“Tempered by Government”

Tibor R. Machan

There must be some enormous carrot stimulating the proponents of a closely monitored and extensively regulated American economy. I reach this conclusion because day after day I run into essays, columns, commentaries on TV and radio, in which there is a constantly repeated and concerted effort to discredit free market capitalism.

The latest of these I have run across is a review in The New York Times Sunday Book Review, April 19, 2009, where one Louis Uchitelle states that the authors of the book he is reviewing, titled Animal Sprits, How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Princeton University Press, 2009) and written by George A. Akerlot and Robert J. Shiller, “challenge the reigning free-market ideology of the past 30 years or so….” He concludes the review–a gushing one for sure–by urging the authors of the book to “push hard” in the direction of “revamping economic theory to deal with a market system that, quite irrationally, failed to govern itself.”

Neither the reviewer nor the authors give any proof that we have all been under the spell of laissez-faire capitalism. They just assert this as taking even a miniscule peak around the country could easily confirm their idea. Yet, it’s just the opposite they could confirm.

As a rather quick refutation of this idea, that we have all been in the grips of free market fundamentalism–a claim made the famous Princeton Conomist, Paul Krugman in one of his columns for The New York Times–let us recall a point made by the late Milton Friedman at the 2002 Mt. Pelerin Society meetings in Chattanooga, Tennessee. In that talk Friedman reported that “In 1946, there were 9,000 pages in the federal register [which lists all the federal government regulations]. Today there are over 80,000 pages. The situation is the same in most western countries….” So why then go on repeating this myth of a supposed orthodoxy of a fully free market place in America, one that was in full force as the 2008-2009 economic fiasco transpired?

It’s not very difficult to ascertain that no free market system has been in place in America, ever, and that whatever elements of it did manage to find themselves part of the American system have by now been squashed good and hard. Oh, the legacy of FDR’s New Deal!

These authors and reviewers must be counting on their readers’ total ignorance of economic history. I suspect that promulgating the myth that it was a free marketplace that brought about the economic mess serve the purpose of disguising the real culprit, namely, the extensive forcible government intervention in peoples’ economic affairs in America and elsewhere. Among other things, if one can persuade people that it was “a market system that, quite irrationally, failed to govern itself,” whatever minor traces of capitalism can be found in the American economy will come under extensive government regimentation–or at least state nudging (a term used by New Deal enthusiast, Cass Sunstein, who used to be President Obama’s colleague at the University of Chicago School of Law and just recently moved to Harvard where he was picked to help President Obama to re-regulate the country).

For the umpteenth time, the free market didn’t do it. Moreover, it couldn’t have done it. That’s because there hasn’t ever been one in the country. And what elements of such a system could be found over the last 40 years, they have been pretty much abolished.

In plain terms, then, since there hasn’t been a free market in America over its entire history, it cannot be the case that such a market failed to “govern itself.” What America has been all during its economic history is a mixed system, with admittedly significant elements of capitalism, socialism, fascism and the like being tried by the statists in our capitols and promoted by their academic and journalistic cheerleaders, the likes of Paul Krugman, Louis Uchitelle and many, many others who probably sit and wait so as to get the nice government job of running other people’s economic lives!

In any case, book reviewer Uchitelle doesn’t by any means fail to disclose his agenda. He says outright that what we needs is to temper the market by the government. The fact that his involves coercing citizens all over the place, deploying prior restraint on all the agents in the marketplace under the benign-sounding rallying cry of “precaution,” does not make even a dent in the faith of these people in government’s purity of motives and their incredible conceit that they, instead of the millions of those in the market, can run things just fine!

Also, there’s no evidence that critics of laissez-faire have read public choice theorists who have shown that government regulators are every bit as tempted to misbehave as are those they are supposed to regulate–indeed more so.

We should heed the counsel of Oliver Cromwell, who wrote that “It will be found an unjust and unwise jealousy to deny a man the liberty he hath by nature upon a supposition that he may abuse it.”

Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior — called “governance” in economic jargon — doing so independently of government or without being told to do so by corporate bosses.

… Summarizing their findings, the award announcement said: “Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.”

The first sentence quoted, that neither argued against “regulation,” is true if regulation is conceived in the broader meaning of the term most common in, say, the private ordering literature in law and economics. This broader meaning is explained in the second sentence except it seems to distinguish between “forms of regulation” and “rules of behavior” when they are the same thing.

And while, certainly, neither scholar was a Milton Friedman-like advocate publicly challenging the growth of government regulation, to say that they didn’t argue against regulation does seem somewhat contradicted by the quote from the Nobel award announcement, which notes that their views identify positions “in stark contrast to the common view” about the role of government as regulator.

I guess it could also be pointed out that their views identify positions “in stark contrast to the common view” about the role of simple market exchanges, too, since the focus of both of their work has been to explore complex economic organizational forms that exist between simple market exchange and government-imposed regulation.

It seems that the Nobel comittee is not bound by the methodological hegemony you mention and see the value in outside the mainstream thinking. It seems that since the selection of Kahneman (a psychologist), there has been a string of selections that are focused on praising thinking that seeks new insights through new approaches.

Even the selection of Paul Krugman, who in many respects is an embarassment to economists nowadays, was based on some very important theoretical insights back when he was actually working in the economics profession. Those insights were non-obvious unless you took a new and fresh approach to looking at them.

While I have heard (and read) a little about these two scientists before now, I am very interested in reading much more.

Please keep up the good work,

Ivin