started an organized campaign in the Carter adminsitration, arguing that regulation were interfering with their ability to innovate. The claim was utter rubbish. There was no evidence of a slow-down in innovation or invention. Moreover, a robust body of research showed that the the big businesses that were calling for fewer rules were not innovators. Small and mid-sized enterprises are the locus on new ideas and procedures (indeed, there was a whole industry of books and consulting practices in the 1980s trying to help big companies figure out how to be innovative).

"Free markets" is an amazing bit of Newspeak. Unlike "free enterprise" which clearly implies that business in the beneficiary of more liberalized rules, "free markets" creates the illusion that everyone automagically benefits. Zingales unwittingly endorses that idea by offering a false dichotomy between "pro market" and "pro business" when business has taken up the "free markets" branding to promote deregulation, particularly in financial services, that led to the concentration of power than Zingales decries.

With that huge caveat, the article is still worth reading, and you will find it here.



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