A modern financial system is necessarily a symbiotic construct, partly public and partly private; one defining, the other expressing the definition intended. It is absurd to view government as an obstacle to economic activity when the truth is a modern economic system is only possible through government action. To speak of deregulating the modern marketplace, in the sense the economic right implies – to "get government out of the way,” is to advocate economic and financial chaos, which not coincidentally is what we have been having.
Despite precipitating a near economic collapse, the economic right remains unrepentant in glorifying its extreme “free market” economic dogma, a creed with two doctrinal points: First, the market is omniscient, and second, only the private sector delivers anything of value—the government can only be in the way.
The elevation of the market to divine status is, in some measure, an outgrowth of the multigenerational Cold War struggle against “godless communism.” Being the central and most obvious distinction between good and evil in that protracted struggle and having prevailed, the so-called free market has become a revealed wisdom and nation-defining concept in American culture.
The fact that central planning does not work does not prove that markets are infallible or that everything that takes place in them is constructive. The truth is that in the developed world there is no such thing as a totally free market, unregulated markets are not perfect and do not always serve the public interest. The marketplace is a social reality that has a single virtue - the rationing of resources in an autonomic fashion. However, that its operation is autonomic does not mean the results are virtuous. It is this limitation that the economic right overlooks in its worship of the marketplace.
The successful sale of this economic dogma of infallible markets over the last generation yielded a wild-west financial/economic system, breeding instability, inefficiency, and fraudulent excess. The current economic crisis, the nearly identical S and L crisis in the eighties, and the dot-com bubble of the late nineties all brought deep recessions, and all three represent private sector excess made possible by policies hinged on the belief that we must surrender our collective economic fate to unregulated markets.
The faithful claim Adam Smith as their Profit, whose “Invisible Hand” concept postulated that private action in pursuit of personal gain often incidentally also served the collective interest. Capital naturally has been enamored with this convenient greed is virtue concept from the beginning. However, Mr. Smith’s Invisible Hand is the beginning of modern economic theory, not the end, and only operates in an economic system adequately defined by government action.
The reality is that functional markets, beyond the crudest form of barter, are the creation of government action. Only government can effectively create and maintain a currency or in modern economies a more complex money supply. Because the most profitable transaction has always been to sell nothing for something or simply take it, functional markets have always required government regulation to prevent fraud and theft. Weight and measures, purity, and quality laws date back to ancient times and have been central to the development of functional markets that harness the energy of private action in service of the general interest.
Any first-semester economic text is substantially about the flaws and limitations of markets. Markets have a tendency to evolve toward monopoly; government action is required to prevent that. Markets are said to be rational, but in fact, they can be quite irrational, even bipolar – swinging from mania to depression (especially when speculators dominate); government action is needed to modulate that. Markets will externalize the cost of production if possible; the government is required to prevent that. One can go on, but Joe Q. Public is told daily just the opposite by the economic right, seemingly without anyone correcting the record.
The reality is that Adam Smith’s Invisible Hand is not inherent to the market but the consequence of government action regulating private conduct to preclude conduct that does not produce real goods and services. To generate something worthy of applause, Mr. Smith’s Invisible Hand must have the not-so-invisible hand of government to clap against. Absent this, the Invisible Hand is at least as likely to pickpockets as to deliver beneficial goods and services.
The recent “credit crisis” is illustrative. The government failed to perform its fundamental task of making sure that things being sold, such as mortgage-backed securities, were what they appeared to be. In the absence of adequate government regulation, the abstract financial instruments of a modern economic system lose their credibility. Adequate governmental regulation is the alchemy that turns complex paper promises into gold.
Greenspan confessed in hearings before Congress after the recent near collapse that he erred in assuming the nation’s bankers would act rationally to protect their stockholder's interests. Such faith naively assumes that management’s interests are inherently the same as the stockholder’s and illustrates the corrupting influence that dogma can have on critical thinking and policy. Where management is paid on short-term performance with no possibility for recompense in the event of long-term failure, mismanagement, and even fraud are encouraged. True believers are predisposed to overlook such potential misalignments of interest.
The reality is that today, stockholders in publicly traded corporations are not infrequently sheep to be sheered by management. The system has long since been allowed to drift into misalignment. The outcome is grossly overcompensated management, reckless gambling with corporate assets, and a growing reluctance by Joe Q. Public to participate in public stock ownership.
It is both simple and fundamental; if private incentives are not aligned with the public interest, the Invisible Hand of the market will disserve and not serve the collective interest, and things will automatically go wrong rather than automatically right. It is essential to prosperity, stability and fairness that public policy recognize this reality.
To work properly, the market must operate within a legal and regulatory framework, an economy structured to assure that market incentives are aligned with the collective interest, which is to say that incentives are constructive, not destructive. In Adam Smith’s relatively simple economy, that usually occurred by default if one only prevented basic fraud and theft, but in our complex economy, such alignment is not necessarily a given.
A modern financial system is necessarily a symbiotic construct, partly public and partly private; one defines, and the other expresses the intended definition. It is interesting to watch as former central planning economies have capitulated to the reality of the market, recognizing it as a tool to be harnessed for collective ends, not an end solution to be surrendered to.
It is absurd to view government as an obstacle to economic activity when the truth is a modern economic system is only possible through government action. To speak of deregulating the modern market place, in the sense the economic right implies – to "get government out of the way”, is to advocate economic and financial chaos, which not coincidentally is what we have been having.
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