FREE MARKET FANTASIES

FREE MARKET FANTASIES AND THE
SIRENS’ SONG OF SMALL GOVERNMENT




Nowhere in our public discourse do the dual theories of free market economics and the virtues of limited government get more attention then on the campaign trail. The fusion of political rhetoric with the theoretical justifications for economic and political positions has become a hallmark of the campaign process to the point that the tenants of theory serve as litmus tests in the validation or rejection of a given particular position. While the various libertarian and conservative think tank gurus would have us believe that government involvement in the economy is the problem and that its size inherently curtails our freedom the current financial debacle might give one pause in subscribing entirely to such notions. Advocates of unrestrained free markets and limited government would have you believe that before the New Deal the country once upon a time existed in some Arcadian free market paradise with little government involvement outside of defense, settling the frontier and the collection of external revenue. Since the election of Ronald Reagan the most extreme proponents of these theories have called for a dismantling of the institutions of the New Deal, especially by “starving the beast” via a reduction in taxes. Devotees of these dual theories would have us believe that most everything of benefit that comes out of economic activity emanates largely from the efforts of individual entrepreneurs and private enterprise and that government can play little in the way of a constructive role in fostering economic prosperity. The constant citation of the virtues of unlimited free enterprise and limited government are elements in the background music of the Republican Party during this election cycle, more so than in the last. As it is, the rationale for much of the argument supporting limited market regulation and minimal government involvement in the economy fall rather flat when viewed against an honest appraisal of American history.

Since as early as 1816 when James Madison called for a “comprehensive system of roads and canals” paid for with public funds and a protective tariff to shield American industry from the competitive forces of the British economy, the federal government has been involved in proactive measures aimed at economic development. The naval suppression of piracy and the initiation of maritime aids to navigation were directly tied to fostering marine commerce. The 1824 Supreme Court decision in Gibbons v. Ogden laid out the legal framework for federal oversight of interstate commerce and thereby the regulation of the national economy that has carried forth to this day. The promotion of agriculture by way of the Homestead and Morrill Acts of 1862 gave away public land to farmers and subsidized agricultural education. Federal contracts to supply the Union Army and Navy during the Civil War were risk free with profits guaranteed, one of the critical factors in the creation of the capital pool that would fuel rapid industrialization after the war. Nowhere is the influence of the federal government in fostering economic development more evident than in the assistance given to the railroad and steel industries in the post Civil War period. Referencing “A Concise History Of The American Republic” authors Samuel Elliot Morison et al detail the very real hand of government in the economy at this time: “Internal improvements at national expense found expression in subsidies to telegraph and cable lines and in generous grants of millions of acres out of the public domain to railroad promoters.” Free land to railroad promoters in turn fostered real estate development and the railroad companies received further assistance in the form of protection from the Indians as provided by the U.S. Army. Likewise steel tariffs allowed what was at the time a most critical industry to flourish as a beneficiary of government economic intervention. Again with reference to the aforementioned source: “An important element in the growth of the iron and steel industry was the tariff, which enabled American manufacturers to compete successfully with their English and German competitors and to pile up fabulous profits.” In fact, much of the history of economic policy in the second half of nineteenth century America revolves around the issue of tariffs and the creation of vested interests that benefited there from. The closing days of the 19th century would see the creation of The Inland Waterways Commission by Teddy Roosevelt as a vehicle to promote the further development in the West of water power and transportation. The twentieth century would see continued government involvement in promoting economic growth via such developments as the Tennessee Valley Authority, the creation of NASA and the development of the Internet within the Department of Defense. To quote G. Pascal Zachary of Stanford University with regard to the importance of government policy initiatives instituted in response to Soviet advancements in space and their affect on the economy: “The post-Sputnik sense of urgency powered American innovation for decades, igniting the growth of the country’s infant semiconductor and computer industries and laying the foundational technologies for the Internet.”

In his analysis of the 20th Century, “Modern Times”, conservative historian Paul Johnson stated that the rise of big government among the advanced nations was the result of the “industrialization of warfare” and its institutionalization on the part of those states then fighting in World War I and not as a function of progressive liberal politics. The collapse of the world economy a decade later would thereby provide an opening to those political progressives who would come to see national government as the primary vehicle for addressing and ameliorating the crisis borne of the Great Depression. While the Depression ultimately came to an end as a result of World War II, the proactive and progressive measures instituted during the New Deal would act to keep the economy on a much more stable and less volatile path for most of the post war period. The present economic crisis, the origins of which can in large part be traced to the policies of financial deregulation derived from a misplaced belief in less government together with the idea that easy credit and convoluted financial products would somehow create an “ownership society”, have brought us to the edge of an economic abyss the dimensions of which are presently unknowable. The notion that reducing government oversight thereby freeing up the financial markets, together with the creation of an economic environment where one could acquire all manner of material goods from homes to i-pods without any consideration of ones’ ability to pay, with an increasing proportion of financial activity being composed of products that few can understand or place a value upon and that somehow such an environment would improve and advance the well being of every American is to me the triumph of faith and folly over reason. Moreover, the blame for this state of affairs cannot solely be laid upon the Republicans and conservatives as the initial impetus for the promotion of easy credit as it relates to home ownership originated in the Clinton Administration.

The current federal bailout of the financial sector is unprecedented more for the ideological shift represented in the mechanics of the intervention than as a departure from prior efforts to insure the stability of the system based solely on the amount of funding involved. From the Penn Central bailout in 1970 through the Savings and Loan Crisis to the bailout of the airlines in 2001 the Federal Government committed a total of 347.5 billion dollars in loan guarantees to American companies. What makes the current rescue plan different is the defacto socialization of heretofore-private financial entities via capital injections through the purchase, by the government, of preferred stock thereby creating a claim on assets which is in reality an equity interest. Moreover, by assuming the role of lender of last resort, the government has affectively reduced the role of the free market as it relates to the financial sector through the elimination of the market risk of not being able to raise the level of capital required to remain in business. It is ironic that in the political debate surrounding the latest financial crisis, it was the Republicans in Congress that insisted that the rescue package should not be in the form of unsecured loans but that there should be some way for the taxpayer to have a vested stake in and quite possibly profit from the bailout. The Republicans effectively insisted on a socialization of the financial sector although for ideological reasons they could not come to use the term.

We are now in an era where the most vexing problems we face are national and international in scope. Be it international terror, the current economic crisis, the need to refurbish our domestic infrastructure, the emerging military competition with China, an aggressive resurgent Russian or the failure of the free market to provide adequate health care, the challenges we face going forward cannot realistically be handled by small government or an economic marketplace characterized by uncontrolled or unmitigated risk. The argument that government plays little or no constructive role in our economic welfare is simply so much ideological prattle and a historical fallacy. The challenge is to increase the efficiency of government and eliminate those areas of federal spending that are truly wasteful. The idea that we can somehow return to the era of Calvin Coolidge and minimal government is simply unrealistic and a political fantasy given the course of our historical development and the challenges we now face. The very underpinnings of mainstream economic thought as championed by the late Milton Friedman, a hero of the conservative movement, are now being called into question within the community of academic economists. Professor Joseph Stiglitz, Nobel Prize winner and former Senior Vice President of the World Bank has made this very point in an article appearing in Foreign Affairs (Dec 2005) titled “The Ethical Economist”. To quote Stiglitz: “American economists tend to have a strong aversion to advocating government intervention. Their basic presumption is often that markets generally work by themselves and that there are just a few limited instances in which government action is needed to correct market failures; government economic policy, the thinking goes, should include only minimal intervention to ensure economic efficiency. The intellectual foundations for this presumption are weak. In a market economy with imperfect and asymmetric information and incomplete markets-which is to say, every market economy-the reason that Adam Smith’s invisible hand is invisible is that it does not exist. Economies are not efficient on their own. This recognition inevitably leads to the conclusion that there is a potentially significant role for government.”

I am not so naïve as to proclaim that we are at “the end of history” with regard to the applicability of conservative economic and political theories. Nor do I think that the pendulum of American politics will, as if by magic, shift leftward and remain stuck there for all time. What I would say is that current historical developments have called into question some of the bedrock philosophical tenants of the conservative movement and of the Republican Party and that this crisis of ideology will give rise to serious debate within the party in the very near future. This philosophical dilemma combined with a generally low generic approval rating for Republicans may adversely impact their appeal for several election cycles.

The campaign practice of conceptually parading around the twin tenants of small government and unrestrained free markets has in our day come to resemble the medieval practice of parading around religious reliquaries, which were believed to contain the bones of a saint or a piece of the crucifix, in front of the populace during holidays so as to reinforce their belief in the mystique of the socio-political system existing at that time. At the conclusion of ceremonies, the reliquaries were returned to the church and it was back to business as usual. Likewise politicians will wax eloquently about the virtues of the market and the relative size of government but after Election Day we will return to a world where the size of government will never again be small and one in which it will continue to be critically involved in economic matters just as it has been since the earliest days of the Republic.

Steven J. Gulitti
N.Y.C.
October 28, 2008
Iron Workers Local # 697