16 May, 2008

What free-marketeers say vs. what others say they say

I've read several times lately that free-marketeers essentially argue that the mechanisms of the market always pick the best price, which is why the government shouldn't interfere. The author then goes on to remind the reader of how the housing market (recently) and the stock market (2000, 1986, 1928) have been grotesquely overvalued, resulting in a financial crisis of sorts that required government correction.

A typical example of this is George Soros, who famously mis-predicted two economic crises and now claims the current troubles are a financial crisis of immense proportions. Here's a direct quote from a recent NPR interview:

The idea was that regulators always make mistakes, state interference in the markets just messes things up... Instead of markets always being right, they're actually always groping at trying to find out what the facts are. But they never get it right.
The problem with this argument is that it's a straw man. Not one free-marketeer I've ever read says that markets are always right. Not one argues that regulators are always wrong. Not even Libertarians argue this point.

I'd like to emphasize that what follows is not my personal belief; it is my understanding of what free-marketeers believe. I personally believe that some measure of government regulation is necessary to mitigate the worst catastrophes and crises.

Free-marketeers readily acknowledge that markets can fall prey to misinformation and overvalue the latest, greatest new thing. What they argue, instead, are two things:

(1) When a market is overvalued, it invariably corrects itself. This correction can take the form of a slowdown, a recession, a depression, or even a financial crisis, but in the long run the correction works, and a free market eventually makes everyone richer.

The key phrase here is, "in the long run." How long is the long run? Good question. It depends. "The long run" can take an awfully long time (decades) or not so long at all (months).

I can't be completely wrong when I describe this as their argument. John Maynard Keynes, the quintessential advocate of government intervention ("prime the pump"), criticized this point of view with the economic sound-bite of the 20th century: The only thing I know about the long run is that we are all dead.

See also this page, where Adam Smith (the quintessential free-marketeer) is described as saying that a free market corrects itself.

(2) In spite of the occasional crises that occur in free markets, their freedom allows the collective operations of individuals acting in their self-interest to move forward and react according to the information they know best about their needs and abilities. Note the careful choice of words: self-interest≠greed. Adam Smith speaks of self-love, which need not be evil. A certain amount of self-love is necessary: I have to feed myself, after all.

In highly regulated markets, small groups of people control the economy. They don't have the information available to everyone about their needs. This lack of information can lead to catastrophic consequences, but placing control of the economy in the hands of a smaller group of people worsens the mistakes. This is why the long-term trend of every highly-regulated economy in history has been at best mediocrity and at worst shared catastrophe. Examples include the hyper-centralized socialist republics like the Soviet Union (where, my wife tells me, computer science was considered by the central committees unworthy of university study), Maoist China, Cuba, Zimbabwe today, and so forth. In such states, everyone in the State's good graces is taken care of, and everyone not in the State's good graces is sent to re-education camps. However, everyone honest remains poor, regardless of whether they remain in the State's good graces.



I'll admit that there could be some people who really do believe that nonsense. I doubt, however, that they have much education in economics. I took several courses and I learned at least that much, and I don't know of any among the pantheon of free-marketeers that I've ever read.

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