A Free Market in Banking? Not Even Close
Still shifting the blame.
How close are we to having a free market in the United States — and does it matter?
This issue came up briefly in a recent installment of the excellent podcast series “EconTalk,” when George Mason University professor Russ Roberts interviewed Australian economist John Quiggin, author of Zombie Economics: How Dead Ideas Still Walk among Us. Quiggin, a social democrat, thinks free-market ideas should be seen as a casualty of the late financial crisis, yet those ideas continue to stalk the world: Hence, they constitute “zombie economics.” He favors vigorous government regulation of the financial industry because he assumes bailouts of big integrated financial companies are inevitable. The price of this safety net, he says, should be close oversight by the State. (Quiggin commits the Nirvana Fallacy — comparing “imperfect” real-world markets to idealized but impossible regulatory regimes.)
Admirably, Roberts protested that since the federal government and the Federal Reserve have stood ready to bail out the influential creditors of financial companies at least since 1984, it can’t be that the free market has been tried and found wanting. After all, if there were no prospect of a bailout, creditors would monitor risk and act as a brake on reckless financial activity – they don’t want to lose their money. But if creditors can count on being rescued by the government or its central bank, they will not perform that watchdog role, as least not as vigilantly as they would in a free market. (See Roberts’s paper “Gambling with Other People’s Money.”)
So, Roberts asked Quiggin, “Why wouldn’t you simply be in favor of no bailouts? …We’ve never tried market liberalism, so why do you think we should go in a different direction?”
To which Quiggin responded: “Of course, we’ve never had a pure system of market liberalism but equally of course my remaining communist friends tell me we’ve never had pure communism. At some point you have to say this is as close as we are likely to get, and the contradictions only get worse.”
Glibberish
This is a glib answer, which Quiggin should be called on. One hears it often, and frankly it makes little sense. Right off the top, so what if communists say — defensively and incorrectly — that pure communism hasn’t been tried? That in no way undermines the proposition that the free market — particularly free banking — has not been allowed to exist in this century, and was not allowed in the last or the one before that either, and therefore that none of the depressions and other economic debacles that occurred in that time can be attributed to it.
For the record, communism – in the sense of a State-planned economy with the market essentially suppressed — was tried, certainly in Cambodia and North Korea, if not elsewhere. The results were disastrous. It was also tried during the postrevolutionary Soviet period known as War Communism. The result? “The country, and the government, were at the very edge of the abyss,” Trotsky said. So Lenin enacted his New Economic Policy, reintroducing money (a gold ruble) and allowing some independent entrepreneurship (by the NEPmen). (See my article “War Communism to NEP: The Road from Serfdom” [pdf]. For the full story, see Peter Boettke’s first book, The Political Economy of Soviet Socialism.)
As for a free market in banking, I see no reason to join Quiggin in saying, we are as “close as we are likely to get.” First, we have never been very close. Between the state and national governments, banking has always been substantially regulated in the United States. From the start it was one of the commanding heights of America’s “Merchant-state,” to use Albert Jay Nock’s term. Intrastate branch banking was long illegal, interstate banking was forbidden until 1994, and governments almost always had the power to cap interest rates and regulate the currency, even when gold played a role. Alexander Hamilton, James Madison, and Abraham Lincoln gave us national banks. Then came the Federal Reserve, followed 15 years later by the 1929 crash, which raised the curtain on the Great Depression and more regulation.
To say the latest financial debacle has roots in the free market is simply to confuse the competitive market economy with the corporate state, the competition-inhibiting partnership between influential businesses and government officials. Implicit taxpayer-backed guarantees to creditors, government-sponsored enterprises such as Fannie Mae and Freddie Mac, deposit insurance that anesthetizes depositor wariness, Fed-organized bank cartelization — none of this has anything to do with the free market.
Moreover, Quiggin is in no position to say that we’re as close as we’re going to get to the free market. How could he possibly know this? The government-sponsored banking cartel is a key party to an impending economic crisis that just might wake people up to the need to remove government from this realm in favor of market competition without privilege. Criticism of the Fed at the grassroots has never been harsher.
Finally, Quiggin did not say what contradictions he had in mind, but the theory and history of free banking, in the few places it has been given a chance, justify confidence that banking without government – that is, freedom — is not only possible but also practical and efficient – not to mention just. (For details see various works by Steven Horwitz, Lawrence H. White, and George Selgin.)
It is the failed doctrines of statism that constitute the zombies that still stalk us.
Comment by Justin on 3 December 2010:
Awesome article!
May I also point out that, even though libertarians and communists use the same “it hasn’t really been tried” argument, any time you try to use a principal of communism you get poverty and any time you use a principal of libertarianism you get prosperity. To me, this suggests that we should probably implement more of the latter and less of the former.
Comment by Joker on 3 December 2010:
‘To which Quiggin responded: “Of course, we’ve never had a pure system of market liberalism but equally of course my remaining communist friends tell me we’ve never had pure communism. At some point you have to say this is as close as we are likely to get, and the contradictions only get worse.”’
But, of course, strawmanning has always worked in politics. This alone defeats Quiggin’s entire argument.
Other than that, good article.
Comment by Doug Roberts on 3 December 2010:
Quiggin is not alone in making his assertion that a free market’s been tried and failed, but those making the assertion think that their educated assertion is sufficient to change our economy. The reality is that the voters are getting the chance to choose between a government-led economy and an entrepreneurial economy when the choice is between hunger and food on the table.
Many long-held relationships have held since the Depression and WWII. Those relationships will come apart and the government’s failure to respond (indeed, they will make things worse) will provide ample clues for voters in how to respond.
Comment by William H. Falberg on 3 December 2010:
“The government-sponsored banking cartel is a key party to an impending economic crisis that just might wake people up to the need to remove government from this realm ………….”
I think this statement points out out quite succinctly how the banking elite have managed to so spin the reality of our monetary system that supposedly real economists actually believe this double-talk. The reality is that a *bank-sponsored government cartel* is the “key party” to this financial mess we’re in. Did they forget to “follow the money” or were they instructed not to.
“Criticism of the Fed at the grassroots has never been harsher.”
That’s because the People understand intuitively what economists were brainwashed to deny.
“……..confidence that banking without government – that is, freedom — is not only possible but also practical and efficient – not to mention just.”
Spoken like a true, inbred aristocrat with feudal notions of what is “just”. His confidence is justified, however, in that we’re already experiencing how “practical and efficient” *banking without government* has worked out. It’s not working for me; how’s it working out for you so far? I find that bumping along the bottom of the economic scale has attuned my nose to the scent of that which is not Shinola.
Comment by KPres on 4 December 2010:
Spoken like a true, inbred aristocrat with feudal notions of what is “just”. His confidence is justified, however, in that we’re already experiencing how “practical and efficient” *banking without government* has worked out.
BWHAHAHAH!
Yeah, we just experienced banking without government.
Nevermind the fact that government establishes what can be used as currency, then sets the interest rate, then forces banks to give loans to low-income people who can’t afford them, then buys up half the bad loans they make, then bails out the companies that fail.
It would be like an auto industry “without government” where the government told the car companies they could only make one model, then told them how much to charge for it, then told them who to sell it too.
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Comment by Shyla on 5 December 2010:
This article raises a critical question about how to structure our economic policies in light of the recession, spiraling debt, and financial collapse.
Let’s say I buy the argument these catastrophes were precipitated by crazy distortions in market forces. Richman suggests these crazy distortions are the result of corporatist influence and unintended consequences.
How do libertarians propose to counter “the competition-inhibiting partnership between influential businesses and government officials?”
In a system where economic policy is crafted by and for such interests, it hardly matters which political philosophy is used to justify the policy. Whether we increase or decrease regulation, the beneficiary is assured. Corporatist interests will be served. How do we change that?
Comment by Anonymous on 6 December 2010:
In response to Shyla, the answer is simple. Stop writing articles on theory; these ideas are best discussed by fellow scholars. A magazine like the Freeman should focus on rooting out corruption.
Comment by Anonymous on 6 December 2010:
More to the point, libertarians need to stop celebrating the wonders of a free market (which isn’t there), and focus on on opposing privileges that distort the existing market.
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Comment by Rad Geek on 7 December 2010:
Shyla: How do libertarians propose to counter “the competition-inhibiting partnership between influential businesses and government officials?”
Well, one possibility is to get rid of the government officials.
When positions of power are held in place, I think it’s a fool’s errand to try to devise strategies for keeping the wealthy and well-connected from corrupting and exploiting the power of these offices to their own ends. Political processes tend to benefit the politically-connected, and every federal regulatory agency, from the FTC down to TARP, has a long and sorry history of being captured and exploited by the trusts, cartelists, monopolists, robber-barons and financial sharks that they were supposedly concocted to restrain. So rather than worrying about how to stop influential businesses from capturing the regulatory apparatus for their own ends, better to abolish the regulatory apparatus, and refocus on economic, rather than political, means of responding to economic crises.
Of course, you may want to ask the question one step back: how, then, do you get rid of the government officials? (I.e., how do you stop admittedly influential players from exerting their influence over the legislative process, in order to assure that the offices they want created and sustained are created and sustained, in spite of popular indifference or popular objections?) Well, that is admittedly a hard problem. My answer is that in order to get rid of the government officials, you ought to get rid of the government.
I don’t doubt that as long as a legislative process is monopolized by a single, professional political apparatus, that apparatus will be an attractive prize and a willing tool for the influential and wealthy. Concentrated power will always be vulnerable to co-optation, corruption, and exploitation by those who are well-placed to take advantage of it. Attempts to vest all political authority in a single, professionalized, territorial monopoly, but then to turn around and strictly limit that government (for example, by means of a written constitution, or regular elections of officials) have always and everywhere failed. If initially limited, it will grow; legislation will multiply officials, establish bureaucracies, and ratchet up the level of political control, in response to pressure from the concentrated interests (chief among them influential businesses) that benefit from all that. Not because power cannot possibly be limited, but because concentrated power cannot be counted on to limit itself in the absence of any ultimate accountability or threat of competition. The solution, then, is not to find ways to insulate concentrated power from outside influence (which, even if achieved, would make an even worse problem: an absolutely unaccountable absolute state). It’s to diffuse power throughout civil society, rather than concentrating it all in a single, professionalized, territorial monopoly government.
Of course, you may now want to ask the question one further step back: if the solution to business-regulatory collusion is to get rid of the regulatory offices, and the way to get rid of regulatory offices (in spite of business pressure to create them) is to get rid of government, then what’s the way to get rid of government? Well, that is a hard problem, and I don’t have an easy answer. Perhaps it is impossible under present social and economic conditions. I’m inclined to doubt that, but if it is, then surely the answer is to work towards changing present social and economic conditions, around the edges and where possible, by means that avoid the corporate-political nexus, and in ways that undermine the corporate-political nexus’s control over our thoughts and everyday lives: spreading libertarian ideas, educating people about the ways in which bankers and other influential businesses have never been subject to free market conditions, how influential businesses have used the state for their own ends, helping people become more self-sufficient, materially secure and culturally respected while working “outside the system,” encouraging forms of protest, social activism and community organization that operate outside of conventional electoral politics or legislative lobbying, etc. Some of my fellow Anarchists call this “building the new society within the shell of the old”; if anarchy is not now possible, that’s no reason to imagine that even more fanciful utopian schemes (e.g. “progressive regulation,” “good government,” or “limit government”) are any more plausible or likely to succeed. And if anarchy is not now possible, there is no reason why we should give up on working anarchistically to make it possible in the future.
Comment by David MacRae on 7 December 2010:
Good article.
The only thing I would add is that the free market has been tried, is being tried and continues to be tried. Everywhere the free market is allowed to exist, the system works smoothly and efficiently with prices declining steadily over time. The obvious example is electronics but it’s also true of everything from food to bicycles.
In contrast, every industry that is heavily regulated is invariably beset by one crisis after another and prices invariably rise without limit.
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