Markets

Excepts from a discussion at Citizen Tom’s blog:

@phadde2 wrote:

Keith, let me ask, are you not concerned with the extreme viewpoint of the free market turning tyrannical?

No. Well, let me look carefully at your statement. Yes, I’m concerned about people that would hold such an “extreme viewpoint.” But I am not concerned about what they profess to be afraid of.

The free market, by its nature, cannot turn “tyrannical.” It is by name and definition free. It consists of voluntary transactions based on perceptions of gain on both sides, else they wouldn’t participate.

FreeMarket

But what about …

Corrections

Do you believe that the market will simply ‘correct itself’?

Yes. That is how it works. If someone produces a product that is not desired, they fail. Thus, they are highly motivated to correct themselves by producing what people want. But …

How long should people wait for these market corrections?

Government’s “regulatory role” is the cause of market distortions that cause government to attempt “corrections” which, inevitably, make things worse.

We saw this in 2008; the Fannie Mae and Freddie Mac propping up of a government-managed mortgage regime (“make the loan, we’ll guarantee anything!”) was hardly free market, though the market will and did endeavor to use the conditions that obtained. Democrat overseers loudly proclaimed the solidity of those quasi-government entities until they were leveraged over 40 to 1 and the collapse was already well underway. Absent prior government intervention, the bubble would have been mere growth, and the collapse would never have happened.

Regulation

Should government play a regulatory role?

There are specific, narrowly defined roles in the US system for government in this regard. They include providing a level playing field to resolve contract disputes, providing rules for commerce between states and outside of states, and taking care of certain infrastructure items that are not practical to be handled by the free market. There aren’t many, in fact.

The issue is simple: Because the government has injected itself into business, it is profitable for special interests to attempt to influence legislators (and now, the executive branch regulators) to bend the rules in those interests’ favor.

Government as Market

This problem, lumped under the catch-all term “lobbying,” is to be expected, because the system has set up a marketplace where influential people on both sides command a high price for their ability to create or remove rules to support some interest at the expense of another, or of the general public. Obama loudly decried lobbyists, and quietly removed the rules put in place to limit their influence. Hillary Clinton, infamously, collected many tens of millions of dollars personally due to her position of influence.

Such things did not start with these two: The term “lobbyist” derives from people waiting in a lobby of a hotel that George Washington frequented for dinner and cigars while President; they took advantage of access to the Great Man, and ultimately made a living at it. But for many decades, the government’s involvement in business was small; the impact upon government spending and rule-bending was modest.

Spending

And yes, lobbying has a major, really the major impact upon spending. Especially as government expanded to intrude more directly into business affairs. From the founding in 1791 to the 1930s, government spending remained right at 3% of gross domestic product. There were occasional spikes during wartime, but this average remained surprisingly constant.

Then government under FDR in the 1930s instituted a series of policies expanding the commerce clause and creating new entities for the “general welfare” and as a result, government’s share of the economy has gone from about one-thirtieth to one-fourth.

All of this favoritism, picking winners, and doing with government what should be in the free market short-circuits the free market itself. These activities prevent (at huge expense!) necessary failures from taking place, and create other distortions that we suffer from, as well as suffering from the attempts to “repair.”

And note that lobbyists are also participants in the free market, in a sense. Remove the “product” of government favor influencing business outcomes, and there is nothing for lobbyists to buy; their skills will be used elsewhere in the US market.

Unions

The Wilson argument would be that Corporations give a business an unfair advantage as it reduces the role of individualism between employer and employee, thus employees must unionize to receive equal standing. If corporations are able to maximize their resources, is it fair for the average American worker?

Yes. Individual American workers are also able to maximize their resources. Or they would be, were it not for government policies to intentionally displace and replace them. Obama is making it tough indeed, but he is merely accelerating a trend begun in the late 19th century.

While my discussion of Wilson’s Sedition Act previously had nothing to do with labor — he simply was throwing people in jail who annoyed him — I think it’s important to note the difference between unions in private enterprise (which should be allowed, though are now largely out of control) and unions in government services, which mean that the taxpayer is not represented at all other than being the central entrée to be carved up.

Motivations

The contrast between the two systems is stark, and is based upon their motivations:

Free enterprise is motivated to produce and market a desirable product efficiently — and note that this is just as true for the individual worker who is also a free market participant, and whose product is his labor or skull sweat. When companies don’t pay enough to make workers desire to work there, they run short of workers; they then pay more until they reach a market balance. Or they fail. When they are forced to pay too much in a hostile and uncertain business environment, they live with this condition … as we see in the current market. This is government’s negative effect upon motivations.

But government is motivated to fail. The more atrociously they fail, as long as it’s spun correctly, the more budget, power, people and turf they receive to “fix” the failure. Occasionally, some event like the VA debacle raises an outcry — but even though a lamb or two might be sacrificed, reluctantly, the result was that the VA was given more budget, power, people and turf. And their failures continue to worsen. Of course; that’s how the game is played and the motivations are structured. It takes great personal courage and character to do otherwise within such a system.

This is the result of government intervention, and I am for removing it. The less government is involved with business, the less lobbyists will have someone to bribe to distort markets with cronyism.

===|==============/ Keith DeHavelle

  • I wonder if you have encountered in your research the fact that, besides
    the positive incentive that government gave the mortgage companies by
    offloading their risk (by signing up the taxpayers as co-signers), there
    was also an insidious negative threat imposed on the mortgage companies
    by government regulators

    Oh, yes indeed. The negative threat was blatant and explicit, and essentially eliminated the “offender’s” ability to open further branches until the regulators were placated by sufficient bad loans. This was on top of other punishments you mentioned, and is probably in the articles you link to.

    I’ve not read Sowell’s work on this, and I will do so. I am aware of him, and have great respect for other things he’s done.

    ===|==============/ Keith DeHavelle

  • JeffR

    Keith, I agree with every word.

    Regarding the question, “How long should people wait for these market corrections?”:

    I would contribute this observation: The hyperventilating media and Progressive activists would answer, “about 12 hours.” (Which is one cable/satellite news cycle, incidentally.) Among these knee-jerk interventionists, you either have the naive ones who will never really understand that patience for the market to react and reward/punish is the best long-term policy, or you have the Alinskyites who will always exploit the fact that every short-term imbalance is an opportunity to promote chaos.

    Regarding your answer, “the Fannie Mae and Freddie Mac propping up of a government-managed mortgage regime (‘make the loan, we’ll guarantee anything!’) was hardly free market, though the market will and did endeavor to use the conditions that obtained.”:

    I wonder if you have encountered in your research the fact that, besides the positive incentive that government gave the mortgage companies by offloading their risk (by signing up the taxpayers as co-signers), there was also an insidious negative threat imposed on the mortgage companies by government regulators. If mortgage companies didn’t take (imprudent & risky) steps to eliminate what’s called disparate impact in the racial quotas of housing loans, then HUD threatened to fine these banks for discrimination, and publicly shame them as racist. Here’s my extremely credible source:

    Thomas Sowell wrote a book in 2009 called The Housing Boom and Bust. Investor’s Business Daily excerpted a chapter from the book in 5 feature articles. That chapter was called “The Politics of the Housing Boom.” Here are the five links to those articles. The 2nd installment especially focuses on this threatening pressure imposed by the government on the banks:

    http://news.investors.com/ibd-editorials/111309-512397-housing-bust-sowell-series-starts-today.htm

    http://news.investors.com/ibd-editorials/112009-513131-how-little-law-from-70s-brought-the-financial-system-to-its-knees.htm

    http://news.investors.com/ibd-editorials/112709-513719-how-fannie-mae-and-freddie-mac-sank-in-the-subprime-quicksand.htm

    http://news.investors.com/ibd-editorials/120409-514409-how-congress-ignored-warnings-and-stiff-armed-reform-of-gses.htm

    http://news.investors.com/ibd-editorials/121409-515098-support-of-fannie-and-freddie-bipartisan-and-beyond-words.htm

    Regards,
    – Jeff

  • Citizen Tom

    Thanks for the link from an excellent post!

    It really is shameful we allow the government to educate our children. When we educate them in socialist institutions, how do we expect them to understand and appreciate a free market?

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