Man oh man, if there ever was a prime example of a revelation of the greatest flaw in libertarian economic theory, it had to be Alan Greenspan's speech. For those not in the know, the former Federal Reserve Chairman spoke before a Congressional committee yesterday. Long one of the grand proponents of laissez fair capitalism, his decisions, ironically, probably has lead to the complete discrediting of such economics.
"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006.
- excerpt from Greenspan: I was Partially Wrong on Credit Crisis, CNBC.com, 2008.
(picture copyrighted Agence France Presse, 2008)
Shocked? Alan, you mean to tell me you didn't take into account the one element of humanity that most market operators and poker players do? You didn't take human nature into consideration?
This could be a comedy or some dumb political farce of sorts if I didn't know the results would be so devastating. The economic ideology that derived from the works of Adam Smith, came to take on an almost ...no...I dare say DID take on political heirs! Greenspan was in good company prostituting and executing their ideology. Looking back at the zenith of financial deregulation, ironically during a Democratic Administration, it amazes me at the level of hubris connected with these people and their school of thought.
But you see, this really doesn't surprise the readers of this site, because we witnessed this almost arrogant thinking from their cousins, the Neo-conservatives. Ah, but we be so harsh, Venom? Arrogant? Could not one say the same to you fellow Keynesians? There are many on the right end of the spectrum who would consider regulation of business decisions by a bureaucrat to be a symbol of arrogance as well. One could take that assumption, in fact I've dealt with that from many folks, but there is a distinct difference between our two camps. That difference lies in the end game or purpose of the imposition of control and outlook or grasp of the participants in the activities involved.
Economic libertarianism prime belief is that the market in by itself is the ultimate mechanism for society. It is how they can justify cloaking it with terms like "freedom", because the market serves a dual function, that of a supplier of goods and services to meet the material needs of society, and as a voting mechanism. In regards to the latter, if a good or service is inadequate to the needs of the public, if it meets some sort of dissatisfaction, then society neutralizes it by not injecting capital into such business. A baker who is exposed in selling biscuits or dumplings containing pieces of cardboard as filler, will be ignored by consumers and thus ultimately shut down from lack of business. Society is saved because such malicious operations are no longer in action, and presumably the owners are either jailed (libertarians do believe in some rule of law) or in some state of permanent poverty.
Economic Wild Kingdom
The hinge that allows markets to correct or help society, is the spirit of trust in the market mechanism itself, and deriving from this, a trust in people. It's not that, if one were to ask the average libertarian off the street if people lie at times, I'm sure they will say yes. But a blind obedience to the power of markets highlights a surrender on an aggregate scale of disbelief in regards to human nature. In a way, this is no different than walking into a theater to watch a fantasy movie, you are asked by the movie director to commit to a similar action as the libertarians to find entertainment with the film at hand.
It's almost efficient, if one thinks about it, even almost seductive. Because such a belief contains both a carrot and a stick, reward if one's participation in the market is done correctly and punishment if not. Belying this is a nature of ruthlessness one can compare to that of animals in a jungle. Getting back to the "stick" portion, the ruthlessness appears when a given business concern either fails in some manner due to some non-malicious reason, or because it indeed committed a crime (see the baker analogy above.). In the first part we have seen this when many say "let the company fail." Famed investor, Jim Rogers, has been on the vanguard of allowing the "bad" banks fail so that down the road their market share (and depreciated assets) would be gobbled up by more "competent" managers. Ruthlessness also appears on the benefit side of things, for a company to succeed must compete; market share by any means, of course when prodded the average libertarian will say so long as it's "ethical."
Efficiency and ruthlessness, sounds almost cold and unforgiving. It is easy to ask, why should we bail out X? Why not allow others to fail? In many instances, opposition would be correct, yet this is only rational so long as we understand the consequences. This is why I brought up earlier how we differ in purpose and grasp of the participants.
Whom serves whom?
We ultimately ask, as radio show host Thom Hartmann said yesterday, do we exist for the economy or does the economy exist for us? What is the purpose of markets in regards to society as a whole? For those of you (me too!) in the more rational camp, there is an understanding that markets are not an end to themselves but simply another tool for society to use. So immediately, there is the belief that markets are subservient to the greater needs of humanity. That isn't to say that we throw caution out with the wind and simply force prices to go where we would like. But that if conflict arises from market activities that could impair society, that solutions be found to safeguard the user of transactions. Not the other way around.
This is where Greenspan and his kind ultimately fail. The rational logical assumption is that it is important to take in human nature. Lying, cheating, stealing, or just trying to "game the system" are past exhibits of human behavior. And chances are such inclinations to commit such actions will still be with us and emerge from time to time. Whereas libertarians like Neil Bortz or Jim Rogers, has said that such activities will be met with the financial failure of those who perpetrate them and that their businesses will be replace, fail to take in the consequences as a whole.
Let's go back to the evil baker one more time. He or she has sold baked goods containing cardboard, which is soon exposed and the person is ultimately put out of business. Many questions arise, that soon exposes flaws in laissez fair capitalism in regards to my lousy little baker example.
What about the victims?
Where is the proper market mechanism to tend to the child who either gets sick or worse chokes on that piece of card board?
And what about the employees who packaged and shipped those products who were not aware of the dangerous fraudulent nature of the products in those boxes? They are now out of work!
Where is the market mechanism that prevents other enterprising fraudsters from learning from the other's mistakes and proceeds to make a better fake biscuit? The fact remains, there is no such mechanism short of a lawsuit. But here, it is only after the fact.
Progressive Realism versus libertarian kabuki
Those in the Progressive Camp understand human nature much more than we are given credit for. We know there will be liars and cheats. This is why regulations are created, why oversight is done to insure the general safety of the public. Sure it may fail at times, but the alternative is leaving the public naked is simply not an option if one is to maintain a healthy stable society.
The former Federal Reserve Director, by saying he is "shocked" is demonstrating that he is either the world's greatest liar or fool. When it comes to money, and in this case, biblical amounts of it, it is only naive to believe someone won't try and game the system. As far back as the mid-1990s, studies began to emerge that the end products of the deregulation wave could pose calamitous results to the economy. When one establishes a vacuum in the world of finance, and really this is what it was, expect those who understand the nuances of banking and capital to find short cuts. Also expect their cousins who share a similar knowledge, but whose intent is shall we say borderline illegal, to prey on the opportunities brought on by this black hole. The difference between the Russian Oligarchs and many here who operated unethically are only divided by a small set of circumstances.
Perhaps, Alan, like the philosophy you and others like Ann Rand and Robert Rubin and Larry Kudlow worshiped, you too have been exposed. You have now shown yourself to be like the CEO of Lehman Brothers, just another "Master of the Universe" who turned out to be master of nothing. Yes, I too am a lover of markets and capitalism, like many others, but as a rational humanist, they were never allowed to blind me. OK, that isn't entirely true, for a while I believe in your crazy idea of free trade. I drank the "if we open up our import barriers they will do the same" kool-aid. Boy was I stupid to think that we would be creating more industrial jobs here by shipping goods to Asia and they finding markets here! You all know what we got in the end, the removal of our trade barriers was only met with minute reciprocation by our Asian trading partners.
You see, markets and bread lines aren't inherently evil in any way, the question has always been how will they be managed to help society best? Not every item or human activity can be dictated by a market. As the old saying goes, there is a time and place for everything. Where markets fail, the state should step in, and vice versa. This is why health insurance makes a miserable product of markets. This is why you can't really make public schools compete for vouchers as if they were rival fast food joints or something. Because society requires certain goods and services, that if put at the whim of market forces, you're ultimately confronted with a winner and a loser. Explain to me which school or fire department should be put on the list of the latter?
One needs regulation of economic activities because these forces could prove destructive. This is why the smart capitalists who used to meet on street curbs decided to form a commodities or stock exchange. Why Teddy Roosevelt created the Food and Drug Administration. Why we have lending laws that prevent discrimination based on race (something tells me we need to work on this one a bit more). Why FDR helped bring forth the National Labor Relations Act or the Securities and Exchange Commission. Why Eisenhower helped give us the Interstate Highway system (can you imagine competing highways...good grief!). Why we got Medicare, I could go on but you all get the idea. In the end, it comes down to safeguarding the public from fools and thieves.
Shocked Alan? We're not.