The natural consequence of libertarian ideology
Dean Baker
I've seen some honest libertarians argue that the government should allow the financial market to collapse because it is the only way to flush the system of the opportunists who rely on government bailouts (the "to big to fail" phenomena) to save their butts if their bets don't pay off. They are right. A bust on the level of the panics of the 1800s or the Great Depression does have a cleansing effect. It clears the field enough to allow new innovators to step in, rebuild the economy and make lots of money in the meantime.
That's the way it should be, according to libertarian thought.
I had a high school economics teacher who was a big fan of Milton Friedman style free markets. He argued that Germany and Japan's post war success (this was in the 80s) could be directly tied to the fact that their infrastructures were completely decimated after WWII. This allowed them to innovate and advance technologically, while America started falling behind because it was carrying forward an ever larger weight of obsolete factories and industries. "If I were king I would require all factories to be burned to the ground after 20 years," was his way of putting it.
Again, I think he was right. As I think the libertarians are right. At least on the cold logic.
The problem for libertarians is that few of them are willing to acknowledge the ugly consequence of their philosophy: during those busts a lot of people die. And those that don't die usually suffer considerably. In other words, libertarian/randian/friedmanesque economic policy has as an expected consequence the increased pain and suffering of most of the world's people. That's the acceptable cost of the "benefit" that comes from the flushing out of the bad blood every 30 or 40 years.
Why don't they acknowledge this? Maybe because they have convinced themselves that it won't really happen (Greenspan seems to be of this group). Maybe because they just don't want to admit to it because its to awful to contemplate. And maybe, for some, its because they know it, are fully accepting of it, but they know they can't sell it. The people would never tolerate it if they were told the truth. Those in this latter group, knowing that boom-and-bust cycles are a net positive for humanity, have a made a conscious decision to hide this ugly truth from the people "for their own good". (There is, of course, a 4th group who just don't give a crap about the welfare of others and just want to make money.)
Libertarians are right that bailing out banks and other corporations, because they are "to big to fail", just allows those poor performers to survive the consequences of their actions. It short-circuits the survival of the fittest nature of the truly free market. But their solution, just let them fail, will cause the kind of suffering talked about above. The better solution, for the welfare of all, is to simply not allow any private institution to become so big that its failure will bust the entire economy. That means regulation. That means enforcing anti-trust. That means something less than the truly free market of the libertarian's dream.
I can live with that. Can you?
What would Ayn Rand expect to happen? On the one hand we have the hot shot executives, on the other hand the schmucks who own stock in these banks. Would Ayn Rand expect that the executives would put aside their ambition, their lust for success, their greed, in order to benefit shareholders who are too dumb to even know what a credit default swap is?Baker hits on something that I wish more people understood about Libertarian/Randian theory. It's something that non-libs only get a glimpse of when things go bad and that libs like Greenspan either deny to themselves or just don't talk about because the truth would make their philosophy unmarketable. That truth is that cycles of huge booms and busts are good things, at least according to their ideology.
Not for a second; Ayn Rand would watch the Wall Street big boys run roughshod over their shareholders' interests and be applauding them every step of the way. That is how the game is played. If Greenspan didn't think the Wall Street crew would rip off their shareholders for every last penny, then he was not a worthy disciple of Ayn Rand.
I've seen some honest libertarians argue that the government should allow the financial market to collapse because it is the only way to flush the system of the opportunists who rely on government bailouts (the "to big to fail" phenomena) to save their butts if their bets don't pay off. They are right. A bust on the level of the panics of the 1800s or the Great Depression does have a cleansing effect. It clears the field enough to allow new innovators to step in, rebuild the economy and make lots of money in the meantime.
That's the way it should be, according to libertarian thought.
I had a high school economics teacher who was a big fan of Milton Friedman style free markets. He argued that Germany and Japan's post war success (this was in the 80s) could be directly tied to the fact that their infrastructures were completely decimated after WWII. This allowed them to innovate and advance technologically, while America started falling behind because it was carrying forward an ever larger weight of obsolete factories and industries. "If I were king I would require all factories to be burned to the ground after 20 years," was his way of putting it.
Again, I think he was right. As I think the libertarians are right. At least on the cold logic.
The problem for libertarians is that few of them are willing to acknowledge the ugly consequence of their philosophy: during those busts a lot of people die. And those that don't die usually suffer considerably. In other words, libertarian/randian/friedmanesque economic policy has as an expected consequence the increased pain and suffering of most of the world's people. That's the acceptable cost of the "benefit" that comes from the flushing out of the bad blood every 30 or 40 years.
Why don't they acknowledge this? Maybe because they have convinced themselves that it won't really happen (Greenspan seems to be of this group). Maybe because they just don't want to admit to it because its to awful to contemplate. And maybe, for some, its because they know it, are fully accepting of it, but they know they can't sell it. The people would never tolerate it if they were told the truth. Those in this latter group, knowing that boom-and-bust cycles are a net positive for humanity, have a made a conscious decision to hide this ugly truth from the people "for their own good". (There is, of course, a 4th group who just don't give a crap about the welfare of others and just want to make money.)
Libertarians are right that bailing out banks and other corporations, because they are "to big to fail", just allows those poor performers to survive the consequences of their actions. It short-circuits the survival of the fittest nature of the truly free market. But their solution, just let them fail, will cause the kind of suffering talked about above. The better solution, for the welfare of all, is to simply not allow any private institution to become so big that its failure will bust the entire economy. That means regulation. That means enforcing anti-trust. That means something less than the truly free market of the libertarian's dream.
I can live with that. Can you?
posted by Chris Andersen at 10:15 AM
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