Free Willie Markets

Markets haven’t truly been free during most of the era of modern capitalism. Whether you are looking at trade barriers or tax codes, securities laws or environmental regulations, fraud statutes or the laws surrounding contracts, safety laws or professional qualifications, there have always been encouragements and restrictions on business. Sometimes, the solid statutes, such as the securities laws that germinated in the 1930s in response to the snake oil purveyors of stocks that led to the 1929 market crash, often have unintended consequences: generally, only well-heeled capitalists can afford the legal and professional fees necessary to raise true passive equity in the public marketplace. Bona fide but entry-level entrepreneurs are severely limited to inconsequential sums while major Wall Streeters just push the “make the structure work” button, and voila, an offering is born.

But then, without restrictions of some kind, we might return to the wild west of corporate misrepresentation and belching toxic smoke stacks or “black lung” killing coal mines. Why would a company install electrostatic precipitators and monitor its outflow of effluents into our rivers and streams, not exactly inexpensive, if none of its competitors was forced to comply as well? Thus, even a motivated “good citizen” smoke-belcher would be unable to compete in a world where it would have to price itself well-above the competition to be environmentally sound… literally putting itself out of business in the process. Literally, such legislation levels the playing field to allow a greater social good to prevail.

Some argue that we have driven such industry out of the United States, and the environment simply draws its pollutants from another place on earth, but dumps them into the same atmosphere we all live under. Fine, if you think (i) we really can manufacture the same materials that have moved such processing overseas with American-priced labor and (ii) if you don’t mind living near a plant that fouls your everyday experience. Further, if you really have watched a gorgeous lake or rive die from pollution, know well that only environmental regulation has a shot of restoring normalcy.

When the tax code gives oil companies tax breaks or allows hedge fund/private equity managers to enjoy a tax rate schedule of less than half that applied to almost everybody else, it is also clear that the level playing field necessary for a more freely operating market simply does not exist. Try and level that playing field and listen to the PACs and “bought and paid for” Congress-people scream like stuck pigs. You can always tell when some elite is about to lose a benefit accorded to them and no one else; the word “socialism” rises above the cacophony of protesting souls.

Writing for the January 19^th Financial Times, Otmar Issing (president of the Center for Financial Studies and a former member of the European Central Bank’s executive board) writes that there is no system of pure “capitalism” or “socialism” that has succeeded anywhere: “Whereas ‘real socialism’ ended in disaster wherever it was tried, history teaches that the idea of a socialist society promising equality will never fade, whatever empirical evidence shows. Moreover, there was hardly a country in the world where capitalism had become established in a way that was satisfying in every respect. Historical determinism was the most absurd aspect of Fukuyama’s notion [the infamous post-tsunami meltdown of a Japanese nuclear reactor]. No liberal philosopher would have embraced the idea of history being predetermined…

“Looking at the evolution of the financial market crisis, the only surprise is that it took so long before a serious movement materialised. The crisis has provided strong arguments for opponents of the financial system. Interventions to avoid its collapse have severely undermined not only confidence in financial markets but also in the market economy as a whole. Once a financial institution has become so big or interconnected that its insolvency threatens the stability of the system, politicians must intervene. The problem of ‘too big to fail’ has made society – more precisely, the taxpayer – hostage to the survival of individual financial institutions.

“As a result, the basis of free markets has been shaken. A market economy rests on the principle that individuals are free to act within boundaries set by a legal system. Individuals are invited to exploit opportunities and to assess risk. No other system can release the same amount of potential locked inside individuals. [The] market is the best discovery process.” Essentially, a level playing field, laced with a schema of reasonable regulation promoting the greater social good (not “socialism”), and a mechanism that does not favor getting bigger or creating exemptions from our legal system for the largest structures (the “whales”) are essentials in a modern era. The world is vastly too complex and interdependent to allow special interests to drift above the law, threatening the global economy and allowing them to have their way with society. In the end, there is no “pure system” that has ever worked; pragmatic and ever-adjusting compromise between and among economic theories is our only hope.

I’m Peter Dekom, and anyone who picks slogans over pragmatics to implement economic solutions is begging for a very, very big fall.