Is the Regulation of the Financial Markets the Solution or the Problem?
Tomorrow Barack Obama will become the 44th president of the United States. His first task will be dealing with the meltdown of the American financial system and an economy that is currently headed towards eventual collapse.
Obama obviously falls into the Keynesian camp on the economic spectrum. He believes that government is going to have to play the leading role in the blockbuster drama called “The American Economy.” As I argued in my recent post on free markets, however, government intervention in the economy is actually the root cause of America’s economic problems. Increasing the role of government even further will likely lead to disastrous consequences.
As the attacks on free market capitalism gain strength in what is still arguably the world’s most important economy, a major discussion about regulation is taking place. Many believe that over the past several years, Wall Street has been an unregulated beast rampaging through the economy. Indeed, in his inaugural speech, President-Elect Obama will supposedly refer to an “anything goes” culture that needs to end.
But is the popular rhetoric about regulation really accurate? A closer look reveals that Americans have significant misconceptions about the state of regulation in their nation and are being fed misinformation about the role regulation can and should play in their financial markets.
There Are Already Plenty of Regulations
69,428. That’s the number of pages contained in the 2006 Federal Register, the federal government’s official compendium of rules and regulations. The regulations contained within the Federal Register cover a wide range of topics – from the environment to the financial markets.
For those interested specifically in the financial markets, spend an hour reading through Securities and Exchange Commission regulations. You won’t get very far but it’s an instructive experience that will probably leave you asking a simple question, “How can anyone enforce all these?”
The simple answer: they can’t.
Bernie Madoff demonstrates this quite well. While running his alleged multi-billion dollar Ponzi scheme, he didn’t violate any esoteric regulations or engage in unethical behavior that wasn’t covered by existing law. From fraud to money laundering, Madoff is guilty of nothing more than a violation of very basic laws, as Alison S. Fraser of Cornell Law School noted in a Cornell Law Review article that’s well worth a read:
Arguably, the current enforcement mechanism is sufficient and no further regulation of hedge funds is necessary. For instance, in enacting the registration regulation, the SEC sought to prevent and deter fraud. However, further regulation is not the answer; looking at the recent hedge fund scandals, each hedge fund adviser had broken the law. If existing criminal statutes can protect investors from the behavior that the SEC is trying to prevent, there is no need to change the regulatory regime and to create more rules that will be not only expensive for the funds to implement—a cost likely passed down to investors—but also difficult for the SEC to enforce given its already stretched resources.
In short, the sheer number of laws and regulations that exist makes their enforcement a physical impossibility. There are so many regulations that apply to so many individuals and business entities that enforcing them all would require magnitudes of order more staff and resources than the federal government is ever likely to have.
Throw in the fact that in many industries, such as finance, a considerable number of rules and regulations are so complex as to be virtually incomprehensible to even experts and you have a recipe for disaster: a small number of people tasked with enforcing a massive number of regulations, many of which are extremely hard to understand.
Naturally, if more regulations are created, the problem of enforcement only grows larger.
Regulators Are Disadvantaged
Regulators are clearly outnumbered by the regulations they are required to enforce and the entities covered by those regulations. This puts them at a significant quantitative disadvantage when it comes to doing an effective job.
But their disadvantages are also qualitative.
Assume you are a whiz kid who can either go to work on Wall Street making lots of money or go to work for the SEC regulating Wall Street. Which path do you pursue?
For obvious reasons, the best and the brightest have little reason to become regulators. While a job at the SEC might be exciting, one cannot underestimate that in almost every industry, regulators are outgunned by the entities they regulate. Those entities have more money and more talent.
This creates a dynamic in which three things happen.
First, it creates an environment in which corruption is a real threat. One need look no further than the ongoing drug war in Mexico to see the impact of money on a government’s ability to enforce its laws. In the most extreme cases, laws in effect cease to exist.
Corruption comes in many forms and it’s not always overt or conscious. Consider for a moment the hypothetical scenario in which a young SEC staff attorney conducting an investigation is, as part of that investigation, dealing with investment bankers and executives who are extremely successful and wealthy. Is it not possible that he’ll be impressed (or at the least distracted) by the success of these individuals, unconsciously impacting his investigation? Such dynamics have been noted in many areas of law enforcement.
Second, the fact that the regulated outgun the regulators creates an environment where the regulators often become the regulated and vice versa. In the SEC, you’ll find former Wall Streeters and you’ll find future Wall Streeters. In most industries, there is a fluid exchange of personnel between the organizations tasked with regulation and the businesses that are regulated by them. This is problematic for obvious reasons but implementing a solid firewall is impractical. Eventually, those who start off as regulators often find greater opportunity by joining the ranks of the regulated. At the same time, those who have achieved success in the ranks of the regulated are often considered the most qualified to lead the regulators.
Finally, the inequality between regulators and the entities they regulate creates an environment in which those with more money are less likely to be impacted by regulation. When you can afford the best attorneys and accountants, regulations are often little more than a minor inconvenience. At best, a means to locate loopholes that circumvent them can be developed and at worst, violations of them can be covered up or defended quite effectively.
Both of these things mean one thing: regulations inherently favor the wealthiest entities and put poorer entities at a disadvantage.
Two examples of this:
Prison populations. Look at the demographic breakdown of the American prison population and the correlated sentencing statistics and you’ll immediately recognize that those who are poor are treated less favorably by the criminal justice system. And for good reason. They cannot afford the best representation.
Taxes. While wealthy individuals love to complain about taxes, the reality is that many wealthy individuals in countries with high tax rates are less affected by those high tax rates than they’d like you to believe. Their wealth gives them the ability to structure (and in many cases “shelter”) their income and assets from the full brunt of tax collectors. Sometimes this is done illegally, but oftentimes it is done using techniques that are completely legal but beyond the reach of the common citizen.
Adding more regulations does nothing to change the fact that the wealthy are less burdened by regulation. In fact, it only exacerbates the situation. As new regulations are added, the additional costs of compliance tend to impact entities with fewer financial resources far greater than their wealthier counterparts. In some cases, new regulations actually create a competitive advantage for wealthier entities by making it prohibitively expensive for smaller entities to compete with them in regulated markets.
The Financial Markets are Too Complex to Over-Regulate
If there’s one thing that has been made evident in the financial meltdown: few people really had a good grasp on the state of the markets. Bank executives, regulators and consumers were largely caught off guard. Of course there were some who recognized the overall impact of the Federal Reserve, government-sponsored enterprises, etc., but at ground level, it’s hard to deny that the workings of the financial system are literally beyond comprehension.
Not only is there so much money being moved on a daily basis, the instruments involved are increasingly complex. From collateralized debt obligations to credit default swaps, even the individuals and companies that deal with these instruments often don’t seem to have a firm grasp on all the details, and risks.
Believing that regulators are going to be able to effective police the movement of trillions of dollars using a wide array is naivety at its finest. Making matters worse is that the financial system is interconnected and global.
Thus, it is virtually impossible for regulators in the United States to look at individual companies and individual transactions; they almost always have to look at multiple companies and multiple (complex transactions). And because many of the counterparties are not based in the United States and transactions are often taking place between foreign counterparties and the international subsidiaries of US-based entities that are governed by the laws of other jurisdictions, it’s unclear that regulators would even have knowledge of or access to the information they need.
Given all this, it becomes quite clear that trying to craft ever more complex regulation designed to cover markets that are almost incomprehensible to their own participants makes little sense when basic laws (such as those against fraud) have gone unenforced.
The Regulated Often Help Craft The Regulations
There’s a reason that many on Wall Street are ready to accept or embrace “re-regulation” as it’s being called. Just as there’s a reason that major energy companies are backing a cap-and-trade emissions regime in the United States despite the appearance that such a regime is not in their interests.
By helping craft the very regulation that governs their activities, special interests are not only able to create new opportunities and identify loopholes, they’re able to create the impression that they can be regulated.
Everybody in Manhattan and Washington DC who has an IQ over 75 knows that there is no way to enforce the majority of the regulations that are on the books now. Thus, collaborating to develop new ones is just a public performance that will do very little to make an impact. That’s why you’re not seeing much of a fight over “re-regulation.”
Regulations Create Cover for Their Violators
There’s an inconvenient fact that many are either unaware of or would rather ignore: regulations often provide cover for criminals.
Take smugglers, for instance. Contrary to what you might believe, many who use container ships to smuggle goods appear to abide by every regulation on the books. By knowing how to dot the i’s and cross the t’s, they are able to avoid detection with enough success to engage in a highly-lucrative trade that leverages the very regulations that are supposed to prevent their activities.
Making matters worse is the irony that more effective enforcement often only provides greater incentive for the activity. Smuggling occurs because of significant inequalities in law, taxation, etc. that create the potential for profit. If enforcement of regulations that inhibit smuggling improves but the significant inequalities still exist, the profit motive to engage in smuggling typically only increases, especially when it comes to illicit items that cannot be purchased through legal outlets.
Thus, it must be recognized that many criminals actually not only embrace regulation, but that regulation itself often creates the incentive for criminality. And since both the honest and dishonest are likely to “comply” with well-intentioned but humanly-imperfect regulation, regulation often takes on an almost meaningless quality that deludes us into believing that there is security when there isn’t.
It’s worth noting here that parts of Bernie Madoff’s operations were governed by the SEC, CFTC, FINRA and international regulators.
Of course, Madoff wasn’t being honest with them. Meaghan Cheung, the 37 year-old who was the branch chief of the enforcement division of the SEC in New York and who came under heavy fire for not catching Madoff in her investigations of him, told the New York Post, “If someone provides you with the wrong set of books, I don’t know how you find the real books.”
While the SEC’s failure to uncover evidence of Madoff’s fraud needs to be investigated, Cheung does make a valid point. When criminals comply with regulators and use that compliance as a means to cover up their crimes, it’s often difficult to find evidence of the truth. And when these criminals appear to be cooperative, suspicions often ease.
This led to the unfortunate situation in which, despite the fact that he was “regulated”, Madoff’s apparent cooperation with regulators and adherence to the law actually benefited and helped prolong his scam.
Regulations Create the False Sense of Confidence
The fact that Madoff’s business was “regulated” gave many of Madoff’s investors a false sense of confidence.
Union Bancaire Privée, a private Swiss bank that advised a number of hedge funds that invested with Madoff, demonstrated this in a letter sent to clients last month, which explained:
Various companies within the Madoff structure are regulated by the SEC, CFTC, FINRA, as well as the FSA in the UK.
These regulators performed regular audits with no material findings, which was essential to approving the fund. The long track record, audits and regulatory oversight showed a compelling investment opportunity with stable returns, limited volatility and good liquidity appropriate to reduce overall volatility.
Translation: we thought the regulators were doing due diligence so that we didn’t have to.
Whether you’re buying a new car or investing $50 million, you have to do your own due diligence. Nobody is going to do it for you. As George Carlin humorously pointed out, “Whoever coined the phrase ‘let the buyer beware’ was probably bleeding from the asshole.”
The presence of regulations leads many to believe that they have protections which really do not exist in the real world. The reality is that most regulations are not worth the paper they’re written on and those who have the unfortunate pleasure of learning this the hard way might wish they could walk away with nothing more than a bleeding anus (instead of, say, an empty bank account).
The key point here is that regulation often encourages individuals to make bad decisions. Just as the presence of government-sponsored entities Fannie Mae and Freddie Mac distorted the allocation of capital in the mortgage markets, regulation can distort the decision-making process. Because individuals and businesses believe that there are sacred regulations protecting them, they lower their guard and fail to do their own due diligence.
Take the Federal Deposit Insurance Act and the Federal Deposit Insurance Corporation. The average American is unconcerned about losing the money he or she has deposited into a checking or savings account because of FDIC insurance. Yet the FDIC guarantees over $4 trillion worth of deposits with just over $50 billion in capital.
Few ever questioned this reserve ratio before the financial meltdown. But the failure of major banks is a real possibility today.
And the failure of a regional bank like IndyMac highlights the risks. Hundreds of millions of IndyMac deposits were not covered by FDIC insurance (although the FDIC decided to provide partial coverage for these). How many of the depositors with uninsured deposits believed that those deposits were protected? More than a few to be sure.
Of course, in a worst case scenario of a total banking system collapse, the United States government won’t let the FDIC fail – it will bail that out too if needed. After all, FDIC insurance “is backed by the full faith and credit of the United States government. ” What’s going to be left of it anyway. But the full faith and credit of the United States government isn’t free to taxpayers. Their money supports government bailouts and when the government prints money, they receive a hidden tax in the form of inflation. In other words, the presence of rock-solid (and free) deposit insurance in the United States is merely an illusion that has led Americans to deposit money with banks that are probably headed towards insolvency.
The logical questions that derive from this: if deposits were not insured, would Americans be more selective about their banks?
Of course they would. Just as many of Bernie Madoff’s investors would have been more selective about the funds they invested in had they not been deluded by the notion that his being “regulated” meant something.
In this sense, the removal of meaningless regulations would actually help create markets in which actual participants (consumers, investors, banks, funds, etc.) regulated those markets much more efficiently and effectively on their own.
Fewer Regulations Are the Solution
Government regulation doesn’t work. Period.
While nobody reasonable is going to argue government should do away with basic laws such as those against fraud or that it should remove basic laws that provide the structure for a stable financial system, asking government to add layer upon layer of “regulation” specific to the financial markets will not help the financial system and it will not help the economy. It will only make matters worse.
As I detailed in my post on free markets, sound fiscal policy and sound monetary policy (which includes disbanding the Federal Reserve) would enable the United States government to let the free market function in a much healthier and natural fashion. By doing away with cheap money, removing the implicit bailout agreements that exist on Wall Street and focusing on the enforcement of basic laws, the financial system can be made far more stable because all participants will have to assume responsibility for their own risk.
For those who believe that Wall Street has been taking advantage of the little people on Main Street, forcing Wall Street to manage its own risk would prove far more effective than trying to regulate it. By removing the hand of government and permitting Wall Street institutions to fail, Wall Street would be given the only compelling incentive to regulate itself: its own survival.
Do not be fooled: regardless of the popular rhetoric from politicians, the media and even Wall Street itself, adding another 10,000 pages of financial regulation to the Federal Register will not benefit taxpayers and it will not benefit those businesses that actually produce the goods and services that serve as the foundations for real wealth creation.
It will create more of the same.
Indeed, as the Chinese philosopher Lao Tzu once observed, “The more laws and order are made prominent, the more thieves and robbers there will be.”
This isn’t about regulation, it’s about control, and more regulations are a stepping stone towards that goal. Progressives believe Government should control the banking and financial institutions of this country.
This started with the Federal Reserve, continued with the SEC, and maybe completed by the policies of the Obama administration. Time will tell.
Your points on the size and scope of the regulations already in place are very interesting. I assumed there were many, but I didn’t know there were that many.
It seems to me that any company at any time could be prosecuted for being in violation of a regulation. The only way to then protect yourself, is to make sure your lining the pockets of those in power.
Been following you since Dead2.0 and love your stuff. But while I think your arguments on the extent and consequences of regulation are sound enough, your faith in laissez-faire is precisely that – faith – no? What historical precedent suggests that truly free markets are any more successful and/or sustainable than the current system or the neo-Keynesian policies that, as you say, seem sure to follow.
Dropped this: “?”
slouch: it’s not “faith.” While examples of markets that are largely free of overzealous government are hard to find, there are some.
First, as one of the articles I linked to in my previous post noted:
“…there was no systemic inflation over the century before the Fed. There were some periods of inflation (during the Civil War) and a sustained period of deflation in the 1890s, but wholesale prices were nearly the same in 1914 as 100 years earlier.”
Second, I think it’s telling to look at how the hyperinflation of the Weimar Republic in Germany was eventually controlled: by a return to the gold standard. First, the Germans created the Rentenmark, an interim currency that was backed by hard assets and then by the Reichsmark, which was backed by gold.
Finally, I’d point you to the Republic of Panama, which has no central bank. The US dollar is its de facto currency and it can only obtain dollars by exporting goods and services (there’s no printing press). That’s the reason that Panama is such has experienced such stable macroeconomic conditions since its independence, as you can read here.
The bottom line is that when governments and central banks are not permitted to issue fiat currency, and you remove external forces which shift risk from those who incur it (such as private banks) to other parties (usually taxpayers), there are very real physical limits as to how much illusory wealth is created and how much risk is incurred.
The reality of this is the same as the reality of gravity. Unfortunately, pragmatically-speaking, it’s unlikely that any of the nations on the brink of economic collapse (US, UK, etc.) can ever prevent the meltdown that is coming because they have passed the point of no return.
Stimulus packages and regulation won’t do the trick. They might have short-term impacts that distort the market in both positive and negative ways but the long-term consequences are not really in question as far as I’m concerned.
Unlike, presumably, the long-term consequences of Stressemann’s Germany and a massively overseas-indebted US private sector in 1914? I’d also question the long-term sustainability of the Panamanian model, given obvious international “interest” in the region and country’s pornographic social inequality, but we shall see.
Your penultimate paragraph is spot on, but there’s a social gravity I think you’re missing.
I read this in Johah Goldberg’s Liberal Fascism today, and thought it had relevance to some one of the points Drama made:
Discussing the regulations placed on the Meat Industry in 1906, Goldberg writes the following:
The historian Gabriel Kolko concurs: “The reality of the matter, of course, is that the big packers were warm friends of regulation, especially when it primarily affected their innumerable small competitors.”…The meatpacking conglomerates knew that federal inspections would become a marketing tool for their products and, eventually, a minimum standard. Small firms and butchers who’d earned the trust of consumers would be forced to endure onerous compliance cost.
Drama is correct in saying that examples of countries practicing true laissez-faire are nill. However, just look to China and India, as examples of huge economic growth by only slightly turning to a more capitalistic system.
slouch: social inequality is a fact of life. Historically, equality has not been a reality. Relatively-speaking, as a species we have more of it today than we ever have.
I think it’s worth pointing out that the way many of us view social inequality is often naive, misinformed and fails to take into account the ways that others perceive their own social status.
Take, for instance, factory workers in China. The incessant complaints I hear from Americans and Europeans about factory conditions mask a simple fact: the Chinese have pulled more than 100 million people out of abject poverty as they’ve industrialized and become an export powerhouse.
While Americans may think that working long hours performing repetitive tasks without the comfort of a leather chair is an atrocity, they might do well to read about their own industrial revolution. It wasn’t exactly pretty either.
I guarantee you that most of the factory workers in countries like China would rather be factory workers earning $100/month rather than sustenance farmers who might be lucky to earn 75 cents/day. In fact, ironically, China’s social stability depends on those people not being sent back to the poor rural communities from which they came.
Even in the most deplorable of conditions (such as the Indian ship breaking capital of Alang), you’ll find individuals bourgeois Westerners refer to as “victims” defending their right to employment that is better than what they would have otherwise been able to obtain a decade or two ago.
So as heartless as it may seem, social inequality is not something I spend much of my time contemplating when it comes to economics. It exists. It always has. It always will. The bottom line is that there are far too many people competing for too few resources and until the world owns up to that hard truth and becomes ready to make tough decisions about it, inequality is a given.
I do, however, believe that when you have stable markets in which producers and consumers can engage in trade using sound money, free of the distortions created by overbearing government but policed to a reasonable extent by a limited government, you have the foundation for as level a playing field as you are going to find when it comes to the individual.
I will make one final point on inequality: when you look at a country like the United States, in which government employs a significant number of people and props up key industries such as finance and defense, inequality is actually created by inflationary policies.
As inflationary and Keynesian policies flood flood the system with money, those who are employed by those entities that receive the money “first” (federal contractors, banks with direct access to the Fed and Treasury, etc.) have a measurable advantage. Because they access that newly-created capital at the onset of its debut in the money supply, their “wealth” (as measured in dollars) increases before the inflation really hits the system. They have the opportunity to use their capital to purchase assets, investments, etc. at a lower dollar value and watch them appreciate as inflation increases.
Those who are in positions where it takes longer to get what trickles down from the newly-created capital are disadvantaged – they get an inflation tax.
As such, when you look at who has really made money over the past decade (defense contractors, investment bankers, etc.) you should not ignore that certain inequalities are yet again caused by government involvement in the economy.
This is a stupid statement:
“While Americans may think that working long hours performing repetitive tasks without the comfort of a leather chair is an atrocity, they might do well to read about their own industrial revolution.”
Some Americans may think that way, but not most. More Americans do sucky shit jobs than do the glamorous work. Most Americans do not work on Wall Street and are not employed by a Web 2.0 company.
Americans are not inherently lazy. I’m so tired of hearing that.
TheHappySurfer: point taken. The way I presented the statement may have been a generalization, but in talking to Americans and reading what your media writes about labor in nations like China, one gets the impression that this is the standard the developed world (not just the United States) is looking for.
I’m reminded of an article in a mainstream publication that I read recently. It actually dealt with Chinese labor in an even-handed manner. The journalist (himself an American) noted another American (I believe she was either a journalist or anthropologist) who observed a factory worker who she later described as being “chained” in harsh conditions. In fact, the “chain” she saw was not a chain at all but a grounding wire to prevent the build-up of static electricity. When you look for exploitation and harsh conditions, you see them everywhere.
The bottom line is that developed nations are often hypocritical when it comes to labor standards in developing nations. Their consumers depend on “cheap labor” and they love the conveniences created by a global economy in which the “grunt work” takes place out of sight and out of mind. At the same time, they also complain about the erosion of their own capacity to produce. Typically cheap overseas labor gets the blame.
You can’t have it both ways. If consumers want factory workers (whether at home or abroad) to have a higher standard of living, they need to be prepared to pay for it. For better or worse, of course, sales data demonstrates that consumers don’t vote their ideals with their wallets.
As for Americans being lazy, I certainly did not intend to imply that. But I will say that in looking at the cost of all your entitlement programs, there can be no doubt that your economy is burdened by a considerable number of people who aren’t pulling their own weight. That’s not an American “thing.” It’s just the natural tendency in consumer economies and in states where the government enables it.
I agree that we have to many entitlement programs. They do nothing for us as a country but create “wards” of the state. It’s not what America was about, but it’s slowly weaving itself into the fabric of our society.
I can’t defend this lazy portion of our society, though at the moment it doesn’t represent the majority of our population. As the “hand me out” portion of our society grows, my country declines. This actually depresses me, because I know what we should be, yet I see what we are becoming.
As for those “elites” who deplore the factory conditions in China, who are they really? First they are journalist, whose job is not to report the news, but to get their stories published. The more sensational the story, the better chance of that happening.
Second, and this is a guess, our the union bosses in this country. If they can use global pressure to force China into adopting standard factory conditions, they can ensure the survival of their jobs over here.
Last point, even if American workers wanted to work for the same wages as Chinese workers, they couldn’t. Our minimum wage laws make that impossible.
The question is not whether social inequality is a fact of life (duh), it’s how much inequality a democratic society is able to tolerate. It’s no coincidence that the reforms that brought the curtain down on what was one of the purest historical examples of laissez-faire in mid-19th century England happened alongside extension of the democratic franchise. Would any industrialised western society tolerate Panamanian poverty levels? I doubt it, though I’ve a feeling we might shortly get to find out.
Okay, you don’t contemplate social inequality too much, but I’d recommend greater consideration of the fundamental interconnectedness of markets and society. It’s your economics I’m concerned about, not your soul.
slouch: there’s no doubt that markets and society are interconnected so perhaps I need to simplify my comment about inequality.
Put simply, I don’t believe that a “balanced” society in which citizens have a realistic and sustainable quality of life can be achieved through over-regulated markets that are burdened by government intervention that almost always harms the interests of taxpayers and the vast majority of businesses.
Quality of life is subjective, as is how you define “poverty.”
Case in point: I’ve traveled to cities with extreme poverty and while I’m not going to glamorize abject poverty and economic inequality, a good portion of the people I’ve met in such places were generally content. On the other hand, I can honestly say that the majority of Americans I know who have far more are less content. They complain to varying degrees about what they don’t have, about how some have more than they, about what they want but can’t afford, etc.
There’s wisdom in the idea that those who are poor are often actually quite rich.
As for the prospect of social distress due to economic pressures, that too is a reality of life. Watching what happens in China during this downturn will be especially interesting.
That said, there’s one final point: those who are wealthy and who pledge allegiance to no country but who tend to control them (i.e. the international banking families, etc.) don’t care about social unrest. They actually foment and take advantage of instability to profit.
You could have the disintegration of a major industrialized nation next year and by in the large, the ultra-wealthy would emerge largely unscathed. In fact, many would profit from it.
“But while I think your arguments on the extent and consequences of regulation are sound enough, your faith in laissez-faire is precisely that – faith – no?”
Firstly, there has not been a single economy in history that can be described as “laissez-faire” capitalism – or at least, none whose records survive. The US considers itself the most free economy in history, but the state collects between 1/4 and 1/3 of its entire output as tax. The citizens of the United Kingdom, who have a greater disrespect towards the state than those of the US, give around 40% of their product as tribute to the state. Even in the freest economies in the world, a significant proportion of activity is under the thumb of the state, and isn’t influenced by market forces one little bit.
And that 33% or 40% share distorts the rest of the economy hugely, especially at the peaks and troughs of the economic cycle. The current crisis is the perfect example. The distortion at the peak was the writing of the rules to favour the big players (well covered by Drama above) and bizarre ideas such as that everyone should own their own home, based on nothing more than fluffiness. The result was soaring house prices and entire economies that were, according to the accounts, producing one part goods and services and seven parts magic. The distortion at the trough, well, you’re looking at it.
When we think of free trade and economic liberalism we’ve been taught to think of jeans, rock’n'roll CDs and Fairtrade bananas, because that’s the difference between us and those poor people in communist countries. But in our free countries the big, important stuff remains squarely in the hands of the men with guns. The banking system, for one, but you can also include energy, mining, telecoms, cars (cars!) – the list is as long as your imagination. One change in the political wind and suddenly the whole system collapses.
The best word I know of for this system is “corporatism”. Most basic economic activity is freely conducted, but at the top everything is controlled by politics. And the truly big-time profits are made, long-term, by corporates – businesses large enough to resemble governments in their own right, businesses that can play the political games, not those who can satisfy their customers. It is not, repeat not, a coincidence that it’s almost as impossible to get a change of address through British Telecom or the Bank of Scotland, as it is through the Department of Work and Pensions. Dogs tend to take on the appearance of their masters, and which emulates which is neither clear nor important.
So true capitalism has never been tried. So in one sense, belief that it can work can be described as “faith” – but to me, having “faith” doesn’t mean believing in something that hasn’t been tried. Otherwise all scientific progress would be based on random luck, which it isn’t. “Faith” means not being able to answer the question “Why?”, and its opposite is “rationality”. Those of us who think capitalism can work for humans – at least those who’ve thought it through – can answer the question “why?” no matter how many times someone asks it. This is the difference between the faith of those who believe that the state can make it all better by signing pieces of paper, and the rationality of those who think that statism leads inevitably to fuckups.
As for the actual question, “Why should men rule their own affairs?”, a blog comment isn’t the right place for the long version. But there’s a shortcut which runs: If people are too stupid/lazy/selfish to rule their own affairs, then they aren’t fit to rule other people’s affairs either.