osewalrus (osewalrus) wrote,
osewalrus
osewalrus

Free Market A False Idol?

An interesting article in the NYT Week In Review describing how the utter dominance of free market thought and trust in Libertarian ideology is starting to crack.
http://www.nytimes.com/2007/12/30/weekinreview/30goodman.html?_r=1&oref=slogin&pagewanted=all

The article misses some other straws in the wind. Recently two members of the (Bill) Clinton Administration economic team -- Paul Krugman and Joseph Stiglitz -- have issued partial mea culpas for their failure to recognize the potential downsides of dismantling regulatory safeguards and failure to realize that their critics had valid arguments to consider. The growing power of anti-corporate populism as expressed in the recent surges by Edwards and Huckabee (forcing Obama and Clinton to sharpen their own rhetoric) likewise show that the talismanic power of labels such as "free markets," "big government," and so forth are starting to crumble.

What is amazing is not that this is happening, but that the conventional wisdom is so slow to perceive it. I encountered this two years ago in the fight over munibroadband, where I first met economically progressive Republicans who believed that local governments needed to provide vital services to create opportunities for economic growth. The failure to understand what is happening is neatly captured by this quote from the NYT piece:
Mr. Henderson is critical of the Bush administration’s effort to freeze mortgage rates, and the new rules proposed by the Fed intended to curb nefarious lending. They undermine the sanctity of contracts, he said, while making mortgages harder to gain for everyone.

“The way they justify it is that you’ve got to protect the stupid people who can’t read a contract,” Mr. Henderson said. “But they’re treating everyone as stupid.”


Actually, people are quite happy to let "stupid people" suffer the consequences of their stupidity. What gets people upset is:

1) When non-stupid people pay the price for the stupidity or villainy of others. The subprime crisis is a classic example of the interdependence of the economy and how behavior in one sector impacts all of us. When market segments collapse, we all suffer -- even the rational and intelligent people who can read a contract.

2) When crooks go unpunished. One of the things that has become abundantly clear is that there was corruption and outright chicanery going on in a lot of these refinancing and mortgage brokerage deal. Whether it was hiding important information from borrowers, or helping borrowers lie about their income so they could pass a credit check, or simply targeting unsophisticated populations and coming on like Max Bialistock to little old ladies, the deregulated market seems to have produced a lot more criminals telling their marks to suck it up in the name of the free market. And this doesn't just apply to the subprime crisis. It applies to corporations using corporate bankruptcy to chuck pension obligations. It applies to insurance companies that somehow manage to avoid ever making good on a claim. After awhile, people begin to question whether the problem is stupid people or crooked people.

There are computer crackers who like to justify their intrusions into the networks of others on the grounds that it is the fault of the target if the network can be penetrated and that cracking thus provides a valuable service. Most folks don't buy that. Similarly, folks are starting to get suspicious that a free market that leaves significant portions of the population screwed is not a wonderful way to run an economy.

3) When too many people get hurt. Just how many "stupid people" can there be? And what happens when it happens to people you know aren't stupid?

I'll admit that Henderson stands on firmer ground with his first argument.
“Every regulation reduces people’s freedom,” said David R. Henderson, a libertarian economist at Stanford University’s Hoover Institution. “The more regulation we get, the worse we do.”

That's a moral argument I can't refute, anymore than someone can refute my belief that there is an omniscient, omnibenevolent God that runs the Universe. But I don't confuse it with an economic argument. And ultimately, that is where the Cult of the Market that has dominated public policy for the last 20 or so years fails -- in its refusal to recognize that it has ultimately become a question of ideology rather than rational economic theory.
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