Analysis on steroids
22 November 2017 16:45 (South Africa)
Opinionista Ivo Vegter

Free markets as a moderate position

  • Ivo Vegter
    IvoVegterBW
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

The misguided idea that free market advocates are on the side of big business is an endless frustration to me. Although they do not oppose business of any size in principle, free markets are usually not in the best interests of big business. They’d rather have protectionism. In that fact lies an important realisation.

Ordinary left-leaning liberals often describe themselves as moderate, because they advocate a balance between business for private profit, and government regulation designed to tax it and curb its excesses. Their stated aim is to protect the interests of the poor and the powerless, and redistribute at least some wealth from the haves to the have-nots. Their only question is how much to take.

You’ll often hear such leftists talk about “market fundamentalism”, as if advocacy of minimal government intervention in the markets can only be the view of extremists.

Take Joseph Stiglitz, former chief economist of the World Bank, for example. In his discussion of market fundamentalism, he loudly chides the financial sector for convoluted tricks to deceive tax authorities about how low their income is, and lie to investors about how high their income is.

He says they caused the 2008 crash by taking excessive risks, but utters not a word about why these executives might have done so: artificially low interest rates, loans implicitly backed by government-sponsored enterprises, and mortgages required by law to be issued to high-risk borrowers. All of these are government functions.

Stiglitz also claims, like many economists, to have predicted the 2008 crisis, though he merits only a passing mention in this exhaustive analysis of those who did.

I, too, have written about the 2008 crisis, and who said what in the years leading up to it. Stiglitz’s belief that advocates of free markets were culprits, while defenders of politicians were innocent, is heartily disproven by what they actually said. The role of government in causing the sub-prime crisis by requiring banks to lend to high-risk borrowers, was reconfirmed recently by a document dump from the Clinton Library.

While Stiglitz advocates greater government involvement in the economy to protect society from unfettered capitalism, he not only ignores government’s role in stimulating the very excesses he is discontented about, but complains that the taxpayer is now on the hook for them. He can’t have it both ways. Either the taxpayer bears the risks and companies don’t get punished for their excesses, or vice versa. You don’t need a Nobel Prize to spot the flaws and outright contradictions in his analysis.

George Soros, who lavishly funds left-leaning political interests, likewise wrote: “It is market fundamentalism that has rendered the global capitalist system unsound and unsustainable.”

Though Soros, Stiglitz and their fellow-travellers have some valid red flags to raise (if you’ll excuse the pun), they all make the mistake of viewing government intervention that stops somewhere short of outright central planning as a “balanced economy”. Stiglitz says: “There must be a traditional private sector of the economy, but the two other pillars have not received the attention which they deserve: the public sector, and the social cooperative economy, including mutual societies and not-for-profits.”

First, let’s note that there is nothing about free markets that prohibits his third pillar: not-for-profits or cooperatives. Companies are cooperative by definition. Their purpose, and how they distribute profit, if any, is entirely up to their founders.

That leaves us, to meet Stiglitz’s requirements, to seek a “balance” between free markets and socialist welfare states. To me, that seems like seeking a balance between freedom and slavery, or peace and war.

I’d argue that it his is a mistaken view of the continuum of economic organisation. I agree with placing socialism on the left. On the right, however, I would place not free-market capitalism, but state-protected cronyism.

As we saw with the 2008 crisis, the risk the left calls “market fundamentalism” really wasn’t market fundamentalism at all. It was a disastrous combination of government regulation and perverse incentives, leading to a failure that even the warnings of 50 leading economists who now claim to have predicted the crash could not prevent. It is no surprise that most of those economists actually work for governments.

What does that spell? Crony capitalism; state corporatism; call it what you will. Whether you’re describing the United States, Europe, Russia or even China, it’s all cut from the same cloth. Only the degree of state control and corruption, and how quick-witted the central-planning maestros are, differ. Even the maestro of the largest, most sophisticated economy in the world was not quick-witted enough.

In less developed economies, the dangers of protectionism – the policy by which government creates laws, tariffs and taxes that protect favoured business interests at the expense of others – are even more obvious. It is well established (and has been for a long time) that there is a strong correlation between a range of measures of economic freedom, and how well a country does on indicators of human welfare, including poverty levels and absolute living standards.

This is why it is so important to distinguish between free-market capitalism and the protection of big business; and between mere privatisation of state-owned monopolies and allowing free, competitive markets. Powerful money interests are always capable of perverting public policy. The more power the state has, the more there is to corrupt. If it has none, not even the largest private monopoly is secure.

There’s a balance in the centre, where government power and intervention are minimised. That limit is zero if you’re an anarchist. If you’re an ordinary free-market advocate like me, you’d aim for a minimum, where laws are limited to the protection of life and property, public institutions function adequately and efficiently, and government is constrained to fund or provide of a minimal set of commonly agreed technical public goods. Think of government power as a U-shaped parabola, or an inverted bell-curve: it rises towards both the economic left (socialism) and right (state-corporatism), and reaches its minimum in the middle. Once you’re at that mid-point, and you can think of a practical way to reduce the minimum further, government power is still too high.

I haven’t yet read the latest blockbuster about wealth inequality, Capital in the 21st Century, which is earning its author, the French economist Thomas Piketty, rock star treatment from the likes of Paul Krugman (who himself recently landed a $250,000 a year job to preach the evils of inequality).

It received sharp criticism from quarters I am more inclined to believe. If you’re pressed for time, Reason Magazine's piece, by Garett Jones, associate professor of economics at George Mason University, is the best of these, in my view. Some of the critics have, in turn, been subjected to withering scrutiny, which has made Pikettymania rather entertaining.

At the risk of over-simplifying a 700-page book based only on its reviews, his thesis appears to be that wealth inequality matters more than absolute standards of living, and that capital is structured in such a way – by government regulation, I might add – that its returns will generally outperform broader economic growth. Therefore, excessive accumulated wealth ought to be taxed away, and this is the only way to structurally reduce inequality.

I instinctively distrust arguments that rely heavily on the desirability or achievability of reducing inequality, because it seems to be a rhetorical evasion of the fact that the war against poverty is being won, and dramatically so. Rising living standards for a declining number of poor people leaves advocates of redistribution with little rhetorical ammunition other than to complain about inequality. I call it ginidiocy.

It’s been argued that a large gap between rich and poor constitutes a threat to social stability, because the poor might be unsatisfied with their lot even if their absolute living conditions are not terrible, are improving, or both. I think it is rather unkind to attribute to the poor not only greed, but jealousy. Calling it “social justice” to base public policy on this premise evades the inconvenient question of why you can’t just call it “justice” without the qualifier.

More importantly, my reading of historical revolutions suggests that inequality tends to be a threat to social stability only if living conditions are unbearable and the poor have nothing to lose, or if the prosperity of the wealthy is protected by corruption and the poor have nothing to hope for, and usually both.

Witness the appeal of opposition politicians to the corruption of the ANC. They know it is a powerful political motivator. Poverty makes good kindling, but it needs the spark of public corruption to start a fire. Witness the 20 years of South Africa’s democracy: public protests have overwhelmingly been aimed at failures in service delivery on the part of government, or actions in which government was seen to protect the interests of big business against those of the poor.

Some academics, like Jonathan Moreno, a professor of history and philosophy at the University of Pennsylvania and senior fellow at the left-leaning Centre for American Progress, have realised the problems an uncritical acceptance of Piketty’s thesis would have for what he calls the “moderate left”. He fears it will drive the left further towards class-warfare and socialism, because it doesn’t really leave much room for broad-based prosperity growth other than by taxing away and redistributing the capital of the wealthy few.

Given its high profile, I couldn’t entirely ignore Piketty, but I intend to do it justice by actually reading it before saying more about it. For all the heat it has generated, I have yet to see a great deal of light. Now you know the lens through which I’ll read it, though.

I believe it to be morally wrong to act against someone’s person or property without their consent, or to use force against them if they did not initiate it. The consequence of this view is to advocate free markets and minimum government intervention in the economy.

Most importantly, I think this is a moderate position. It isn’t radical. It isn’t wild-eyed fundamentalism. The extreme positions are coercive redistribution to benefit the poor on one hand, and coercive government protection to favour the business interests of cronies on the other.

When you use force, it doesn’t really matter in which economic direction you’re pulling. DM

  • Ivo Vegter
    IvoVegterBW
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

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