Don’t Blame Our Problems On The Myth Of Unbridled Capitalism
Every day we hear politicians and pundits bemoaning the sad state of our economy, and blaming our problems on “greed”, “lack of regulation”, and “unbridled capitalism”. These statements belie an incredible ignorance of human nature, and of the capitalist system based on our voluntary interactions. The reality is that greed is the driving force behind our economy, we have too much regulation rather than too little, and unbridled capitalism ceased to exist in this country a very long time ago.
Capitalism is nothing more than a system by which individuals engage in an endless series of voluntary interactions intended to maximize their own self interests. Whether we are selling our services in the labor market, or negotiating a price for a new car, our objective is always to produce the best possible outcome for ourselves. This is the very definition of greed. The system works precisely because we are all constantly seeking to maximize our own advantages.
When we discuss the impact of regulation on the economy, it is important to keep in mind that there are two distinctly different types of rules we are required to follow. I call these cannot and must regulations. Both of these force people and businesses to behave in a manner which is not in their individual best interest, but some are far more detrimental than others in terms of their impact on the economy as a whole.
When most people think of government regulations, the cannot type immediately comes to mind. These regulations are designed to prevent us from engaging in actions which may be in our individual best interest, but are detrimental on a societal basis. Laws that prevent businesses from making false claims in their advertising, or from dumping industrial waste into our rivers and streams fall into this category. When applied uniformly and fairly, most people would agree that this type of regulation has a positive impact.
The far more damaging form of regulation is the must type. These are rules that compel individuals and businesses to behave in a manner that is directly contrary to their best interests. Minimum wage laws and CAFE standards are perfect examples of these must type regulations that serve to disrupt the normal function of the free market.
The Community Reinvestment Act of 1977 is a another example of this type of regulation. It essentially forced banks to abandon traditional lending standards in order to make loans in low income neighborhoods. Prior to this government mandate, banks had always acted to protect their interests by adhering to a proven set of rules to determine the credit worthiness of their customers.
The original Community Reinvestment Act was limited in its impact because there was still no secondary market for the risky loans it required. That changed in 1992 when the government authorized Fannie Mae and Freddie Mac to purchase and resell these loans. Other regulatory changes over the years required these institutions to devote an increasing portion of their business to low income borrowers. It may not be possible to establish a direct causal relationship, but many analysts point to this as the beginning of a series of events that ultimately led to the subprime mortgage crisis. Excessive and misguided regulation rather than lack of regulation was the problem.
Even the most beneficial types of regulation are useless without proper and competent enforcement. Where was the FDA when the Peanut Corporation of America was knowingly shipping products tainted with salmonella? Why did the SEC fail to take notice while Bernie Madoff and Allen Stanford stole upwards of $58 Billion from their investors? Given the incredible incompetence of the federal government in enforcing the regulations most essential to our well being, how can anyone honestly believe that more regulation is the answer to our problems?
The unbridled capitalism that critics love to hate has never really existed in this country. Since the formation of the First Bank of The United States in 1791, the federal government has played an ever increasing role in manipulating the economy through non-market driven actions. The Federal Reserve contributed greatly to our current problems by maintaining artificially low interest rates, thus fueling speculation in the housing market. By attempting to impose its will on the market, the government is largely to blame for the problems we face today.
In order for a capitalist economy to function, individuals and businesses must be free to make rational decisions that serve their own best interests. When government interference compels people to behave in manner that defies this basic principle, capitalism in the true sense of the word ceases to exist. The recent actions of the Bush and Obama administrations will only serve to increase the level of government interference in the market economy. Don’t blame unbridled capitalism when things get worse.
Very well said. It’s unfortunate that more people don’t understand basic economics.
Obama is being very slick in how he frames the discussion of our problems. By demonizing “rich people” and “bankers” he’s setting up and us vs them scenario. I wouldn’t be surprised if he does pull a Chavez and nationalizes the banks. He’ll force them to lend money regardless of credit-worthiness, and the taxpayers will be stuck with even more bad debt.
You’re saying “don’t blame unbridled capitalism,” which to me implies “do blame the over-bridling of capitalism.” Am I wrong?
The thing is, the Wall Street bankers insist that they must get “injections of liquidity” (what we non-bankers would call “bailouts”) in order for them to survive the credit market having dried up. By your definition, that would be government meddling in the natural course of the markets… but it’s the companies that make up those markets who are expecting to be bailed out.
There are some HUUUUGE banks that are, right now, insolvent. There are a dwindling number of smaller banks that are solvent, and don’t need any bailing out. But the insolvent ones are so big, representing so many creditors and stockholders, that if they go down, they will take down the good banks with them.
And then we would have nothing. Literally nothing. The United States – all of us – would be broke. We could be annexed by Mexico. Or Canada. Or the Dominican Republic, etc.
Again, maybe your position is not that there should be for no government intervention into the economy – correct me if I’m wrong. But if that is your position, then… what SHOULD we do?
Derek,
I doubt there is anyone alive who can credibly answer the question of what we should do next. The situation is so far beyond hope that most of us will just throw up our hands in despair. This doesn’t answer your question, but the problems we are facing are not the result of the failures of the capitalist system. I blame the government for everything.
1: The banks are insolvent because they invested in mortgage backed securities that would not ever have existed if the government had not required Fannie and Freddie to create a secondary market for loans to low-income borrowers.
2: Most reasonable people would agree that banking is an industry that requires a certain amount of regulation. Over the past two decades, the government has constantly changed the rules that define a bank and the boundaries in which they can operate. The only reason that institutions like Citi and AIG are now considered too big to fail is that the government changed the rules on interstate banking and approved the endless series of mergers that made their current size possible.
When the system has already been broken beyond recognition, a dose of ideological purity won’t fix it. My main point is that the system we have created does not even remotely resemble capitalism, so we need to blame something else.
OK, I see what you mean. I just think that blaming the government for everything is a huge oversimplification.
For example, you grant that the government has to regulate the banking industry to some degree, but you criticize government regulators for changing the rules and allowing Citi, AIG, BofA, et al. to become too big to fail. The key point, though, is why they did so: because they are in the pockets of the thousands of lobbyists that Wall Street has in DC. The same lobbyists who make sure that regulators would ease some restrictions and/or not enact proposed new ones. Specifically, ones that could have kept their clients from making crazy, off-the-books bets with their depositors’ and shareholders’ money, pocketing the upside when it paid off, and then expecting to be bailed out when they got in over their heads deep enough to take down the whole bank.
There are no effective restrictions on industry lobbying, not even to prevent legislators from becoming lobbyists for the very industries we taxpayers paid them to regulate as soon as they leave office. A lot of people call that free speech and the freedom to be employed by whomever will hire you in the free market economy. I call it corruption. And the kicker is, right now your and my tax dollars are being spent by the bailed-out banks to pay even more lobbyists to make sure that the next wave of bailout money comes right to them, again, and with no more strings attached than there were the first time around.
Derek,
You’ve hit on something we can agree on. Corrupt lobbyists and politicians are at the root of the problem. Doesn’t this mean we really can blame the government, since it is run by the corrupt politicians? Congress could easily change the rules governing lobbying activity, but they choose not to because they are a bunch of thieving bastards. Lobbying is only effective when our politicians are amenable to bribery.
The more I think about it, we all can blame whomever we want after the fact, but it’s not going to make any difference. It’s important to know what went wrong and why it did, but pointing fingers can turn unproductive very quickly, especially among politicians with a taste for grandstanding. The real issue is what we need to do now to get ourselves out of this, and how we can best prevent ourselves from sliding back in.