State Corporatism ≠ Free Markets

By mw | Related entries in Bad Decisions, Barack, Bush, Business, Economy, Libertarian

“A free market is a market in which property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers. By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other’s property without the use of physical force, threat of physical force, or fraud, nor is the transfer coerced by a third party.”[1]Wikipedia

I thought it useful to start this post with a definition, just as a reminder that the term “Free Market” actually means something. Moreover, what it means has little or nothing to do with the way the term has been used recently on this blog. Specifically by Justin. Most recently here:

“… doesn’t that mean that Friedmanomics is the cause, not the solution? It’s not like we’ve had some socialist economic system since 1980. “Free markets” has been the mantra and Democrats have been on board for the most part. So then…why shouldn’t we be talking about changing models?”

Other examples here, here, here and here.

Justin is not alone in this regard. Pundits and bloggers declaring that the current economic clusterfork is an example of the failure of free markets abound. The problem goes beyond sloppy semantics or ignorance of what a free market means.

Roderick Long takes this nonsense head-on in the lead essay for this month’s excellent series at Cato Unbound: In “Corporations vs the Markets – or – Whip Conflation Now.” Long takes Conservatives, Liberals and Libertarians to task for the sloppy linguistic conflation of state corporatism, big business favoritism, corporate welfare, and private-public partnerships with a free market.

Of the three, I find his indictment of Republicans and the right most damning:

“If libertarians’ left-wing opponents have conflated free markets with pro-business intervention, libertarians’ right-wing opponents have done all they can to foster precisely this confusion; for there is a widespread tendency for conservatives to cloak corporatist policies in free-market rhetoric. This is how conservative politicians in their presumptuous Adam Smith neckties have managed to get themselves perceived—perhaps have even managed to perceive themselves—as proponents of tax cuts, spending cuts, and unhampered competition despite endlessly raising taxes, raising spending, and promoting “government-business partnerships.”

Consider the conservative virtue-term “privatization,” which has two distinct, indeed opposed, meanings. On the one hand, it can mean returning some service or industry from the monopolistic government sector to the competitive private sector—getting government out of it; this would be the libertarian meaning. On the other hand, it can mean “contracting out,” i.e., granting to some private firm a monopoly privilege in the provision some service previously provided by government directly. There is nothing free-market about privatization in this latter sense, since the monopoly power is merely transferred from one set of hands to another; this is corporatism, or pro-business intervention, not laissez-faire. (To be sure, there may be competition in the bidding for such monopoly contracts, but competition to establish a legal monopoly is no more genuine market competition than voting—one last time—to establish a dictator is genuine democracy.)

Of these two meanings, the corporatist meaning may actually be older, dating back to fascist economic policies in Nazi Germany; but it was the libertarian meaning that was primarily intended when the term (coined independently, as the reverse of “nationalization”) first achieved widespread usage in recent decades. Yet conservatives have largely co-opted the term, turning it once again toward the corporatist sense.”

It is only when the term “free market” is severed from any historical definition or conventional meaning that the current economic crisis can be explained as a government rescue of a “free market” failure.

As a result of this mushy thinking, we are now given to understand the “free market” problem that was created by too much government spending, too much government debt, too much government sponsored credit via easy monetary policy, and a market wildly distorted by government intervention to meet social goals (along with a large helping of corporate criminal fraud that slipped through the existing government regulatory framework) can only be solved by increasing government spending, increasing government debt, have an easy monetary policy and create more market distortions with more government intervention to meet similar social goals.

I am not a free market anarchist. I acknowledge and accept the government’s regulatory role and more importantly, police and judicial functions to enforce and adjudicate contracts, settle disputes, and prosecute fraud. There will always be greed and fraud in free markets, in government controlled markets and everything in between. Criminals and hucksters will always take advantage of any opportunity they can find. But the biggest opportunities for fraud and corruption will always be found in government controlled or government distorted markets. Reference the oligarchs in Russia. Reference the army and party controlled monopolies in China. Reference the housing bubble, the credit default swap scam and the resulting financial fallout in the U.S

Look, I have no problem with railing against the failed Republican corporatism/mercantilism, or the complicity and responsibility of Republican big spending, big deficit, big government, big business favoritism and crony capitalism of the last eight years in the current economic crisis. If you want, you can even make the case that the “new” Democratic corporatism and planned Democratic big spending, big deficit big government is superior because you prefer the beneficiaries of the Democratic version of state corporatism and big government largess better than the Republican version. Fine. They are variations on a theme.

Just don’t blame the “free market.” Free markets had nothing to do with this. Quite the opposite.

Excerpted from “Divided We Stand United We Fall


This entry was posted on Tuesday, November 25th, 2008 and is filed under Bad Decisions, Barack, Bush, Business, Economy, Libertarian. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

13 Responses to “State Corporatism ≠ Free Markets”

  1. Alan Stewart Carl Says:

    There you go again — bringing pesky things like definitions into it.

    I’m pretty sure “free market” has become a shorthand for “Republican policies.” The problem is, Republican policies haven’t exactly been free market. They have, in fact, helped promote oligarchy in America. Concentration of wealth and/or resources is never good for the free market, whether the wealth and resources are controlled by government or by one corporation. Trust-busting used to be seen as a pro capitalist act. Republicans have made it seem like some anti-business ploy.

    What bothers me about the free market bashing is that it’s often accompanied by this sense that we need “another way.” If “another way” just means better/smarter regulations, I’m all for it. But if people actually think that giving government greater control of the markets will somehow improve matters (rather than just shifting around the problem), they have a flawed notion of how wealth-creation and upward mobility and product variety actually work.

    The free market did not fail. It was subverted. The point is to save the free market, not to damn it.

  2. Shane Says:

    Well said mw and Alan. I am constantly having to stop the rhetoric of a “failing free market” of others when I have discussions on the current economic situation. I think you are both making severe and important distinctions that Republicans aren’t necessarily free market proponents like they touted.

  3. kranky kritter Says:

    I’d like to make an addendum.

    Whenever anyone talks about “the free market” they are almost invariably talking about “what currently passes for a free market.” For the most part, a free market is an unachievable ideal. There are always constraints. This fact really messes things up for opportunists eager to declare what current events are proving.

    In the wake of the current economic problems we face, many different folks see an opportunity to declare the rectitude of a particular philosophy and the inherent flaws of another. Invariably (there’s that word again), such folks see current circumstances as further proof that they have been right all along and their critics have been all wrong.

    Comically, or perhaps tragically, one characteristic of cults is that they don’t process new data with regard to whether it supports or disproves the cult’s underlying hypotheses about the way the world works. All new data proves their hypotheses correct, because they aren’t hypotheses, they are articles of faith. So when a cult says the world will end tuesday and then the sun rises on wednesday, the result is inevitably a renewed sense of zeal, not a loss of faith.

    Who wins the battle for ideological supremacy in the halls of academic debate is not a primary concern for me. These abstract sands constantly shift, because models are just models. But insofar as these battles spill over into the action we do and don’t take, I worry. Reflexively, I don’t look to sociopolitical ideology for solutions to real-world problems. I look to people who study data and real-world behavior, and derive ideas from that, and change their ideas based on new data. Economists do that. We will be well-served to keep listening to them across a broad range, instead of appointing a new council of narrowly ideological priests.

    Capitalism and free markets have never IMO been the truth and the light and the way. They simply embody useful tools and ideas whose force can’t be denied now just because we’re in the hangover phase of a 2+ decade low-interest-fueled credit binge.

    Personally, I regard the bitter and vengeful triumphalism of the left on current economic issues to be as inevitable as it is unfortunate. Though I don’t consider myself an ideologue, I lean towards the fundamentalists who have always insisted that there is no such thing as a free lunch. It’a a matter of math. Someone pays, or no one eats. Over the past 2 decades, the folks who ignored or misunderstood or dismissed this point have been spread widely all across the ideological spectrum.

    Now the check is here. Now we all have to work together to decide who is going to pay for this check, and where we’ll get the wealth to pay for upcoming lunches. And while it’s interesting and satisfying to focus on who is to blame, it’s seldom especially useful.

    There’s a common reaction to bad events which follows the form of “we have to do whatever is necessary to make sure this never happens again.” Taken too far, this impulse loses utility and leads to rigid and perverse “solutions.” Such as when an accidental child drowning leads to the construction of a chain link fence round the pond.”

    We need to do better than to prevent everyone from playing in the pond.

  4. gerryf Says:

    Unfortunately, neither Wikipedia nor Long, nor anyone else gets to say what the free market is in the current lexicon..language is fluid and words generally become what the masses agree it is.

    Absolutely, the “free market” is what you say it is, but it has become much more. We can say that what we have is not a free market, and that’s true, but what we have has been defined as “the free market” as the powers that be have trumpeted their system and policies as that for 30 years.

    It’s called language pollution.

    Now we have “free marketeers” trying to save the idea of the free market because of the collapse of current system in hopes of maintaining to an allegience to an impossible system.

    A free market is an impossilble idea that cannot be obtained because people will always try to control the market, much like communism wasn’t true communism.

    Sorry free marketeers, but you are stuck with the failure tag now because you didn’t speak up earlier. Kind of like Bayer lost control of Aspirin

  5. George Mauer Says:

    Oooooh Irony! I see Irony!

    You know how “Communism has proven to be a failure”?

    Yeah….

  6. karlub Says:

    Lot’s of wisdom, here. As a new GOP Committeeman I spend a lot of time trying to explain to my colleagues that when most Republicans say “free market” what they really mean is a set of market restrictions favorable to the corporate interests most abundantly represented in their campaign contribution ledgers.

    And the corruption of the term is, now, permanant.

    This is why the effort to promote rational government based on free market insights tempered with sane regulatory practice has to first be based on local, concrete policy. It is my new mantra.

    This type of policy ends up being non-ideological, and hence immune to the branding deficiencies of currently discredited ideologies. Examples: Allowing self-employed individuals to band together to purchase health insurance at groups rates, statutorily restricting budget growth, mandating that new entitlement legislation contain within it the mechanism for payment, and others.

    Ideally, these policies should be promoted by explicitly non-partisan non-profits at the most local levels possible. I will be starting one in Southeastern PA. Facebook or tweet me at Karl_Bucus if you plan on doing something similar elsewhere.

  7. kranky kritter Says:

    Well Gerry, the true and accurate parts of so-called “free market ideology” will outlive any popular association with the public perception of a particular era. Ideas with efficacy and predictive value are stubborn that way.

    And recycled ideas with insufficient efficacy and predictive value will fail again and again after re-branding. The real-world is stubborn that way. Please take care to note that I don’t say that as a slur at any given ideology or a plump for any given ideology.

    Conservatives once crowed as they imagined that they had slain liberalism, but the success of the re-branding as “progressive” has now passed the nascent stage, I think we can say. Ultimately, the success of the neoliberal progressive approach rests on its efficacy in bringing about the sorts of promised changes it predicts will occur when progressive ideas manifest as policy. And whatever happens, the results will count in the eyes of the public as progressivism incarnate, even though we already know that when the pendulum has finished swinging in the progressive direction, progressive true believers will be complaining that the past years did not go far enough.

    I’m pretty comfortable that progressivism will be undone by its excesses and by the inevitable corruption that ensues when extra power is fed into the progressive bloodstream. Just as this occurred with conservatism. Maybe the best predictor is the hubristic willingness to believe that the competing ideology has been conclusively discredited.

    Most likely, both conservative and liberal ideologies have basic inherent flaws that repeat themselves in some form. Conservatism tends to overestimate the sustainability of an economy when the pyramidal distribution of incomes gets too tall. Progressivism tends to underestimate the negative effects that diminished individual motivation levels have on the healthy functioning of a socioeconomic system. Conservatives tend to respond to complaints about an elongated economic pyramid with “I’m sure it will be fine.” And liberals tend to respond to complaints about insufficient individual motivation with “I’m sure it will be fine.”

  8. mw Says:

    I just don’t accept the premise of many of these comments that free-marketeers have lost the war because they lost a battle for control of the language. I’ll again quote Long in a follow-up essay from the same series:

    “Since free-market rhetoric has so often been used as a cover for corporatist policies, how, Yglesias asks, can we now make use of it without thereby enabling the very corporatist strategies we oppose? The answer, I suggest, is that our use of free-market language must self-consciously and explicitly emphasize the difference between genuine and phony free-market solutions. We must persistently call BS whenever corporatist stratagems are either credited to or blamed on the free market — whether it is a President Sarkozy attributing the financial crisis to some supposed regime of laissez-faire or a President Bush wrapping the biggest corporate welfare handout in history in the mantle of the free market. We must develop a new (or revive an old) way of speaking about free markets, one openly aligned with left-wing ideals and openly hostile to corporate interests. While such a left-libertarian language will encounter resistance from traditional libertarians and traditional leftists alike, it is being explored and shaped even now by those on the libertarian left.[2] I invite libertarians and leftists alike to join in the process.” – Roderick Long

    As a self-described “libertarian-leaning independent” I am not sure that I would put myself in Long’s “left-libertarian” category, and honestly am not even sure how to distinguish between “right-libertarians” and “left-libertarians”. Moreover I don’t really care. The important thing I garner from the Long essay, is that those of us who believe in free market principles need to reclaim the language, and not permit sloppy free market semantics by the right or left or reporters or bloggers be used to undermine the meaning of the term, and by extension the argument.

    The Donk is as good a place as any to draw a line in the sand.

  9. Don Gooding Says:

    I find the Wikipedia definition sorely lacking, although a noble attempt to describe simply a complex phenomenon.

    Oversimplification stems in part from assuming the term “market” is well-understood, which it is not. Sometimes “marketplace” is meant – some variation of traditional village marketplaces where buyers and sellers assemble for voluntary exchange. Sometimes it’s the economist’s theoretical notion of demand meeting supply, potential as well as actual: the market for late-night pizza in New York City versus rural Maine.

    Moreover, markets and marketplaces are radically heterogeneous, and at times deceptively complex. Traditional economics dramatically oversimplifies markets to make the math possible, and in the process oversimplifies the debate over “more” or “less” government intervention in markets. Conflating consumer electronics, cancer care, corporate finance, corn, cars, candy and chemicals in the discussion of government’s relationship to commerce leads to more heat than light.

    Competition is implied in the Wikipedia definition but can’t be assumed. Government-designated monopolies don’t need to coerce their customers but don’t serve free markets. More subtle government manipulation of competition – for example, rigging safety regulations to favor large companies over small – would violate my notion of free markets, but wouldn’t violate Wikipedia’s definition.

    I agree with the thrust of the article, and gerryf’s observation that language pollution has muddied the debate. My own work on centrist economics will be proposing alternative articulation of the most appropriate role of government in markets, in an attempt to bring nuance and reality to an ideological debate that’s been raging for over two centuries.

  10. TerenceC Says:

    Don

    All fair points and I believe I agree with your statement that “competition can’t be assumed” – what we will see in the coming years (and actually have for atleast the last 5) is the largest transfer of wealth in history – moving away from the US towards China, India, and the Middle East. While discussing your format regarding the role of government in your work, don’t underestimate the new paradox in global economics caused by this shift in wealth and “cloaked” in large measure by name’s like Sovereign Wealth Fund. Laissez Faire can only exist if everyone is playing by the same rules – which isn’t the case – and are all regulated in an equal manner. This is an exceedingly complex issue since it flows from Micro to Macro levels and then back again. It was easier to fit the equations and management variables into standard economic theory and practice when it only revolved around the US and Europe………but that just isn’t the case any more.

  11. Alex Says:

    Thank you. State corporatism and the Federal Reserve’s stranglehold on monetary and fiscal policy in our country is the antithesis of the Free Market. Hayek and von Mises would be proud of your post. When you tell the truth like this, it doesn’t have to be for the purpose of educating those who don’t know the truth, but for defending the few who still do.

    Thanks again,

  12. Cynizen Says:

    I have been mentioning this very topic in comment sections and face-to-face conversations for months now.

    The more people with a good head on their shoulders the merrier.

    Fights about semantics become boring after a while. We should all allow the definition of a word to evolve (as words tend to do) to include what was perhaps previously only implied. A free market by definition should include minimal rules and parameters as all games do.

  13. mw Says:

    OK, lets not talk about semantics. Lets talk about common sense. This post was prompted by the patently false statement made by bloggers and pundits that the “free market” was responsible for for the sub-prime crisis.

    The proximate cause of the financial crisis was major financial institutions completely misunderstanding and/or fraudulently representing the amount of risk they were assuming with credit default swaps as well as misrepresenting the very nature of the instruments to their shareholders and regulators. There are rules and regulatory agencies to regulate insurance. There are rules and regulatory agencies to regulate securities. There are rules and regulatory agencies to regulate banks. Incompetent regulators failing to detect fraud do not make it a free market. Investment banks and insurers not understanding risk and/or pulling the wool over the eyes of regulators, is by no stretch of the imagination a plausible definition of a free market.

    The root cause of the financial crisis was massive government intervention in the market over two decades. Here is the the Wikipedia entry which is reasonably concise in unraveling the connection. Yeah its Wiki, but this article has no caveats and is well referenced and footnoted. Was greed and fraud in Wall Street and corrupt mortgage brokers a big factor? Absolutely. But the crooks needed someone to sell this stuff to. There had to be a market for pre-packaged financial garbage with a pretty shiny bow on it. That market was created and encouraged by the GSE’s (Fannie Mae and Freddie Mac) as matter of public policy.

    “Increasing home ownership was a goal of the Clinton and Bush administrations.[83][84][85] There is evidence that the Federal government leaned on the mortgage industry, including Fannie Mae and Freddie Mac (the GSE), to lower lending standards.[86][87][88] Also, the U.S. Department of Housing and Urban Development’s (HUD) mortgage policies fueled the trend towards issuing risky loans.[89][90]

    In 1995, the GSE began receiving government incentive payments for purchasing mortgage backed securities which included loans to low income borrowers. Thus began the involvement of the GSE with the subprime market.[91] Subprime mortgage originations rose by 25% per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of subprime mortgages in just nine years.[92] The relatively high yields on these securities, in a time of low interest rates, were very attractive to Wall Street, and while Fannie and Freddie generally bought only the least risky subprime mortgages, these purchases encouraged the entire subprime market.[93] In 1996, HUD directed the GSE that at least 42% of the mortgages they purchased should have been issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.[94]

    By 2008, the GSE owned, either directly or through mortgage pools they sponsored, $5.1 trillion in residential mortgages, about half the amount outstanding.[95] The GSE have always been highly leveraged, their net worth as of 30 June 2008 being a mere US$114 billion.[96] When concerns arose in September 2008 regarding the ability of the GSE to make good on their guarantees, the Federal government was forced to place the companies into a conservatorship, effectively nationalizing them at the taxpayers’ expense.[97][98]“

    That is the root cause of this crisis. I call that a market distorted by massive government intervention. You call it whatever you want. But don’t call it a free market.

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