Sunday, July 29, 2012


The birds are silent in the woods.
Just wait: Soon enough
You will be quiet too.

(Robert Hass, "After Goethe")

Tuesday, July 17, 2012

Debate on the Free Market

Required Reading for the Debate:

Arthur Brooks, "Five Myths About Free Enterprise"  (Washington Post, July 2012)
Joseph Stiglitz, "Of the 1%, By the 1%, For the 1% " (Vanity Fair, March 2011).

A conservative colleague, Scott, sent me the above piece by Arthur Brooks in order to persuade me that my hostility towards our American free-market system is misguided.  The piece got me thinking seriously about the huge divide between libertarians/conservatives and progressives/liberals in this country.  At times it almost seems as though we are speaking completely different languages and that any sort of reasonable meeting of the minds is impossible. 

I'll admit that more than a few times I've been guilty of baiting and provoking conservatives, but this time I thought I would try to see if it could be possible to have an honest, intelligent dialogue between the left and right on this very important issue.  We who are living in the United States in 2012 are at an economic and political crossroads: the country will either move in a more libertarian direction (smaller government, more tax cuts, less regulation) or a more liberal one (more government programs for those at risk, tax increase for the wealthy to pay for these programs, and increases in government regulations on corporations).   Since these ideas about our future are basically incompatible, it behooves all of us to think seriously about them. 

So I asked associates from across the ideological spectrum to weigh in on this issue.  And here is how they responded:

Mike Russo (Distributivist)

Scott, although I disagree with some of your positions, this is one case where we are in agreement. I believe in free enterprise--as much, or maybe even more, than any libertarian does. Remember, I own my own small business (it may not be a financially viable business, but it is a business nonetheless). And, as a businessman, it would be idiotic of me to attack the free enterprise system, which enables me to earn the meager profits that I do.

That having been said, I do believe that what we have in the United States today is not free enterprise in the true sense of the word--or in any sense that someone like Milton Friedman would understand it. What we have is actually a kind of corporate fascism, where a very small percentage of the population controls most of the wealth, rigs our economic system for its own advantage, and uses the ill-gotten wealth that they basically steal from the rest of us to control our system of government. 

So, although I agree that free enterprise in the true sense of the word might actually help to distribute wealth broadly and this would certainly promote the common good, this is most definitely not what we have in the United States at the present time. We might have had something of a free-market system in the post-war period, but is certainly doesn't exist any longer (especially after the Supreme Court's Citizens United decision).

The one thing I would take issue with in the piece is with Brook's claim that Wall Street and the banking industry had nothing to do with the financial crisis that we are in. This is typical conservative nonsense.  Wall Street  and the banking industry are almost totally to blame for our economic melt-down, and this is the very reason why we need much more government regulation of these industries.

But other than that, I'm glad that we can agree that free markets are a very good thing. We just need to define a bit more carefully what a true free market is...and what it is not.

P.S. Since we are exchanging required reading, here's something you might want to look at. It's by a Nobel Prize winning economist, but you can just call him a deluded liberal if you prefer:

Christopher Salute (Pro-Business Centrist)

I agree, for the most part with Brooks' five points. Though, I find anyone who stands completely on one side of any playing field more ignorant than those reading their articles. At least those reading the paper and educating themselves are attempting to find middle ground. And, I think that's where we'll all find peace with corporate and governmental policy.

I'm baffled at the stances I'm seeing against free trade, lately. I see it in students and even my own colleagues. We play the blame game and debate in circles. It comes down to a few inescapable facts:

Yes, many large corporations are corrupt. This is the case all over the world. The difference in the US is that they are not DIRECTLY tied to the government, local law enforcement, and exploiting their employees for pennies a day in unsafe work environments. And, you have the freedom to protest this without lethally being shot at.

The financial landscape exists this way for a few reasons. One is that bankers are constantly looking for higher margins. This is true. And, I think that there is a ridiculous amount of unshared wealth, out there. But, I'd prefer that over being allowed 2 pairs of shoes, a sack of flour, and a mule after working my tail off to become a doctor. Because, that's the other side of the coin.

What we forget are the other few reasons that the financial landscape is this way. The first is that corporate banks (unless they hold on to and service their "paper") borrow and sell to and from the US government. This is regulated. In order to remain competitive, loan agencies will push the legal limit to how far they can lend because they have to hit their quotas to be able to sell their loans back to the fed.. And, they depend on the government banks to say "yes you can" or "no you cannot do this." I think that is where the major breakdown was during the meltdown. Loan agencies are going to do everything they can to make money. This is to be expected. If you are the regulator, you must regulate. This is the difference between morality and LEGALITY.

The second is that consumers are no longer doing their homework. I have worked in finance, communications, human resources, marketing, sales, etc. etc. And, the silliest thing I hear from co-workers, colleagues, customers, alike is "Well, nobody ever told me that." Did you really think that borrowing another $100,000 against your home at a volatile interest rate was a good idea? Prime and other rates like this were jumping all over the place. Loans are subject to change based on this. You MUST know what you're doing before you jump into the deep end with all or most of your money.
  • "Nobody told me this rate could jump to 12%"
  • "Nobody told me that my art history degree wouldn't get me a job"
  • "Nobody told me that this product I paid $1 for was inferior to the $20 counterpart."
I think that what happened this decade was a perfect storm of uneducated (but more importantly irresponsible) consumers who expected someone else to do their work for them, definitely corrupt large corporate bankers, and a lending/government system that LOOKED more regulated than it actually was.

But, free enterprise? THAT is what creates jobs. Nearly 90% of us work for small businesses (under 1000 employees). They are responsible for the most job growth, innovation, and revenue in the US. So, why attack them?

I am all about job growth, giving back (believe me when I tell you I give a larger proportion of my earnings to charities all over the world than most anyone you'll meet), etc. And, I am the last one to buy a new car, 20 new suits, or a rolex. But, as a small business owner and executive in the top 10% of US salary earnings, I can tell you I have earned every dime I've made. And, if I were in the top 1%, I'd have earned that, too. What probably keeps me back is my desire to educate myself and see my family more. The career track I was one would have put me in that same bracket had I not gone back to school and chosen a different path. And, nobody is entitled to that money but me! Tax me all you want. I'll donate at my leisure. But, don't penalize me because you don't think I worked hard for it. I'm sorry that I don't have my own reality show for you to watch.

I continue to struggle because I live just outside the largest city in the world, am earning my PhD, and graduated college just a few years before the recession. I have debt, I have sat up at night wondering if I could make my mortgage payment, couponed my way through a grocery store so I could eat, etc. etc. I woke up the next day and I figured it out. But, thank GOODNESS I am in a country where I can do that. This sense of entitlement is the biggest barrier to getting us out of the recession. Nobody owes anyone a job, a suit, and a meal. If you think that, you'll be waiting for those until your last day. There are thousands of employed illegal aliens doing manual labor. That Art History degree is doing nothing on your wall so use it to dig up some potatoes in the midwest if you're that hard up for work.

 To generalize this group of people and say "all business men are criminals" is just as bad as saying "all protestors are bums."

Peter K. Fallon (Christian Progressive)

I think it comes down to a fundamental problem, one that no one really wants to talk about. That is ideology. Not any particular ideology, but the phenomenon of ideology itself: any idea, flexible in its birth, that becomes increasingly rigid and rule-bound to the point that it becomes "the one true way" and anyone with the balls to suggest a modification finds his/her loyalty or "purity" questioned.

That has happened to American Capitalism in the last thirty years (and, consequently, to global Capitalism after the fall of the rigidly ideological Soviet Union).

There is only one acceptable form of Capitalism -- out of many, many iterations -- for the American economic right today: global, unregulated, laissez faire, (so-called) "free-market" Capitalism. Any other form, for this group, is not Capitalism at all, but an evil masquerade of Capitalism (I can imagine some reading this right now thinking, "but it IS an evil masquerade! It IS!"). By this reckoning, FDR was a Socialist -- or even a Communist. Barack Obama is not only a Socialist or even a Communist, he is also a Nazi, a Kenyan, a usurper, and the embodiment of evil (I can imagine some reading this thinking, "but he IS the embodiment of evil! He IS!"). Government, this rigid, ideological perspective says, has no role to play in a marketplace: not consumer protection, not environmental protection, not the health and safety of workers and consumers, not the protection of investors and/or bank depositors, not the investment or subsidizing of new technologies that might release us from dependence on old technologies (which, oddly enough, this same group seems to have little objection to government subsidization).

Furthermore, government must not help the poor and unemployed (make them "dependent" on a "nanny state") lest they become lazy and spoiled. It is not insignificant that Adam Smith made note of the relationship between redundant labor and wages. Blessed are the poor, for they shall work more cheaply...

The fact of the matter is that Capitalism is a philosophy, not an ideology (or, at least, it is in principle if not in current practice). Smith's "Wealth of Nations" is not a rule book; it is a description of principles Smith observed at work in the emerging economy of the (English) industrial revolution. It is one of a number of Enlightenment documents, every bit as much as the distinct social contract theories of Hobbes and Rousseau, as Montesquieu's separation of legislative, judicial, and executive powers. And just as we've seen the changing nature of the social contract, as well as the changing nature of separation of powers (there were no multinational corporations with unlimited access to legislators until the 20th century), the nature of Capitalism legitimately changes, because the relationship between its constituents must change.

One of the biggest changes we have seen came in the 20th century and the rise of an image culture made possible by photography, the lithograph, and half-tone printing, and, of course, television. The digital technologies continue this change. Smith described a Capitalist system rationally organized around capital (including technology), resources (including labor), and a marketplace. Each market has its own needs, rationally identified; resources (including labor) are available to differing extents according to the various characteristics of the market; and capital goes to work organizing the resources and producing the commodity necessary to satisfy the market's need.

This situation no longer exists. It is gone the better part of a century, and completely gone a half-century or more. Capitalism as we currently play the game is more or less entirely irrational. Needs are trumped by mass-manufactured desires. Satisfaction is replaced by saturation. Quality of content falls to attractiveness of presentation.

But even Smith saw, 240-something years ago, that economic advancement -- especially when spurred by technological change -- has negative consequences for society.

I'm always curious whether the most rigid, ideological Capitalists have ever even read "Wealth of Nations;" however, I'd bet what little money I have in my 401k that most have not read Smith's "Theory of Moral Sentiments." It was Smith, indeed, who pointed out the problem of greed and selfishness; not merely pointed it out, but actually labeled it a "problem," one damaging to the social fabric. And he acknowledges that this greed sometimes results in objective social injustice. And -- AND! -- Smith actually points to the role of government in enforcing just interaction -- not simply by punishment once an injustice occurs, but "enforcing the practice of this virtue":

"As the violation of justice is what men will never submit to from one another, the public magistrate is under a necessity of employing the power of the commonwealth to enforce the practice of this virtue. Without this precaution, civil society would become a scene of bloodshed and disorder, every man revenging himself at his own hand whenever he fancied he was injured." (Theory of Moral Sentiments, VII. 4. 35.)

So if we could drop the ideological demands of "purity" and begin to see that there IS NO ONE "TRUE" Capitalism, and that Capitalism well-regulated is Capitalism still, and -- in Adam Smith's views -- one morally superior to a Capitalism that refuses to deal with anti-social attitudes like greed and selfishness, it would be a good thing.

As for Brooks's analysis of the five "myths":

1] Mark Twain's three types of lies: lies, damned lies, and statistics. There may be a greater proportion of the world's population living on more than $1/day now than in 1970. So what? In aggregate numbers there are a half billion more people living on $1/day now than in 1970. This is a desperate, de-contextualized piece of bullshit that ideological Capitalists (and, no, not all Capitalists are ideologues) trot out whenever they feel on the defensive. Poverty is growing in raw numbers. Hunger is growing in raw numbers. Globally. Stop with the "proportion of the world's population." Asia has grown far faster than Africa -- mostly because of a totalitarian, tightly-controlled Capitalism in China. In some places, like Zambia and Mozambique, the proportion of people living in desperate poverty has grown.

2] Brooks creates a false dichotomy. It's not either/or. Free markets don't have to be driven by greed. If they weren't driven by SOME greed, however, they wouldn't need regulation. And even when greed is present in a free market, not all the participants are greedy, self-centered, and anti-social. But greed drives a free market when market values replace humanist or spiritual ones, and no regulations are in place to inhibit selfish, anti-social behavior.

3] This is a scare tactic, closely related, I think, to calling any criticism of the (current) system of redistribution of wealth "class warfare." Americans DON'T resent the wealthy. They DO admire them. There's no class warfare going on. Americans simply want the wealthiest Americans to pay -- ooops, I almost said the nasty, class warfare-based phrase "their fair share." Americans simply want their wealthiest neighbors to pay in proportion to the benefits they receive. Even yesterday's Rasmussen poll -- that reddest of all red pollsters -- shows a majority of Americans (67%) in favor President Obama's tax plan. Envy has nothing to do with it. Justice has.

4] This one is just nuts. I have nothing to say -- except this: this is as good an example of the influence of ideology on opinion as you're ever likely to find. It becomes impossible to see something that is objectively manifest and measurable to the world if that something is in opposition to your ideology. It's a kind of cognitive dissonance. Or a refusal.

5] Free enterprise is not unfair, no. And I must say I find this one to be something of a straw-man argument, easily destroyed, that I've never heard from critics of Capitalism (as played right now). Free enterprise is NOT unfair. Free markets are NOT unfair. All of this, however, is a distraction from the real issue. What is unfair is the rigid, ideological orientation that demands the illogical conclusion that because they are NOT unfair, they must therefore be fair. This is an anthropomorphizing of a system -- a technique -- into a sentient being with will and intention. Saying a free market is unfair (or fair) is like saying a gun is fair or unfair, or a nuclear warhead is fair or unfair. What we DO with that gun or that nuclear warhead or that free market is really the question. What are the intentions of the man holding the gun? What are the intentions of the players in the market?

The fact remains that markets are not morally neutral. They are a technique founded on the values of profit, efficiency and expansion. They are no longer rational, being motivated by the desires of developed marketplaces as opposed to the needs of undeveloped ones. They tend to exploit the undeveloped markets for the benefit of the developed ones. Especially when they're not regulated.

And THAT, not Capitalism or a market, is what is unfair.

Thomas McNamara (Libertarian)

What is striking are the diametrically opposed views of capitalism of Michael and Peter. Mike starts off by saying he is a strong believer in free enterprise, perhaps more than me, and what he is railing against, without calling it by name, is crony capitalism. Mike points out that the capitalism we have now is not that advocated by Milton Friedman (who was my economics professor at Chicago). With all this I agree. There is a difference between being pro free market and pro big business. Watch Ron Paul on Youtube and you will see that libertarians are the biggest opponents of crony capitalism.

Peter likewise rails against crony capitalism. Peter argues that there is more than one type of capitalism, and capitalism with regulation is still capitalism, and we should get away from advocating just free market capitalism.

However, it is government intervention in the free market, whether by regulation or otherwise, which brings about crony capitalism. George Stigler (also University of Chicago) pioneered studies decades ago in the economic theory of regulation showing that big businesses or other political interest groups usually wind up "capturing" the regulators and using regulation for their benefit or against newer smaller competitors. The reason we have so much lobbying and crony capitalism is because the government has largesse to hand out, whether it be government loan guarantees in favor of Solyndra, Fannie Mae, Freddie Mac,, or government bailouts of banks. Minimize government intervention in the market and the government has less to hand out, and there will be less lobbying and crony deals. Thus, government regulation is not a solution, it is part of the problem.

Much of what Mike says is discussed in a recent book by Luigi Zingales (also of the University of Chicago), entitled A Capitalism for the People.  So, Mike, you have been exposed as a closet Chicagoan (Friedman, Zingales, et al.). Welcome. Your real argument is with another resident of Chicago, Peter Fallon, and his pro-regulation position.

Thomas Trottier [Marxist]

I guess I would say the following regarding this debate, from the perspective of a Marxist:

1. Capitalism creates a growing divide, with a few very wealthy at the top and a larger impoverished mass at the bottom. This is true world-wide or from just looking at the USA. When I look at this, I don't just look at income [although that can also show dramatic differences], I look at I look at ownership of property, particularly financial wealth. As an example, the richest 400 individuals in the USA in 2008 owned wealth directly that equaled 10% of the US GDP! This is a country of more than 300 million people.

2. Under capitalism, corporations that are successful and grow bigger push out the other businesses. Therefore there is greater concentration of wealth. Even if these corporations contract-out some of their work to small businesses, it is the corporations that dominate the economy. Look at how CVS and others have almost eliminated the mom & pop drugstore. Home Depot and Lowes have had a similar effect on the small hardware stores. That is not fascism, that is capiatlism.

3. Marx explains that capitalism has a tendency to over-production [and over capacity]. This leads to crisis. The 1930's crisis was ultimately caused by this. World War II, with its massive destruction eliminated the over-production and allowed the post-war boom that came to an end in the 1970's. Capital's use of credit, speculation and gimmicks allowed the economy to move forward, at a slower pace, but this prepared the world for the present slump and "credit crisis."

4. We are now in for a long period of world-wide capitalist downturn. All the governments have no choice but to implement austerity. The coming election in the USA is not a choice between bigger and smaller government, it is a choice between someone who openly proclaims austerity and someone who will basically pursue similar policies, but with maybe a few small taxes on the wealthier part of the population to convince people that we must share the pain. Neither party can solve this crisis.

5. Unemployment and poverty will grow, in an overall sense, as capitalism will not invest in any major way in production. Why would they? They have excess capacity.
6. As the reserve army of the unemployed grow, the capitalist will continue to cut wages and benefits and make workers [those luck enough to have a job] work longer and harder.

7. Like it or not, there will be many more movements [see Greece, Egypt, Spain, Quebec] in countries all over the world, including the USA as the masses struggle to defend their standard of living. Eventually, a layer will come to see that what is needed is Socialism. This will be a long and complex process given the capitalist control of the media and the confusion added to the movement regarding the experience of Stalinism and re-formism.

If you are interested in finding out more about the Marxist approach to the economy, check out Socialist Appeal's website

Peter K. Fallon (Reply to Thomas McNamara)

Tom, one of the dangers of ideology is its dismissive approach -- frequently descending into ridicule -- toward ideas that appear to threaten, simply because they question, the central "truth" of the ideology.

So when you weren't cha-cha-ing upon the supposedly diametrically-opposed views of Mike and myself (in fact, there is very little opposition between our statements, none of it diametric, all of it a matter of nuance -- and ideology hates nuance), you appeared to be two-stepping around my major point: whether you see Capitalism as a philosophy or an ideology; whether you think it is a "science" with "theories" supporting it, or whether it is really nothing more than a set of observations based on a constantly-changing human nature.

More importantly, you give no indication of whether you teach it as an ideology.

Finally, you misrepresent my stance. I am not "pro-regulation." I am anti-ideological. I am against the dismissal *before the fact* of the possible need for regulation to right wrongs the market fails to correct, or to balance a playing field that looks fine to the *human beings* playing on it, but not so fine to the ones who are left out. That may be a nuanced point, but it's not a terribly difficult distinction to recognize. So I wonder whether you simply missed it, or chose to dismiss it?

Thomas McNamara  (Reply to Peter K. Fallon)

First, let me point out that, as a practising attorney who does not have the summer off, I did not have the time to address everything with which I disagree in your email, when I responded to Mike's invitation to comment before leaving to go to work this morning. Nor did I think it was incumbent upon me to do so.

In successive emails you have expressed concern about what I teach my students about capitalism. I would never question you about what you teach your students in your class as I would not want to impinge upon your academic freedom. Since you asked, however, you should be aware that I am an adjunct instructor who teaches business law and I do not teach economics or capitalism.

My views about capitalism were formed based upon my study of economics at the University of Chicago, my reading, my observations of the world, my understanding of history, and my experience. I believe that free market capitalism is the economic system which leads to the most efficient allocation of scarce resources, is responsible for improving the quality of life of humankind, including poor people, and is the system most consistent with individual freedom. It concerns me not whether you want to refer to it as philosophy or ideology.

I respect your points of view, with most of which I disagree, but I am not dismissive of them a priori. For example, my views of the harmful effects and counterproductiveness of government regulation and intervention are based upon the work of George Stigler and others concerning the economic theory of regulation, and numerous examples of government regulation or intervention making problems worse (e.g., minimum wage laws intended to help poor people leading to greater unemployment of them, federal mortgage loan guarantees leading to the housing bubble and foreclosures, federal student loan guarantees leading to students being burdened with opressive debt and increases in tuition which far outstrip the pace of inflation, rent controls leading to reduced housing, price controls leading to scarcer supplies, stimulus and bailouts leading to debt crises and bubbles, antitrust laws supposedly intended to foster competition instead leading to government action against more succesful companies instigated by competitors who can not competer in the makerplace, the machinations of the Federal Reserve leading to the suppression of interest rates, less savings, and massive declines in 401K and pension fund values, etc., etc., etc.).

I am not dismissive of your views a priori.. I just find these writings and economic examples more persuasive.