One way to think about the political impact of the GFC is to look at the range of political positions it's rendered untenable. This range is large, encompassing, in the US context, everyone from Bill Clinton to Newt Gingrich. More generally, it covers anyone who embraced the claim that a US-style economic system, as of, say, 1995-2005, was the best that had ever been seen anywhere, and could only be improved by making government smaller and/or more business-like.
. . . The only tenable position for anyone who wants to maintain any part of the existing economic and social order is Keynesian social democracy, modernised to deal with the developments of the last few decades, and disciplined enough to avoid the disasters that brought down the Bretton Woods system in the late 1960s and early 1970s.
I believe that many on the left believe this. I even believe that it may have some political salience, although not nearly as much as John Quiggin wishes. But as an empirical matter, it is high-test hokum.
Or perhaps John Quiggin has some different, special meaning for the words "Keynesian social democracy" that have nothing to do with aggregate demand management, and everything to do with regulatory oversight of credit growth. But at Chicago, we had a different word for those who thought that the unchecked growth of the credit supply was the main problem confronting macroeconomists. We called them "monetarists".
Monetarist theory is, of course, not especially helpful when it comes to thinking about the current banking crisis, but then, neither is Keynesian theory. The idea that the writings of Lord Keynes offer us the key to adequately managing global capital flows and the level of Tier One regulatory capital is no less bizarre than the notion that one could divine such a blueprint from the work of Milton Friedman.
Especially odd is the notion that the only tenable position, unless we are to go Marxist, is social democracy. Would we not have had a financial crisis if we'd had really super single-payer health care?
It is true that the belief in both tighter bank regulation and a larger welfare state cluster on the left, but if social democracy is some sort of preventative cure-all, how come the US economy is outperforming places like Denmark, Sweden, and Germany, not to mention the OECD as a whole? Why, if the problem is "American style capitalism", are the biggest GDP declines found elsewhere? I understand that the left finds it politically convenient to link the uninsured and the banking crisis, but this seems only very slightly less silly than blaming it on gay marriage--indeed, looking at the countries worst effected, the latter's correlation seems stronger.
But is he right poliically? The cluster may be irrational, but that doesn't make it any less politically salient. Maybe. On the other hand, it was less than five years ago that we were talking about a permanent Republican majority based on the obvious political victory of a militant foreign policy. I'm not sure I'm quite ready to write capitalism off the electoral map.
I'm generally forgiving of people who embraced communism in the 1930's. During the Great Depression, many thought that Capitalist Democracy had failed as an economic model and that the future represented a choice between Communism and Fascism. Based on what was generally known at the time, communism was a rational choice that a decent person could make. I get the feeling that people like Quiggan are taking advantage of the current econiomic situation to try and manufacture another such choice.
As a Democrat, I haven't given up on capitalism and free markets. I do think there are areas (such as health care) where free markets have failed, and I think you underestimate the cost savings of taking for-profit insurance out of the picture, and fail to consider the benefit to business from separating health care an employment.
But I don't hear our president calling for an end to capitalism, I hear him reinforcing the notion that it's important. I don't even hear Bernie Sanders calling for an end of capitalism. But I do hear Democrats calling for an investment in people, particularly in terms of education, health care, and the environment. And I believe those are good investments; investments that will benefit the free market.
And I object to the many who are going to pile on, conflating regulation of markets and business with elimination of capitalism or conflating social supports for people in economic trouble with socialism.
As far as the American economy outperforming others, my guess (and it's only a guess) is that because it's the largest economy, it's the one where people have put their investments while they ride this wave of economic contraction through to a new period of economic growth.
"I think you ... fail to consider the benefit to business from separating health care an employment."
As someone who is neither a Democrat nor a democrat I'm going to lay responsibility for creating that problem squarely at your team's feet. Price-fixing and tax code shenanigans lead to that state of affairs, and that kind of output fuels my deep skepticism of further government involvement in health care.
As a side matter: I have not-for-profit health insurance; are you proposing to eliminate my coverage in your pursuit of savings as well?
Also, I object to your objection to those that conflate regulation of markets and business with the elimination of capitalism. To the extent that many people hold that capitalism is precisely just the free market (which is by no means universal) they are correct in holding the further view that to the extent that the market is regulated it is not free and hence not capitalistic.
I think you've got something going with your "tallest pygmy" analysis.
I am not proposing anything when it comes to health care; I'm suggesting that all the analysis I've seen hasn't taken into account the cost-savings of a single-payer system to business, and I do suggest it would be the best thing for "free markets" imaginable.
As for shenanigans and tax loopholes -- like the prescription drug benefit passed by Republicans -- I agree. It's all muddied the water and the discussion.
Regulation of markets and business frequently spawns new industry; just ask anyone in environmental engineering.
"and I do suggest it would be the best thing for "free markets" imaginable."
by starting a monopoly?
"Regulation of markets and business frequently spawns new industry; just ask anyone in environmental engineering."
Or the helpful folks at HR block. We can also pass some hard to follow regulations on how our shoes have to be tied, which will spawn an industry of certified shoe tiers. But at the end of the day, we're just paying people to dig up holes and fill them back up. Spawning industries is only helpful if they are in fact productive
Businesses don't pay for health care, they pay for their employees' work. Sure, some of that pay sometimes takes the form of health-insurance premiums. If employees didn't need that, because someone else was picking up the tab, they'd get cash instead. One might as well argue that the government should pay for everyone's food, to spare businesses the cost of the portion of their salaries employees pay for food.
That's why the analyses you've seen ignore this "cost savings": it's not there.
How about the cost savings of reigning in the medical tort industry, possibly the most reliable Democrat constituency since the Confederation? It is certainly "for profit" adds no real value and imposes huge costs (financial and otherwise) on the delivery of healthcare services. If someone is hurt, they should be compensated for the loss, not treated like a lottery winner. If a doctor is truly awful, then take away his license or chuck him the clink, don't make him into a cash cow for the John Edwards and Fred Barons of the world.
I could be on board for that.
On the low end, however, I actually see something else interesting happening. I try to avoid doctors whenever possible. Luckily, my home state has recently made a nod towards decartelization by giving nurses certain rights to issue prescriptions, which goes a long way towards my ability to buy medical services (legally) without the encumbering "benefit" of the sort of malpractice coverage that doctors are required to have.
How about we try... actually having a free market for health care, and we'll see how much how many people really want to spend on lottery tickets bundled with medical services. I mean, if they want to, more power to them, but I rather recent being forced to buy in, myself.
"I do think there are areas (such as health care) where free markets have failed"
In what sense (bearing in mind that government is responsible for about half of our health care spending now) have free markets failed? They seem to have facilitated a lot of innovation in medicine in recent years. Costs have gone up as well, but this partly because health care is skilled labor intensive, and that skilled labor gets paid pretty well in this country. It's also partly because costs are inflated when the money comes from a third party (whether government or private insurance).
"But I do hear Democrats calling for an investment in people, particularly in terms of education, health care, and the environment."
I'd hate to be against investing in people, but what's our ROI been on government investments in education so far? Some of the K-12 districts that spend the most per student have the worst performance (e.g., D.C.). And if the main objection to our current health care system is its cost, how will spending a trillion dollars more per year make it less expensive?
Okay, I stand corrected. The health-care insurance markets have failed, insurance and providing health care are actually two different industries, despite insurers efforts to control providers. I buy insurance (we're self-employed, so we really do buy it,) and it fails to pay for our health care over and over. You know the stories, no need to repeat them here. The market has failed because I have no choice -- there's only one company in Maine (Anthem), population is too small and suffers from too many chronic illnesses to attract another insurer for competition. And the market has failed because too many of my neighbors can't afford any health insurance. The prices they pay for an office visit (not an emergency room visit) are much higher than my insurance companies negotiated price. The folks not rich enough for insurance but not poor enough for help are screwed; and that's a great example of market failure. And employers left and right are either dropping insurance as a benefit, and signing up for plans that effectively constitute a pay cut for many employees because they cost more and pay less. Another market failure. On the provider end, the markets have failed because frequently the price of a procedure has nothing to do with the cost of a procedure; it's also failed because the profit motive is not based on outcome, but on the number of procedures.
I also take exception to the conflation of insurance with medical research and development; again, two separate but linked industries. I invest in medical companies with good products, my spouse worked in the field of medical clinical trials for years, we know a lot about medical research and innovation. There will always be a market for innovation; and much of that innovation is already based on research subsidized by government; so by your terms, it's not a "free market" already.
Most of the folks you know were educated in the public schools, I'd guess. It didn't fail them. And I in no way correlated cost of a system with quality, that's a straw man argument. I said investing in education -- meaning, perhaps, seeking better outcomes in areas like DC -- was good. We spend a lot of time talking about education failures, little about it's success, sadly. As the mother of two kids with learning differences (language arts problems, gifted in math/science) I have a pretty good idea of how difficult it can be to find success in the public system; a pretty good view of places it needs improving. But I like the notions they hold in Korea -- the best should teach. Just take a look at how they're students compare to other nations.
But none of this rises to the level of suggesting I believe we should throw out capitalism. I think it's apparent I believe in it; I'm an angel investor, I'm self employed, I've created jobs for other people, I pay for my kids to go to college, with hopes that they, too, will be good capitalists and create jobs.
But I also grew up in poverty, and I know what that feels like, too.
"The health-care insurance markets have failed"
then
"Most of the folks you know were educated in the public schools, I'd guess. It didn't fail them."
You seem to want it both ways. Just switcharoo and you have: Heath insurance hasn't failed millions of Americans and public schools have failed millions of inner city kids. So lets keep the current insurance system and completely replace public schools. Hmmmm
You are justing stating as fact what you want to hear. Facts have little to do with it.
Has it occurred to you that the fact that Anthem is the only insurer in your regulated market might just be a government failure? Anthem might be willing to play Canada Bill, but it's risible to call it a "market failure" when no one else want's to join in the rigged game that the Princes of Maine have established as a monopoly.
Every time a I read a post like this I wonder why you have time to engage with the likes of Quiggin or Matt Yglesias on economics and not with John Hussman. It's obvious that Quiggin, Yglesias, and President Obama hope to use the financial crisis to advance unrelated policy goals they advocated before the crisis, but if the current crisis isn't managed properly, we'll have bigger and more immediate problems than invidious comparisons between, say, the average American's vacation time and that of the average Dane. So what say we put the fire out -- and make sure it's completely out -- before we compare and contrast our economic system with that of Denmark.
When we finally get around to doing that, we might notice that Denmark is a capitalist country too (#8 on the current Index of Economic Freedom), even if its government spending comprises a larger percentage of GDP than ours.
Today's Boston Globe has yet another op-ed piece by New Urbanist utopians, certain that the current crisis will finally force everyone to move out of the suburbs into apartments over storefronts within easy bicycling distance of everything the bien pensant could want or need. Last year, similar articles based on soaring fuel costs. So it is with Social Democrats today.
But is he right politically? The cluster may be irrational, but that doesn't make it any less politically salient. Maybe.
Maybe, but I'd say no -- not in the U.S. anyway. It looks to me that the aggressive actions the Obama administration has taken are already giving a lot of Americans at the least the beginnings of indigestion.
Today it has been reported that going forward, the UAW and the U.S. government will, together, own about 90% of GM. Who thinks an auto company that is jointly controlled by the Obama administration and the UAW is going to be a success in the market? Bueller? Anyone?
But even if it is a continuing disaster as an auto company, it may at least serve as a salutary example of why big government interventions in the market are a serious mistake.
Another Democrat and liberal here. And a devout capitalist.
I do not see capitalism being discredited. Caveat emptor capitalism has been shot down (I hope), and the extreme idea of "let the markets police themselves" is gone with it.
The purpose of government is to make life safe and fair for everybody. Letting financial institutions create new instruments, advertising them as safe and secure, and keeping any and all oversight from the instruments failed horribly. We (the people) let the government fail in their job to regulate and police. Once that regulation is reinstalled, and we keep hacks selling "medicine" from the backs of their wagons from spewing their bull and selling crap, capitalism will again flourish. And that will be a good thing.
"The purpose of government is to make life safe and fair for everybody."
Okay, but explain how this is consistent with your claimed support for capitalism, which requires risk and reward.
"The purpose of government is to make life safe and fair for everybody"
Um, no its not - it is to secure basic rights and give you the space to have a chance at building a good life, while doing those things which non-state actors really cannot do (customs, army, police and not much else). My state and local government cannot control the street thugs that roam my neighborhood, yet these incumbent-for-life Democrats also see fit to limit my ability to protect myself. They cannot make me safe (and what government can make everyone safe all the time?) and yet they severely limit my ability to defend myself, again in the name of safety.
One reason that Bernie Madoff's scam lasted so long is that he operated under the aegis of the SEC and very other regulatory agencies. Lots of folks were skeptical of his trading schemes, but they figured that since he was vetted by the SEC, he must be ok - that's not a failure of the markets, that is an over-reliance on government oversight which will never be perfect. If people had been a little more skeptical, Madoff would have done a lot less damage.
I don't get where the libs are coming from. The United States is not the only economy that is suffering in this global recession. In fact, it is doing a smidgen better than many of its European counterparts.
I keep hearing from the Obama admin that the economy has bottomed out and will likely turn around before the end of the year. If that turns out to be true, with inflation being low, and interests rates as low as they can be, this may turn out to be a bad recession but nothing too dramatic.
Have the libs found a way to do away with the business cycle? Do they have a plan to make economic bubbles a thing of the past? If not, they are just engaging in wishful thinking."In fact, it is doing a smidgen better than many of its European counterparts."
It's doing worse than Europe as a whole. Besides, many European economies are so buried in toxic assets as the U.S.
"[The U.S. is] doing worse than Europe as a whole."
Per the IMF's April '09 'World Economic Outlook'...
Euro area Real GDP: 0.9% (2008), -4.2% (2009 forecast)
U.S. Real GDP: 1.1% (2008), -2.8% (2009 forecast)
And if you're counting on Denmark, Sweden, the UK, or any of the other non-eurozone countries to pull up greater Europe's average - well, based on their individual-country forecasts, that's probably not a winning strategy.
The purpose of government is to make life safe and fair for everybody.
Well, that's pretty modest, then, isn't it?
I don't think this recession is a failure of capitalism, or even of government regulation. It is a failure of basic common sense. All the information people needed has been there all along, but people deluded themselves with fancy models and the conviction that the rules of the game had changed.
The rules of the game don't really change all that often. There was the Industrial Revolution, and before that there was agriculture. What, exactly, was supposed to have happened this time to make life run on entirely new terms? IPods are cool and all, but I don't think it was that. I don't think it was anything.
Rules like "don't invest in anything you don't understand" and "don't borrow if you can't pay back" still work. As does the time-honored reaction to the sort of people who try to sell you swampland in Florida.
...how come the US economy is outperforming places like Denmark, Sweden, and Germany, not to mention the OECD as a whole?
GDP growth isn't the only way to measure the effectiveness of a political-economic model. It will be interesting to determine -- in another five or ten years' time -- what the final tally will be for bail-outs and recapitalizations and stimulus packages. My guess is that with one or two exceptions (Austria?) it the Anglo-Saxon powers, Britain and the US (and Ireland, too), who will have to pay by far the largest bills in percentage of GDP terms.
Bad guess--continental banks are actually at least as highly leveraged as ours, particularly when you consider that bank assets are about 1x our GDP, but 3-5x GDP in most big European countries. And they all made stupid loans, too, though some of them picked emerging markets, moronic corporate investments, or bad American securities to park their money in rather than the domestic housing market.
Megan-bad facts. You generalize massively. Some continental banks were as heavily leveraged as ours but most were not. Banco Santander and the Spanish banks generally were nowhere near as heavily leveraged, nor were the German, Swiss, Italian or French banks with the odd exception. Generally speaking the major European banks outside the UK and the odd European bank like UBS have nothing like the exposure of the US banking system. Jasper is entirely correct in his speculation about the degree of govt help the respective banking systems will require to get them back on the rails. The US was 70% of the problem and we'll be bearing 70% of the cost of fixing it.
Maybe not quite as highly leveraged, but their Eastern European loan portfolios are likely to be even worse performers. Interesting you mention Sandander - Spain now has an official 17% unemployment rate.
Shrug. There are lots of regional U.S. banks that aren't leveraged, too.
This is the problem I have debating Euro vs. U.S. economic models sometimes: people like to pick one country in Europe and compare it to the whole U.S. For instance, Luxembourg and Norway have a higher PPP GDP per capita than the U.S.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html
but Norway is small and Lux. is tiny. One might just as unfairly pull out D.C. and Delaware.
http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP_per_capita_(nominal)
BTW I couldn't find a per capita PPP-adjusted list of U.S. states (and I'm too lazy to get the population and do the math on aggregrate PPP GDP for every state), but it appears that the PPP adjustment for the U.S. as a whole is miniscule anyway (14.33T vs. $14.29T; compare to Japan where the adjustment is around -10%) so it's probably less important than in state-to-state comparisons. Still it would be nice to have, since it's a more accurate comparison.
Austria is actually heavily exposed to loan losses in Eastern Europe. And I've mentioned this before, but Australia, which is ranked higher than us, Britain, and Ireland on the Index of Economic Freedom, is weathering the economic storm better than nearly any first world country.
For some strange reason Megan seems to think social democracy and capitalism don't co-exist around the world. Well what of the UK which is a social democratic society has harbored a financial sector that was larger than the US as a % of GDP and the 12th Duke of Devonshire whose family has been part of ruling class in England since the 16th century continues preside over the greatest and most magical estate in the country. France where a revolution occurred in 1789 and liberte, egalite and fraternite were the watchwords, but the Duc de Broglie continues to preside over his vast estates as do the Rothschilds over Chateau Latour and Chateau Lafite Rothschild. Germany where the greatest fortunes in the land are held by the Princes of Thurn and Taxis, postmen since the 15th century, and the Quant family who own 70% of BMW which they have done since the 20's. I sometimes wonder Megan who was in charge of your education. You are astonishingly ill informed for an ed writer at the Atlantic. Speak to Andrew who was properly educated at an establishment that first came to prominence at about the same time as the Cavendish family. He'll tell you who they are.
You mistake cronyism and corporatism for free-market capitalism.
"Well what of the UK which is a social democratic society has harbored a financial sector that was larger than the US as a % of GDP" - Which just may be the death of the UK financial system. Thank god the US system is not such a large % of GDP, else these bailouts would be even worse.
To be fair, ottovbvs may simply be coming from a tradition in which capitalism != the free market. There is a significant current of political thought, including a number of anarchists that support the free market to a more-or-less radical degree, that define capitalism as cronyism and corporatism. It's an easy habit to fall into when so many spouts of capitalist rhetoric actual pursue policies of cronyism and corporatism that are abhorrent to the free market.
Monetarist theory is, of course, not especially helpful when it comes to thinking about the current banking crisis, but then, neither is Keynesian theory.
So why haven't you read any of the theory that is especially helpful when it comes to thinking about the current crisis? You could start with Tom Woods if Mises hurts your head (though he shouldn't, esp. if you've truly slogged through Keynes).
Otherwise, good post, though there's a huge difference between defending "American-style capitalism" and capitalism as such.
Would we not have had a financial crisis if we'd had really super single-payer health care?
I think you've misunderstood Quiggin's basic point. It's not that a Keynesian social democracy would have PREVENTED the financial crisis. But GIVEN THAT CAPITALISM GENERATES FINANCIAL CRISES, the only thing that's going to give you and your family a guarantee of not ending up ruined and destitute is the state. Here's Quiggin:
"A critical assumption underlying these views was that the system was stable enough to maintain equilibrium without substantial government intervention and without collapsing into crisis. As far as I can tell, no one seriously argues this in relation to the current financial crisis."
The claim of the Washington Consensus was that capitalism was basically self-regulating, that with a central bank handling the monetary issues, the rest would take care of itself. That turned out to be false. People want a reasonably predictable life, where working hard leads to having a decent lifestyle and there are backstops against personal or nationwide disasters; they want to live in a society that protects them against arbitrary catastrophes. What the GFC has made clear is that only government can protect us against the arbitrary catastrophes generated by the market. The minimalist state will not exist, because people don't want it. They want a system that insures them against arbitrary economic explosions. The private sector, it has become abundantly clear in the past year, cannot do that.
But states can't guarantee that you won't wind up ruined and destitute. The economic crisis in Zimbabwae was generated by the state, in particular the state seizing productive farmland and giving it to cronies, followed by massive hyper-inflation.
The Weimar Republic in Germany generated massive hyper-inflation, causing families to wind up ruined and destitute. Families lost fortunes in WWI and WWII - wars both created by States. The independent Indian government for decades presided over GDP growth that barely kept pace with inflation. The Tamils in Sri Lanka are having a pretty tough time at the moment, caused not by the market, but by the state and the would-be state leaders of the Tamil Tigers.
Who protects us against the catastrophes generated by governments, not for arbitrary reasons, but because of the leaders' desires to gain or to remain in power?
Just as a note, one theory of the cause of the hyperinflation in Weimar Germany was in fact not dissimilar to the Asian Financial Crisis... namely that too much foreign money with foreign investors with little understanding of local/regional markets can submarine an economy when they see something shinier elsewhere and swing away their capital...
Neal, I'm very curious about that theory. I've never ran across it before, and it surprises me greatly that foreign investors would have been rushing into Germany before the Weimar Republic hyperinflation. Germany in 1918 had just admitted defeat in the greatest war the world had seen to that day. However, there was no massive physical destruction in Germany itself that would need to be rebuilt - the war was fought on Belgium and French territory. There was massive political uncertainity about what the Treaty of Versailles would contain. I'm surprised that in that case foreigners would rush into investing in Germany. Can you please tell me whose this theory is, and where they've published it along with any supporting evidence?
And even if many foreign investors did rush in, and then switch their money away, how would this lead to hyperinflation without the German government deciding to intervene? I would expect a contraction of the money supply, not a massive expansion of it, from a rush out of capital. Of course the hyperinflation may have been caused by the Weimar Republic's governments' response to a capital flight (if such a capital flight did occur), but in that case a very bad response that just made things worse and rather conflicts with the hypothesis that states can guarantee you don't wind up ruined and destitute.
Foreign money leaving was a symptom of the Asian flu, but it didn't cause it. It started with local companies taking on too much unhedged currency exposure, because they could borrow more cheaply in US dollars. Blaming foreigners is always more appealing, though.
TracyW makes some good points. If you look at the number of unnatural deaths in the 20th century, government caused far more deaths than war, despite some pretty nasty wars.
Spot-on, Megan. When you look at the gaping disparity in PPP GPD per capita between the U.S. and Europe, the notion that socialism works better is clearly nonsense.
Anyways, the real crisis came about because we dismantled Glass-Steagal and let institutions aggregate and agglomerate until they were "too big to fail." That's not a failure of free market capitalism, that's a failure to preserve free market capitalism. You can't have a "free" market in which some players are insulated from bad decisions by a presumption that the federal government will bail them out. Simultaneously, we had political pressure pushing subprimes into the hands of people who were bad credit risks.
Nonsense. The financial institutions got "too big to fail" through free market mechanisms. So this is a failure of free market capitalism.
And there's no particular novelty about specific instances of free market failure. For instance, the practice of trust busting was created by the recognition that free markets sometimes lead to undesirable monopolies.
Free markets may "fail", i.e., produce undesirable results, whenever they severely violate some model assumptions, such as perfect information, or when they produce negative externalities. This is not news. The big banks' activity was essentially an example of an enormous negative externality.
Bald assertions of faith, not fact.
"The financial institutions got "too big to fail" through free market mechanisms. So this is a failure of free market capitalism"
Some might note that banking is among the most heavily regulated industries in America, both at state and federal levels. How then did all the blame for a banking crisis fall onto that sliver of the operations still subject to free market competition, as opposed to the share heavily regulated by the same people you wish to grant greater power?
"the practice of trust busting was created by the recognition that free markets sometimes lead to undesirable monopolies."
And others realize that the much more sure way to assured, regular profit is via government regulation preventing market entry by others.
No market is perfect, every activity produces externality (especially regulation, I note), and there is almost always at least one undesirable result from every human activity, market-based or otherwise. What drives me crazy is how critics of our modern mixed economy system take it as beyond dispute that regulation carries none of the costs and more benefits of permitting people greater freedom to organize their economic affairs.
Uh... Perhaps because things went fine when banks were more heavily regulated and the sliver was narrower, such as in the 50s and 60s? Because we know that financial institutions became too big because some of the existing regulation was repealed (Glass-Steagal Act)? Or because the systemic risk spread throughout the economy with the very free market process of securitization?
The financial sector is not a free market, and thank God for that. Apparently, the more like a free market it becomes, the worst the consequences for the economy.
Are you one of those people that thinks the Federal Reserve shouldn't intervene? Because there nothing free-markety about one guy deciding the interest rate and the supply of money.
Yes, there are those... but we weren't talking about them, were we? As long as we are talking about bad stuff that has nothing to do with the conversation, I hate child rapists and Coldplay.
If they drive you crazy, you really shouldn't invent critics in your head. I was talking about the specific cases of banks and this financial crisis. It is widely accepted that it was the failure of regulation, and a relatively freer market, that got us into this mess. So yeah, in this particular instance free markets processes failed.
Of course, excessive regulation is pernicious and leads to inefficiencies in many cases. But no one is arguing it doesn't, so you may stop fighting windmills.
The financial institutions got "too big to fail" through free market mechanisms.
Legislation is not a market mechanism.
For instance, the practice of trust busting was created by the recognition that free markets sometimes lead to undesirable monopolies.
A monopoly is not a free market. A more accurate statement would be "reognition that some intervention is required to keep free markets as free as possible."
I think you're confusing free market with competition. A free market is just the absence of government intervention, and it can very well lead to a monopoly. Trust busting is a series of governmental practices to end a monopoly.
So, in a trust bust government interferes in the market (no free market) to, for instance, break a company in several pieces, thus enforcing a competition that wouldn't spontaneously appear just by letting the market run free. Government intervention to improve competition.
Overturning of previous legislation to regulate bank activity leads to a freer market. That's what happened in the Clinton-Bush era.
"A free market is just the absence of government intervention"
As I pointed out below, that's not correct - you're confusing free markets with anarchy. Free markets mean that the government sticks to refereeing, as opposed to getting out on the field and actively taking points from one person to give to another, in order to control the outcome. The difference is whether outcomes are determined by competition, or by government micromanagement.
Having the government involved in setting the rules of the game is perfectly consistent with free markets.
Ann
About the definition of free market (and anarchy), I've just replied to your point below.
The UK is successfully capitalist + socialist? Yeah, that's going well. They're jacking up the tax rates so badly, Andrew Lloyd Weber wrote an appeal to the government not to do that and chase all the wealth producing talent out of the country. The combox section is interesting--it's the common British attitude that wealthy people are selfish and everyone else deserves their money. Still, some commenters analyzed the total impact of various taxes in the UK and showed that the rich are lucky to keep 20% of their earnings and the average middle income people keep about 40% of their incomes.
Why should I as a taxpayer pay to maintain other people's comfortable lifestyles through the inevitable bumpy ride? Welfare is for the destitute. If you have money and means, live on that. Don't steal from me to keep your McMansion.
"the practice of trust busting was created by the recognition that free markets sometimes lead to undesirable monopolies"
I think you're confusing free markets with anarchy. Free markets need to be regulated - the question is whether the regulation should be focused on designing the system or on controlling the outcome. Socialism/communism focuses on micro-managing outcomes, while free markets involves the government setting and enforcing the rules.
Think of it in terms of a sports game. With anarchy, there are no rules at all. With free markets, the government sets the rules and provides referees to see that the rules are followed, but as long as everyone follows the rules, then whoever wins, wins. Each side is free to compete and try to earn as many points as possible. With socialism, the government takes points earned by one side and redistributes it to the other side based on who 'needs' it more, or 'deserves' it more, or to prevent 'too much' inequality. And of course with communism, all points are shared equally by the two sides (true equality!).
Preventing monopolies is part of good system design, which is an important governmental role in free markets.
That was a very clear explanation, but not a correct one. What is commonly understood by a free market isn't really that. A completely free market is very simply the state of affairs that you obtain in the absence of all state intervention, except for the enforcement of legal contracts and property rights. Everything characteristic of the market (supply, demand, price) originates exclusively through a consensus of buyers and sellers. Everything else, like taxes or additional rules, constitutes a regulated market. In an anarchy there is no state at all.
When the state intervenes by breaking a company apart, he is acting as an outside force to modify the supply, effectively forcing competition that would otherwise not exist in the free market. You said that "as everyone follows the rules, then whoever wins, wins". But that is clearly not the case with trust busting. In this case, whoever wins (by cornering the market) gets broken apart in the name of the very socialist principle of "greater good" (there are compensations, of course).
Your description of socialism and communism is a bit of a caricature, but mostly correct. I'll just add that virtually every country, including the U.S., is a mixed economy with some socialist principles at work. There were some societies approaching pure capitalism in the 19th Century, but it was not a pretty picture.
Nimed -
The same term can be defined differently by different people, but your definition seems like a strawman to me. Do you know any supporters of free markets that define them your way?
I still think that a more useful division is between the government setting and enforcing the rules, and the government meddling directly in outcomes. The initial change that led to the financial crisis was the government forcing banks to lower their lending standards, and thus this all began with 'too much' rather than 'too little' regulation. Trying to define regulation only in terms of quantity, rather than type, doesn't seem very productive.
I don't know why there is a tendency in this blog to abuse the term "straw man". How am I making a straw man? I never attributed you a position that you don't defend. As to the definition of free market, it is a technical term. It's not defined differently by different people.
First 2 sentences of Wikipedia under the entry "free market":
"A free market is a theoretical term that economists use to describe a market which is free from government intervention (i.e. no regulation, no subsidization, no single monetary system and no governmental monopolies). In a free market, property rights are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers."
In Investor Words:
"Business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy."
I am going to point a finger and accuse you of laziness. How could you not check Wikipedia out before writing your post?
Setting the rules is is meddling in outcomes. You seem to think that the only non-free market thing the government can do is redistributive taxation. That's not true. If government fixes floors or ceilings on prices, it's not a free market anymore. If the FDA imposes all sorts of regulation for new drugs, it's not a free market anymore. Instead they are regulated markets.
This is not what happened. Banks were never coerced to lower their lending standards. In fact, they loved it, because they made a ton of money in subprime before things went down the drain. Many people in this point talk about Fannie and Freddie. If you mean Fannie and Freddie were forced, see this and this.
In this I agree completely. Regulation as been treated almost as an homogeneous substance, of which we need more or less. But certain specific regulation that prevented bank excesses for the second half of the 20th century has been either repealed in Congress or circumvented by the creation of new financial assets (the until recently much admired called Wall Street creativity). These assets helped individual financial institutions manage risk at the cost of increasing systemic risk.