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Krugman Blames the “Free Market”

December 21st, 2007

Whether you choose to call it a bubble, a recession, a crisis, or a “downturn,” everyone has a solution to or a scapegoat for the current financial “episode.” (relatively neutral, no?) Par-for-the-course, Paul Krugman blames the free market:

In a 1963 essay for [Ayn] Rand’s newsletter, [Alan] Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

…In Mr. Greenspan’s world, predatory lending — like attempts to sell consumers poison toys and tainted seafood — just doesn’t happen.

…Of course, now that it has all gone bad, people with ties to the financial industry are rethinking their belief in the perfection of free markets.

He says that government should have prevented this. But government caused it!

As an economist, I suspect that Paul Krugman is familiar with the all-important caveat, ceteris paribus. It is this caveat which Krugman has wholly ignored in crafting the free-market straw-man.

Mr. Krugman, with his Ph.D. in Economics from the Massachussetts Institute of Technology, should know better than to characterize our current system as anything even approaching a “free market.” More free than some, certainly. But the market is not free where the price of corn is so heavily subsidized as to make our beer more expensive or unavailable at all. The market is not free where regulations at various levels preclude business owners from deciding whether to allow their patrons to smoke freely in their respective establishments.

“Left to their own devices” under a Randian ideal of unfettered capitalism, big business wouldn’t be in bed with big government, the Federal Reserve would not claim a monopoly on the issuance of money, nor would member banks (namely: all of them) be likely or able to form such a cabal as the Fed.

The market is not free where the interest rates are purposefully and unabashedly manipulated, and where contracts specifying payment in currency other than irredeemable paper banknotes are void.

A free market can not profitably create money out of thin air. It follows that a free market could not possibly have loaned more than their reserves would allow. Scarce reserves and able borrowers preclude a free market from finding borrowers of dubious credit-worthiness. Competition for credit makes it all-but-impossible for housing values to rise 5- or 10-fold in as many years barring other extreme circumstances.

No. By whatever euphemism you choose to call it, a free market did not, and could not have caused the current problems (I prefer “corrections” or “revelations”) in the the financial sector. With its negligently loose monetary policy prevailing for the better part of the decade, the Federal Reserve with its license for theft, is the prime mover for the current “episode.” Where someone criticizes the “free market,” look always for the shadowy hand of government pulling the strings behind the curtains.

The market is not free.

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no third solution

Blogging about liberty, anarchy, economics and politics