Thursday, March 29, 2012

The Free Market's Alibi

There are a vast number of misconceptions and myths about capitalism and free markets. The most prevalent source of these myths is accusations by capitalism's enemies that the free market was the cause of some crisis, collapse, abuse, or corruption. A lot of, if not all, of their evidence is true. The problem is that they leave out some important facts. Businessmen, investors, speculators, bankers and consumers did behave the way capitalism's critics say they did. ENRON did generate and perpetrate a number of Star Wars named schemes to bilk consumers and the state of California of a lot of money. House flippers did buy homes, wait just a few months for the price to appreciate, and sold them at big profits. Bankers did lend money to people who could not pay it back. California did experience rolling blackouts. The great Depression did happen.

The problem is, the free market isn't guilty. It has an alibi. It was not there when the problems happened.

In every case, the government was doing exactly what basic economics would tell you will cause exactly such a problem. There were price controls on electricity in California. The state of California created an artificial market called the California Power Exchange with a complex set of rules which ENRON was able to use to game the system to its advantage. The Federal Reserve lowered interest rates in order to try to inflate the economy out of the Tech Bubble recession, and inflating a housing bubble instead. Hoover is accused of being a laissez-faire president, and that was supposed to have caused the Great Depression, but it turns out that he was the most interventionist President America had yet elected. He increased government spending, ran deficits, instituted public works projects, signed Smoot Hawley, increased taxes, created the Reconstruction Finance Corporation, and instituted so many new government interventions that taken together, some historians call it "Hoover's New Deal".

In every one of these cases, the free market gets the blame, but the purpose of this blog is to show that the free market has an alibi. It wasn't there. Like a murder suspect who was across town at a public event in front of dozens of TV cameras at the time of the victim's death, the free market is proven innocent, because it could not have committed the crime.

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