In defense of free market fundamentalism

June 10, 2011

“Extremism in the defense of liberty is no vice. And moderation in the pursuit of justice is no virtue.”

–Senator Barry Goldwater (R-AZ)

There is a great deal of debate in the media about the economy and whether the “recovery”, which supposedly occurred in the US in 2010, is faltering. While the macro economic statistics, which fascinate many economists, show that there was indeed some increase in financial flows through in the US economy, it remains debatable whether any real economic benefit trickled down to the lowest common denominator, namely people.

The growing political unease in the country over economic policy and job creation is starting to become downright nasty. For the first time since the 1970s, Americans face the prospect of a low or no growth economy and this is not an outcome that is at all welcome. The swing from the irrational exuberance of the past two decades to something more closely akin to “normal” is shocking for the public. The latest evidence of pressure for fiscal cuts is shown in the proposal this week by Democratic New York Governor Andrew Cuomo to limit public pensions.

Reading various online threads, it never ceases to amaze me that advocates of what we will call a more liberal or progressive line of economic thinking inevitably embrace the corporate state for solutions. We need to buy every American a copy of George Orwell’s Animal Farm, a book you need to read a couple of times during your life. Orwell was a long time supporter of the socialist Labor Party in the UK , but he was also a fierce libertarian who saw the authoritarian side of socialism so beautifully told in Animal Farm.

The individualist or free market tendency in economics, on the other hand, is ridiculed by supposedly liberal economists and others as the choice of greedy people who are really sociopaths or worse. Free market fundamentalism, to paraphrase environmental activist Vandana Shiva, is at the root of the economic woes of the earth. She writes in her book War on the Earth:

The predatory practices of corporations are increasingly turning our fragile garden into a junkyard. Citizens are told by their political masters and the corporados who pay them that there is no alternative. That’s true if one’s only concern is profits. That approach is fast turning our planet into a toxic waste dump.

What is fascinating about Shiva is that even as she attacks the excesses of big business, much of her work and also her background as a physician and scientist is very similar to that of the great libertarian economic thinkers such as Ludwig von Mises, F.A. Hayek and Frederick Bastiat. Shiva’s focus on empowering individuals to think and to act in a free fashion as actors in a larger civil society to achieve collective needs is very much in line with von Mises, not to mention the classical liberal view of America’s founders who embraced diversity and equality of opportunity for all as the basic rule of civil society.

The rapid commercialization of American society since WWI and the rise of the corporation as the dominant model in the global political economy raises many challenges for those who struggle to protect individual liberties. First and foremost its is necessary is to understand the distinction between true individual choice as economic actors and people being swept along by a consensus about economic policy that is molded by the public relations apparatus of government and large corporate enterprises.

Geoffrey West, in a conversation published by Edge, “Why Cities Keep Growing, Corporations and People Always Die, and Life Gets Faster,” illustrates the dilemma facing society. Large organizations, which seem to promise stability and security, often are actually dying and thus unable to promote wealth creation and employment. Noting the quality of great cities as economic entities which promote and encourage individual diversity, West raises basic questions about whether industrial consolidation and the rise of global corporations is really good for society — that is, individuals in aggregate — in terms of long-term economic growth.

Von Mises argues in his classic 1945 book, Human Action, that it was the development of economic thinking generally, not merely the free market variety, which made the period from the industrial revolution onward so powerful in terms of expansion of benefits for all people. Von Mises wrote:

People fall prey to the fallacy that the improvement of the methods of production was contemporaneous with with the laissez faire only by accident. Deluded by Marxian myths, they consider modern industrialism an outcome of the operation of mysterious ‘productive forces’ … Hence the abolition of capitalism and the substitution of socialist totalitarianism for a market economy and free enterprise would not impair the further progress of technology.

So when author and professor Nassim Taleb is reported to say that all CEOs and economists are basically “sociopaths,” a person with a lack of conscience and extreme antisocial attitudes and behavior, what does he mean? My interpretation is that Taleb accurately notes that most CEOs of large enterprises are value destroyers in the sense described by West, while individuals and smaller enterprises tend to be far more productive in terms of creating value for society and employment for people.

Large corporations tend to avoid risk and over time try to control markets and even governments to protect their interests. While the vast majority of business people, who run smaller enterprises, are honest and support a civil society (and generate the majority of jobs), the captains of the largest corporations often take actions antithetical to a democratic society and their shareholders.

Far from being an achievement of the era of laissez faire economics, the rise of the large corporation is a throwback to the period of monarchism and tyranny before the industrial revolution. In The Modern Corporation and Private Property by Adolf Berle and Gardiner Means, published in 1932, the authors warn:

The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital … [Such owners] have surrendered the right that the corporation should be operated in their sole interest.

Likewise, the wonderful reference to economists as sociopaths conjures images of the dominance of the statist mindset among the dismal profession. The notion that national economies can be managed from the macro level and that human action, as opposed to market perception, is not significant are entirely authoritarian perspectives. Yet this type of thinking is precisely what passes for mainstream economic thought in the academic world and in important institutions such as the Federal Reserve System. The Fed likes the idea of large banks because they serve as conduits for make-believe macro economic policy, not because large banks are good for the economy or its inhabitants.

Just as large, mature organization tend to lose the ability to innovate and thus destroy shareholder value, the economic thinking which celebrates big government and cartels in finance and industry is slowly killing the private sector in America and diminishing the rights of individuals. In the difficult debate over economic restructuring and renewal which must occur in the US over the next several years, we ought to begin with an assessment of elemental principles. Americans need to leave aside labels like left and right, and start asking basic questions about what mixture of policies will best enhance the economic and political lives of individuals.

Once we understand that many of the problems we face today as communities of individuals called nations come about due to concentrations of power in large governmental and corporate enterprises, and the corruption of these structures, then people on all sides of the supposed political debate are going to discover new common ground.

Focusing on individual economic and political rights is no vice, as Barry Goldwater famously declared. Rather, a new focus on individual rights and responsibilities in an economic and social sense is the start of a long overdue discussion about the American political economy. If we inform our discussion with the focus on individual liberties that was the point of departure for our nation’s founders, we will be successful.

 

Comments

in line with von Mises
These excerpts are from his SOCIALISM: An Economic and Sociological Analysis, translated from the 2nd German edition of 1932, pages 476-77.

The destructionist aspect of accident and health insurance lies above all in the fact that such institutions promote accidents and illness, hinder recovery, and veryoften create, or at any rate intensify and ‘lengthen, the functional disorders which follow illness or accident.

Insurance against diseases breeds disease.

By weakening or completely destroying the will to be well and able to work, social insurance creates illness and inability to work; it produces the habit of complaining which is in itself a neurosis — and neuroses of other kinds. In short, it is an institution which tends to encourage disease, not to say accidents, and to intensify considerably the physical and psychic results of accidents and illnesses. As a social institution it makes a people sick bodily and mentally or at least helps to multiply, lengthen, and intensify disease.

Posted by piniella | Report as abusive
 

Excellent article. laissez faire has practically become an obscenity in these economic times. but the original idea applied more to society. a free, educated society is the best economic regulator possible.

Posted by fermium257 | Report as abusive
 

Absolutely fantastic article. An aspect of the financial sector not often looked at is the amount of opportunity locked up as in this day and age the majority of opportunities have a financial edge to them. That is to say any idea, innovation, technology, or product would do well to bed with financial interests or suffer some untimely demise. The spirit of innovation at the micro level isn’t what it used to be.

Posted by Laster | Report as abusive
 

Another Good article, and thank you, Chris.

Posted by Laster | Report as abusive
 

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