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Free Markets - I Love Thee Not
Dec 18, 2008

I used to consider myself a staunch free market advocate, with a dollop of oversight thrown in to keep things in line.  I love the powerful benefits that free markets can create.  Free markets can drive innovation, move capital quickly and efficiently, and even transform the lives of many “at the bottom of the pyramid” through solutions such as microfinance.
 
But my love of free markets has turned sour.  Don’t get me wrong – I’m still a big believer in the power of incentives and keeping government out of the way. Yet the ability of the few (e.g. Madoff and his $50 billion ponzi scheme) to destroy so much for so many is proof the status quo is not good enough.
 
Many people are blaming the “ethics of Wall Street”, for catastrophes such as Madoff and the entire subprime mortgage meltdown.  And while we can blame failures of ethics on the bankers making the risky loans and trading derivatives of derivates to make millions, I think society needs to take a look in the mirror.   
 
We, as society, have created an economy incentivized by short term profits.  So, we shouldn’t be surprised when individuals and firms do whatever they can within the law to maximize short term profits.  Sometimes that’s good - it’s motivates people to work hard and efficiently, and it can be a good measure of accountability - but without the proper government involvement it leads to the “drill, baby, drill” mentality with terrible externalities and long term consequences that will burden our children.
 
The other problem with an incentive structure based on short term profits is that, while the vast majority of workers will maintain what most of us consider good moral standards, inevitably, some will not.  There will always be a few bad apples that, left to their own devices, will cause tremendous pain for many.
 
So what’s the answer? Calling for higher ethical standards sounds nice, but isn’t going to do much without regulation.  And while the focus on short term profits has its problems, I haven’t heard a better (realistic) model to help facilitate capital flows and create jobs.  
 
What we need is for government to channel the short term profit incentives for long term good.  Companies that do good – through their business practices, their supply chains, and their products – should get favorable tax and regulatory treatment so it’s literally more profitable to do good.  And then, we need strong oversight and harsh penalties for those who break the rules.  The power of the markets is unmatchable, but as the current financial crisis and scandals show, we need much stronger regulation to channel that power for good.
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Posted: Thursday December 18, 2008, 6:53 pm
Tags: economy freemarkets [add/edit tags]

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Su Kahumbu Stephanou (1) 		Thursday December 18, 2008, 9:21 pm
Absolutely spot on. Capitalism can be an absolute monster. Where motives are purely profit driven society, (especially share holders of large idustries) must accept where they leave their not so clean foot prints.

Randy I agree with your ideas of incentives and punitive measures. It's actually ironical that this has not been the case all along.

Spread the word

Su

Elainna Crowell (157) 		Friday December 19, 2008, 12:57 am
I have long worried about the prevalence of short term thinking
in our business, political and consumer culture. I do believe much of the environmental damage done today, not to mention the global economic crisis is driven by this form of thinking. I recall an aboriginal woman telling me that you white folks are in too much of a hurry to see where you are going. I suspect our hurry-up culture is tied to our seeming inability to focus on long term consequences.

Road LessTraveled (3160) 		Friday December 19, 2008, 7:35 am
Colleges need to teach sustainability in their business degree courses, as well as how to plan for fifty or one hundred years ahead. Currently, they teach 5 yrs, maximum.

Congress also focuses on five years or less. I would create a law that the Indian nation had for their reps; debate what this law will mean for seven future generations of our children. Then vote, and not before.

If all companies, organizations and schools did this and taught this, we would eliminate 99% of all problems...

We only have ONE future, and we are all going there, so why not make it a green and sustainable one?

Jerry Stone (16) 		Friday December 19, 2008, 9:21 am
This is one of my favorite quotes, which I think is quite inline here:

"Bureaucracy defends the status quo long past the time when the quo has lost its status."
Laurence J. Peter, US educator & writer (1919 - 1988)

Emily L. (123) 		Friday December 19, 2008, 9:43 am
Great post. I have gone through a similar transition, because the free market system seems so commonsensical, but falls apart a bit when you factor everything else in. I recently read an article debating whether broader Capitalism was dead or not, and there was one classic quote in it. I'm paraphrasing, but it was something like, "Capitalism is definitely not dead; it's just lots its warm fuzzy feeling." :)

Past Member (0) 		Friday December 19, 2008, 10:44 am
I am a strong believer that due to the U.S. Government giving a private corporation (The Federal Reserve) control over the creation of our money, AT INTEREST, is the major reason we are in the position we are in today. Every dollar that is in existence is created at a price. We are in debt just to have money. How can we ever get out of debt?? I think a pretty well known international banker in the 1800's said it best:

"Give me control of a nation's money and I care not who makes the laws"
- Amsel (Amschel) Bauer Mayer Rothschild, 1838

Joe Festa (0) 		Saturday December 20, 2008, 6:56 am
Randy and all, I too say enough is enough. As are jobs leave this country in unfair world trading, we all pay the price one way or another. We need to put the F in NAFTA and make sure all countries pay a competing wage, so all can share in what mother earth can supply us in a green friendly way. And no more phony bologna home loans or parimid schemes like the recent high oil prices.

J F Festa from stonesoup101

Lisa Sun (0) 		Saturday December 20, 2008, 7:22 am
Simplifying our tax system and strengthening our financial market regulation are vital to our nation's short and long term economic vitality.

Whether teaching ethics and sustainability in schools can redress what I see as an economic development issue is worth examining. America's free market system, which is not the only model of free enterprise in the world is up to a major challenge now - we are losing our global competitiveness, in part because of our macroeconomic policies will present extraordinary demands and testing of our own belief that free market and democracy are inter-dependent and inter-connected.

It is absolutely obvious to all of us who are Americans that our system is broke and we need to fix it. The harder question for many to tackle, which is why our education system and free press have failed all of us is that we do not allow or reward critical and independent thinkers to take leadership in our government. Our political process rewards cronyism and demands partisanship, so in the end the failure of our free market thinking can not be fully addressed by women and men elected to stay in office, not to represent the best of the nation.

rona s. (0) 		Saturday December 20, 2008, 12:33 pm
Yes, absolutely! Plus some ways to incentivise those who (legally) get rich from the system to re-invest their wealth in ways that benefit the community - rather than just spending most of it on big white holes in water and small coloured rocks, etc!

Panda Eats Bankers (274) 		Sunday December 21, 2008, 9:55 pm
Well I used to beleive in communism,(not Stalinism,or Leninism, but a model closer to Marx's original ideas),so it seems we've both reassessed Randy.
I like the idea of a mixed economy these days,where wealth is produced,and then redistributed via welfare,universal healthcare,education etc.
The market does get the goods to the people,which is for me, its strongest point.The weakness is ,that sometimes those goods are unnecessary,or even dangerous.
The important factor in any society is "who is in control ?"
Thats why I'd like to see markets, operating within rules,which make them socially beneficial..through participative democracy.
Otherwise we have the situation, wheretoo strong a market creates tyranny,as can be seen in the way that business, dictates government policy across the world..and it's selfish ethos, has a negative effect on our environment,health,education etc.
Environmentally speaking,our very survival, is stymied by the need, for oil,car,and other types of business to continually grow,regardless of the socially malign effects of this growth.
Unccountable business, is as dangerous as an unaccountable state.
Extending democracy,seems the best palliative, to the accumalation of too much power,in too few hands.
At the end of the day,its this desire to put people first,that makes me a social democrat.if anyone wants to know ,what my "ideal"society looks like,then look at the Scandanavian model-its imperfect,but perfection is unattainable anyway, (and its pursuit,is very dangerous,as history shows)Sweden for example, has combined freedom,high levels of welfare,and something closer to equality of opportunity than unregulated free markets can produce.
The latter aspect of the mixed economy/social welfare model, ensures that everyone's talent,is more likely to be fulfilled.
By comparison, unregulated market economies,have a greater tendency, to overpromote the children of the rich and powerful,who aren't always the most switched on individuals...as can be seen in the case of the outgoing US President.

David B. (0) 		Monday December 22, 2008, 3:32 pm
Yes, it's all about who 'we' are. When we see each other as part of 'we' then we care how we are doing. Otherwise it's "I've got mine."

And good government can foster the 'we' and here's hoping that's what will happen over the coming years.

Andy Stocking (61) 		Thursday December 25, 2008, 8:05 am
Ok, I'm going to come in and defend the market - however, I agree that an improperly functioning market is not worth defending. One of the critical assumptions necessary for markets to work efficiently is that there is equal access to information - that is, all market participants have a relatively equal ability to get information. What has happened in the Madoff case and the real estate crisis is that some people have a lot of information, the rest of us have little information, and those with lots of information lie.

So, what market mechanism counters the liars? Historically, the answer has been the media - they are tasked with equalizing the information levels across market participants. Investigative reporting is what should uncover the madoff crisis and end bubbles earlier. So I think the appropriate question is: "Why didn't the media alert us earlier to these problems?"

That's a different question and longer discussion - but PBS has a great documentary on this question called News War: http://www.pbs.org/wgbh/pages/frontline/newswar/

Chuck Lasker (0) 		Monday December 29, 2008, 9:41 am
Our problem in America is we can't decide whether to be socialist (Euro-style) or libertarian. We must be one or the other - total freedom or government sponsorship. Our mix has the worst of both worlds. In my opinion, at 350 million people, Euro-socialism is the only solution. We must remove the profit incentive from essential services (energy, health care), and we must provide regulation and incentive for long term profit methods.

As a Republican for 27 years, the word "socialism" scared me. But people in Germany are happy. People in Sweden are happy. It works. Clearly our form of free markets no longer works. We must find a solution, and educate the public as to why it will work, and not to fear progressive change.

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