I am an unapologetic capitalist. Individuals and society are demonstrably better off when people can make choices; when they are forced to compete, adapt, and improve; even when they can fail. Growth and efficiency happen when capital freely flows from unproductive to productive sectors and companies. As a result of a proliferating capitalist movement in most of the developing world — particularly China and India — people are nourished, clothed, housed, educated, and enfranchised on a scale never seen in human history. Turning my head one way, I observe one camp — albeit a small and shrinking camp — with the look of “you imperialist Nazi”; turning the other way, I observe a sacrifice burning on an alter to Ronald Reagan. I’m obviously not comfortable with the former side, but neither am I with the latter.
This is a post about how we think about the free market — specifically the words “free market” and how they limit our economic thinking in ways that are self-defeating to the very free market that we support. I’m convinced that our country would be less divided and more powerful if in one specific way we talked about the free market with slightly more nuance.
In the “free market,” everything that impedes anything, any restraint on any activity — real or imagined — is automatically bad. There can never be a good law, a good tax, a good program, agency, regulation, or anything public in a free market. When we aim for a free market, we are always over-regulated and over-taxed. Our government might get smaller and smaller, but it will always be too big. The problem is that we really need the government to do certain things. And yet it can’t when the limit of our thinking is free versus not free.
I believe we would be better off if, instead of using the phrase “the free market,” we instead opted for a “mostly free market.” The former phrase is absolute and uncompromising. There is only one question: Will this law restrict my freedom in any way? If so, that law is bad.
However, the phrase the “mostly free economy” is clearly a generality rather than a prescription because it is vague rather than absolute. Because of its vagueness, it forces the individual to ask more important questions like “will this make people better off?” “how is a person made better off”? “might there be unintended consequences?” “if so, can we construct the policy so that they be avoided?”. In the “mostly free market” world, the goal is well-being, not freedom. Freedom is generally a means of reaching the goal, but it is not the goal itself. The mostly free economy is an economy in which people are generally free to make decisions about their lives; companies can invest in what is profitable; where government will stay out of most of most day-to-day decision making——but where government will operate in the rare occasions in which the characteristics of the free market become the very things that cause its own destruction.
History is explodingly clear that having freedom and prosperity in the long term occasionally requires that freedom be taken away in the short term.
The old rules about humankind are gone. We are quite capable of creating a world that is inhospitable to ourselves. We have to make centralized choices on a macro scale that we haven’t had to make before—choices about Earth’s scarce resources, choices about waste, choices about what to exploit and what to leave alone.
If this were not so, I would hardly be motivated to write this post.
This seems to have been the understanding of Richard Nixon, who signed into law the Clean Air Act and the Clean Water Act in the early 70s. These two acts — the most successful of the environmental movement in history — have lead to then-unrecognizably cleaner air and waterways, all without destroying our economy as was predicted at the time. I don’t have to say that Nixon was a capitalist, but Nixon understood that capitalism has to be protected from itself occasionally. While capitalism is the best economic model, not only is it not perfect but it’s flaws can be astronomical. These must be dealt with in the public sector.
Another example. Our investment banks of today occupy the hub of our economy in much the same way railroads did more than a century ago. Because of this unfortunate reality, banks that fail create a lot of problems for hard-working, responsible people. We were caught flat footed when Bear Stearns and Lehman Brothers began their steep fall. Both companies were leaders in securitizing income from the interest of real estate loans into mortgage-backed securities, products that were disastrously insured by credit default swaps, pioneered by AIG and others. Because there was such a market for mortgage-backed securities, local loan officers (historically whose well-being was directly tied to the ability of the mortgagee to pay back the loan) began relaxing their loan requirements in order to sell more mortgages to investment banks. Enough of this created a bubble the size of which we’ve never experienced.
As the financial crisis reached the precipice, 20% unemployment was not out of the question. The Troubled Asset Relief program (conceptualized by Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke, both Republicans) stopped the drop and to this day actually made a small profit for the federal government and the taxpayer—hence the use of the word “investment” to refer to this and similar government spending. Further, sensible regulations were put in place to prevent the things that created the bubble in the first place and to insulate the economy in the event that a bank fails again.
But in addition to harm-reducing measures, governments work in ways that augment the power of the free market. They make important investments in education, science, infrastructure and so on. Of course, citizens have to remain vigilant to ensure accountability in these projects, but the simple truth is we would not have the internet without the government. The project to create the internet was a wildly successful collaboration between the private and public sectors. Today, our private sector benefits from it as much as any human invention.
So let’s dispose of the phrase the “free market.” The “mostly free market” is not much harder to say, and will help us get out of our own way when thinking about economic challenges.