The Free Market (can be) Corrupt

[ZSorenson]

Again, I use a controversial title to draw attention. But I am hardly misleading this time - the (can be) was is - before integrity called.

One very important, probably obvious, thing I learned about economics and capitalism while studying the recent world economic crisis in college this year was that the processes of the free market are no guarantee of a successful society.

While the crisis can properly be blamed on government intervention, it can also be blamed on rank irrationality on the part of the market players - in many cases you can't objectively claim that 'implicit guarantees' were the direct cause.

In a discussion about regulation and what it might have prevented - my professor kept reminding us of the all-powerful impact of 'incentives' on economic decisions - I pointed out that governments are subject to the same 'bad incentives' as private players. To his certain consternation, I brought up his earlier lament of talk of using leftover $200 billion of TARP funds for a 'jobs stimulus'. Political economy is a real thing. To lambast the free market for being too unruly and subject to forces is to pretend that governments exist in vacuums. But John Galt explained this, the reasoning is clear, you see governments are -blankout-.

My revelation was that the sword is two-edged. Governments and markets are comprised of people who may choose in either environment to act rationally or not. The free market can and often 'fails', because those in it act irrationally. 'Incentives' are chosen too.

The implications of this are as follows:

1)'The free market' is not an 'answer' to any problem. This speaks against blanket Libertarianism, but especially against those who advocate for laissez-faire with only the promise that a free market will inevitably make the world 'better'. In many cases, it might not. (Stay with me here, by 'better' I mean 'socially better', if you are familiar with that bizarre concept)

2)There is no reason why the government (in the long run) will do 'better' then the free market, because the same people are involved: society.

3)There are many reaons why the government will probably be 'worse' than the free market. See Hayek, von Mises, etc. for this sort of argument.

4)The real battleground is intellectual, philosophical, moral. A society must be convinced of the importance of reason and how to use it for that society to do 'better'. There are some free market critics that say the business cycle is caused by a pattern of ruthless competition that leads to overproduction. If so, there is no reason why industry or consumers couldn't adapt to this phenomenon or prevent it outright over time. The factor that would do this is a decision by the players to acknowledge reason, and desire to solve the problem. Government can't do that for people, though it might try to manipulate them. The market won't force people to change, no matter how many times they fail. They will change when they choose to, so they must be convinced intellectually of what changes are necessary.

5)An individual that accepts reason would categorically reject government intervention on moral grounds - that what it purports to achieve is morally fraudulent, even if it can achieve it.

This is a criticism primarily of modern economics - the concept of incentive is perverted because the assumption is that incentives just are without proper thought as to where they come from.

I also want to bring up the argument that a free market isn't good because it 'produces results'. It's good because it is moral. That is the argument that needs to win. But we know that.

Edited January 3, 2010 by ZSorenson

[ZSorenson]

Also, governments can sometimes actually produce 'good' results. If the government had insisted that Blu-Ray be the standard for High-def media, many people wouldn't have wasted money on HD-DVD. But this wouldn't have been moral.

Edited January 3, 2010 by ZSorenson

[Black Wolf]

Again, I don't think any objectivist believe that the free market has never made bad choices. It is, however, the only moral political system. People are happier and more likely to achieve better results when they are free.

I honestly don't know how I feel about your comment about government interjecting their opinions on what constitutes a good standard for High-def media. I feel that whenever a government official tells you that Product X is inferior to Product Y, only a sense of entitlement will ensue. The government told me that a Product Y is better than Product X... I can't live without Product Y.. I am ENTITLED to product Y!

Edited January 3, 2010 by Black Wolf

[2046]

/facepalm

So basically, freedom fails because some people buy HD-DVDs instead of Blu-Ray?

[Black Wolf]

/facepalm

So basically, freedom fails because some people buy HD-DVDs instead of Blu-Ray?

I've heard that freedom fails because people use internet explorer instead of Firefox.

[brian0918]

It is not possible to act rationally under coercion.

[Jake_Ellison]

My revelation was that the sword is two-edged. Governments and markets are comprised of people who may choose in either environment to act rationally or not. The free market can and often 'fails', because those in it act irrationally. 'Incentives' are chosen too.

No, even from a strictly pragmatic view point, the free market wouldn't fail because of forces acting within its rules. It eventually fails because of the people enforcing those rules, since without a moral basis for Capitalism, the culture and the masses will not support a Capitalist system of laws.

As far as I can tell, the sword is very much single edged even strictly in practice, not just morally. Even in dictatorships, such as Chile under Pinochet, or China today, the free market, even if it is just relatively free, it allows people to be productive, so it "works" (in the sense you are talking about) as long as it lasts.

The phenomenon that invariably destroys economic value is government involvement in an industry and the economy, and the phenomenon that invariably creates it is free trade. Any time you concede this point to a statist, you are creating an unnecessary rift between Ethics and reality, and affording him an advantage he does not have.

[Grames]

One very important, probably obvious, thing I learned about economics and capitalism while studying the recent world economic crisis in college this year was that the processes of the free market are no guarantee of a successful society.

...

I also want to bring up the argument that a free market isn't good because it 'produces results'. It's good because it is moral. That is the argument that needs to win. But we know that.

I agree with this. The point of a laissez-faire economy is not to achieve a utopia but to be free.

But HD-DVD was better.

[Alexandros]

Would you mind giving me the names of the critics (even better, the links to their articles/essays) who argue that overproduction causes the boom-bust cycle?

[C.W.]

Again, I use a controversial title to draw attention. But I am hardly misleading this time - the (can be) was is - before integrity called.

One very important, probably obvious, thing I learned about economics and capitalism while studying the recent world economic crisis in college this year was that the processes of the free market are no guarantee of a successful society.

While the crisis can properly be blamed on government intervention, it can also be blamed on rank irrationality on the part of the market players - in many cases you can't objectively claim that 'implicit guarantees' were the direct cause.

In a discussion about regulation and what it might have prevented - my professor kept reminding us of the all-powerful impact of 'incentives' on economic decisions - I pointed out that governments are subject to the same 'bad incentives' as private players. To his certain consternation, I brought up his earlier lament of talk of using leftover $200 billion of TARP funds for a 'jobs stimulus'. Political economy is a real thing. To lambast the free market for being too unruly and subject to forces is to pretend that governments exist in vacuums. But John Galt explained this, the reasoning is clear, you see governments are -blankout-.

My revelation was that the sword is two-edged. Governments and markets are comprised of people who may choose in either environment to act rationally or not. The free market can and often 'fails', because those in it act irrationally. 'Incentives' are chosen too.

The implications of this are as follows:

1)'The free market' is not an 'answer' to any problem. This speaks against blanket Libertarianism, but especially against those who advocate for laissez-faire with only the promise that a free market will inevitably make the world 'better'. In many cases, it might not. (Stay with me here, by 'better' I mean 'socially better', if you are familiar with that bizarre concept)

2)There is no reason why the government (in the long run) will do 'better' then the free market, because the same people are involved: society.

3)There are many reaons why the government will probably be 'worse' than the free market. See Hayek, von Mises, etc. for this sort of argument.

4)The real battleground is intellectual, philosophical, moral. A society must be convinced of the importance of reason and how to use it for that society to do 'better'. There are some free market critics that say the business cycle is caused by a pattern of ruthless competition that leads to overproduction. If so, there is no reason why industry or consumers couldn't adapt to this phenomenon or prevent it outright over time. The factor that would do this is a decision by the players to acknowledge reason, and desire to solve the problem. Government can't do that for people, though it might try to manipulate them. The market won't force people to change, no matter how many times they fail. They will change when they choose to, so they must be convinced intellectually of what changes are necessary.

5)An individual that accepts reason would categorically reject government intervention on moral grounds - that what it purports to achieve is morally fraudulent, even if it can achieve it.

This is a criticism primarily of modern economics - the concept of incentive is perverted because the assumption is that incentives just are without proper thought as to where they come from.

I also want to bring up the argument that a free market isn't good because it 'produces results'. It's good because it is moral. That is the argument that needs to win. But we know that.

ZSorenson, among the things that you did not include in your post (which is needs to be limited, I know) is why you came to the conclusions in your first paragraph. It would help to know that mental process to assist you with your errors.

There are many things to learn from Objectivism, one of the first and very important is that what passes in schools and in the culture at large for thought, isn’t. Learning that there is a proper thought process and then how to use it is very difficult and painful, but necessary. One of the clear signs that a subject is being approached from a rational perspective is the need to present definitions, often new ones, in the subject.

Fortunately, for those of us interested in economics, there is a mainly rational beginning point: Austrian Economics. To understand the reality of economics it is necessary to study their writing. Of course there are economists working today whose viewpoints benefit from both the Austrians and Objectivism, and it is vital to study them.

All of this leads to the subject that you have addressed, markets. The tendency of “modern” economics is to approach markets from the viewpoint of “perfect competition”, the idiocy of thinking that government action have no impact on markets, and from a collectivist emphases. This means that they tend to ignore the context, treat all of the participants on each side as a unit, do not believe it necessary to actually consider what the actual participants are thinking (each of them), and ignore all of the actions of government (except when they can find some result they like that they can ascribe to governmental action). All, or even only one, of these attitudes would lead to an inaccurate analysis of any market. All of these positions have to be discarded to address reality.

The market in question, the mortgage market, from the original buyer of a mortgage to the holder of a highly leveraged mortgage backed security, consists of thousands of individuals and business entities, each with its own interests, understanding, and situation. Each participant is making decisions based on its context for what it understands as its best interest. Many of the actors have years of experience and expertise in this market.

The beauty of the market is its multiplicity of participants. In any market, some, perhaps many, will make bad decisions, for different reasons, ranging from mistakes to evasions. On the whole, over time, a market will more toward results that are in accord with mankind’s interests. In a free market, this last statement is almost a truism, in that, since it is mankind making the decisions, each individually, it has to be their chosen interest. There is no other acceptable standard of success of a market, including someone’s declaration that in their opinion some other outcome would have been better. That opinion holds no concrete or moral worth. You might find a situation in which a free market “failed” because of a generally held belief that in wrong, say the success of a crucifix manufacturer, but it will be trivial.

If you find a market that has screwed up in some sense, you have found a market that a large number of the participants have made bad decisions, decisions that are not consistent with their own interests. In the mortgage market, it was not in anyone’s interest that many of these mortgages fail, that companies who offer mortgages fail (or lose money), or that the major banks lose money and fail. To find an answer you must look at what would cause many actors to make bad decisions, in this case, basically the same bad decision. It isn’t that their interests have changed. In other words, the context or a change in the contest of the mortgage lender and the bank is not what led them to make the decision they made. It was more systemic.

There are three factors that led to the bad decisions. They are all government related.

One, for nearly two decades the federal government, through many different agencies and channels have argued, insisted, and added force to the campaign to expand American home ownership, especially to the “lower and middle class”. They have vigorously pushed to lower lending standards. The Congress in the early 2000’s raised the percentage of the mortgages that Fannie Mae and Freddy Mac had to provide to the “lower and middle class”, resulting in a lowering of their standards.

Two, also for many years, the Fed has kept interest rates low, very low. This does two things. First, it makes available much more made-up money than the economy can support. This alone is why housing prices rose so fast for so many years. But even more important, the low interest rate completely distorts the decision making process in economic calculations. One of the most significant contributions of the Austrians is their recognition of the importance of price in economic decisions. If the price does not reflect the underlying economic reality, the decision will not be good. Artificially low interest rates distort the actual level of savings, the real things, that are available. The result cannot be different than we have seen.

Third, after a century of government interference in the banking system including the Fed, the Comptroller of the Currency, the state banking laws, all of the laws that Congress has passed, and on and on and on, the banks are in many ways not independent, but extensions of the over all governmental apparatus. Many other economic actors, like the credit rating companies are so dependent upon government approval as to be incapable of true independent judgment.

All of this is to say that the mortgage market has not been free in any sense for many years, probably since the creation of the FHA. To declare that it failed is to ignore the reality that it could not not fail.

To get a more complete rendition of the this situation, plus documentation, read Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas Woods. I knew the basics and some of the details about the situation originally, but I learned a lot from that book.

The subject matter in this thread underscores that the supporters of capitalism are often less informed of what capitalism is than you would expect. We understand that capitalism is moral, which is a major step forward, a step that cannot be overrated. But we often do not know any more about what capitalism is than its enemies. Plus what is taught in the schools in both economics and history is corrupted by a virulent anti-capitalism. Capitalism is not only the only moral system, it is the only practical system. No other political/economic system works, only capitalism.

[ZSorenson]

No, even from a strictly pragmatic view point, the free market wouldn't fail because of forces acting within its rules. It eventually fails because of the people enforcing those rules, since without a moral basis for Capitalism, the culture and the masses will not support a Capitalist system of laws.

This is a good point. There is no free market accept for that which people agree to create. Things are not defined by what they are not. The free market is not the absence of government intervention. It is what results from people accepting the enforcement of individual rights.

I should clarify the two main ideas I was trying to communicate (now that I see how people have responded).

1) The question of market regulation cannot be based on any concept of good or bad visavis society. I mean the false 'social' sense of good or bad like that advanced by utilitarianism.

2) Market failures need not always be blamed on government intervention. The temptation to speak in the language of utilitarianism can be great. Yes, market players make poor decisions often, but that is not an argument for regulation. Everyone knows that I think, on this board, but I wanted to say that it's 'okay' if it is the private sector that 'failed'. Because it's not an indictment against capitalism. If someone says "Wall Street did it", I want to be able to say (if they are accurate), "So what?", rather than having to connect the problem to interventionism of some kind by the government.

As for the Blu-Ray example, I was being sarcastic sort of. I have a cousin with a physics Ph.D who has made this argument as a general example of why regulation is good. So I borrowed it from a real experience, I wouldn't have made it up. If you speak the language of utilitarianism, then such a thing as what I described in the Blu-Ray example is indeed 'good', or could be.

Certainly most of the modern advocates for the free market argue a sort of Utilitarianism. So I am pointing out that I have expanded my thinking beyond that, that's all.

Responding again to Jake Ellison, thank you, you have made a good point about why a free market is fundamentally correlated with wealth creation. Both require and and are in accordance with correct philosophy. This achieves the utilitarian argument as a bonus of sorts.

[ZSorenson]

The subject matter in this thread underscores that the supporters of capitalism are often less informed of what capitalism is than you would expect. We understand that capitalism is moral, which is a major step forward, a step that cannot be overrated. But we often do not know any more about what capitalism is than its enemies. Plus what is taught in the schools in both economics and history is corrupted by a virulent anti-capitalism. Capitalism is not only the only moral system, it is the only practical system. No other political/economic system works, only capitalism.

I've understood what you have written concerning the extent of intervention. I'm glad you pointed out the rating agencies, which were effectively not allowed to innovate like the firms whose securities they were rating. All of your points are valid, and without the CRA, Fannie, Freddie, would there have been a crisis? Certainly it would have been a lot less likely without the low interest rates which (that is the Fed) may be the ultimate cause of the problem. I have pointed out, or wondered aloud, earlier whether the intervention of the government in China or those in East Asia generally did not lead to a 'flood' of money that either the financial institutions or the real economy couldn't handle.

I still think a lot of the failure occured on Wall Street. The fraudulent 'predatory lenders' needed capital from somewhere. Risk assessments were made that assumed an impossible and historically unprecedented growth in home values over time. These mistakes did not require distorted incentives from government intervention.

My point overall was that there shouldn't be a dichotomy between how people and economics and incentives change depending on whether a market is laissez-faire or regulated. People are people in every sector of a society.

I like Jake Ellison's explanation the best. A free market depends for its existence on the same philosophical principles that also create wealth.

I think that people must choose a free market system for it to be, it cannot be forced on them. That is why I made this thread, to say that the presence of a free market will not guarantee wealth creation. So, if Libertarians won by the same lucky political formula that gave us Barack Obama, instituting free market reforms alone would not necessarily work. Welfare recipients can in fact rebel, political fortunes change, unprepared businessmen can fail overall to create wealth. Society must be prepared intellectually to desire a free market, and then it can come about.

I agree with you about the main causes of the crisis. Thank you for all the facts. I do want to point out that I'm not sure Austrian economics is itself very perfect, please help me find a good place to learn more about it besides wikipedia. I do appreciate their focus on the real economy though, which seems to be nearly irrelevant in mainstream economics, oddly. Also, at one point not so long ago what you say about economics as a science was true. What I've experienced is much less like what you have described - though in general utilitarianism, concepts of greed and altruism still rule the day. I have addressed in this thread my main personal complaints with economics today - I think that incentives are themselves chosen, that the government responds heavily to political incentives. Economists have given up on rational economic agents, and now talk about 'predictable irrationality' - and speak of incentives.

Integrating it all, I have this to say: the free market does not guarantee prosperity. Take the example of the United States during its most free period of economic development. Since that time, we have seen a decidely statist trend, and have experienced such wonders as the 1930's and the 1970's and 2008-9. We saw a man walk on the moon, but can't find a degenerate hiding in a cave. For that matter, we built the world's tallest buildings, yet now can't manage to build even the world's shortest as their replacement.

What matters in economics and politics is not how people react to given circumstances, but whether they choose to think or not in their response.

People must be taught that this choice affects their destiny not that a free market creates magical incentives for success, or that a government can impose those incentives.

Everyone should advocate for a free market, but I don't think the argument will succeed unless people are convinced of the morality of it. This is an argument heard everywhere in objectivism, but I wanted to discuss it in the context of the current crisis. There were those who made a killing on Credit Default Swaps by easily and rationally predicting the unsustainability of the housing boom. Despite the distorted incentives caused by government, Wall Street firms and their managers could have avoided a substantial and predictable loss of value if they had been paying attention. I suppose that while government may have caused the crisis, Wall Street didn't need to accept it. Blaming it entirely on government is saying that incentives rule over rational thought and innovation. That is the thinking that leads to calls for regulation, as with the concept of systemic risk.

[SD26]

The phenomenon that invariably destroys economic value is government involvement in an industry and the economy, and the phenomenon that invariably creates it is free trade. Any time you concede this point to a statist, you are creating an unnecessary rift between Ethics and reality, and affording him an advantage he does not have.

Jake, that rocks...

[New Buddha]

Small businesses can and do fail. This is natural and would happen even in a totally free market. However, when you see a systemic failure that affects the entire economy, you can be assured that the government has intervened and distorted the prices in one or more sectors of the economy -- creating an artificial demand which triggers an un-justified supply and ends in a messy "market correction" -- once everyone learns that they've been had. I would challenge you to find one single example in the 20th century where this was not the case.

Regarding Wall Street and the current fiasco. The most I will grant you is that we did see a failure of Corporate Capitalism - something which I detest. CEO's, protected by limited liability laws coupled with the lack of responsibility that comes with true ownership, did make decisions that were not in the best interest of the corporations they served. They made decisions they never would have made had they truly owned the companies. Large corporations have been guilty of lobbying for special favors not granted to small businesses. But this is in no way a failure of the "Free Market" or a condemnation of capitalism.

[C.W.]

I still think a lot of the failure occured on Wall Street. The fraudulent 'predatory lenders' needed capital from somewhere. Risk assessments were made that assumed an impossible and historically unprecedented growth in home values over time. These mistakes did not require distorted incentives from government intervention.

My point overall was that there shouldn't be a dichotomy between how people and economics and incentives change depending on whether a market is laissez-faire or regulated. People are people in every sector of a society.

Integrating it all, I have this to say: the free market does not guarantee prosperity. Take the example of the United States during its most free period of economic development.

There was a high level of idiocy on Wall Street. But remember, these people were trained by the same ones who trained the government leaders and regulators. They all agree on the program, in principle. They all do not realize that made-up money will have an adverse impact even if consumer prices aren't rising.

Government intervention is a wider concept than direct regulation. The Fed's activities have economy wide affects but also hit specific markets. If a market goes up 30% a year for several years, it is because of inflation. There are at least three areas of the economy that have gone up significant percentages for decades that can only do so because of inflation, but are not considered as inflation by the people you mention. (1) The trade deficit (the deficit itself is not a result of inflation, but the money accumulated overseas is, $11 T, is all inflation) and the accumateded dollars overseas, (2) annual increases in medical expenses of over 10% a year for decades; (3) annual increases of 7% a year in higher education. Without constant increases in the amount of "money" every year, these increases could not happen.

You did not mention the importance of prices in economic decisions. When the interest rates are held at a low level no one can make good decisions, even if the understood what is happening. Prices are cognitive tools. When prices are manipulated, the economic mind, if you will, is short circuited, undercut, destroyed. When interest rates are kept low, the boom will happen, and the bust will result. It is cause and effect. Von Mises was the only economist who foresaw the result of the roaring 20's.

I am confused by your statement, "Take the example of the United States during its most free period of economic development." My understanding of American history is just the opposite. Please expand your comment and tell me what period you had in mind.

For a good source to read, there are several good sources. I first read Human Action at age 18. In fact I had read it twice and much of what Objectivism had to say about economics before I went to college and got my BA in economics. I have always said that I forgot more economics in college than I learned. I would suggest starting about 150 pages into that book (really). It would be good if you can get hold of some of the works of Bastiat. If you can't easily find von Mises, read Capitalism, by George Reisman. Years ago I heard several lectures by George and he is good.

I have come to consider knowing American economic history as vital. Many of the arguments against capitalism depend upon completely wrong history. I am reading How Capital Saved America by Thomas J. DiLorenzo and can recommend it. I like that it is organized by subject. Read the articles on economics in The Objectivist Newsletter and The Objectivist.

You said that a free market does not guarantee prosperity. I am not really certain what you are saying in your remark. My statement is that if prosperity can be achieved it can only be so in a free economy. Freedom allows people to pursue their own values and be creative and productive. From what I know, only catastrophic conditions will prevent mankind from achieving prosperity. I think that the history of the last century underscore my viewpoint. In spite of all of the barriers place in our way, Americans have produced prosperity. We could do so much more if we were free. The liberals have held us back. That is why my avatar is the flying car. We were promised flying cars, as my girlfriend has pointed out to me, we don't have flying cars because we have been held back. We would have so much more, and more happiness. Mainstream economists have concluded that a mature economy can achieve at best a 3% rate of growth. Just watch our mature economy when it is freed. We will blast their 3% to bits!

[philosopher]

Isn't the whole field of economics based on a non-Objectivist premise? It starts with the idea that the government should choose the economic system and devises theories to help them decide. But shouldn't the government only protect individual rights (and therefore ignore the economy)?

[ZSorenson]

There was a high level of idiocy on Wall Street. But remember, these people were trained by the same ones who trained the government leaders and regulators. They all agree on the program, in principle. They all do not realize that made-up money will have an adverse impact even if consumer prices aren't rising.

I have agreed with everything you have written in this thread, and have only attempted to clarify my position, and perhaps failed to make that clear. I am glad you have written what you have because it needs to be said regardless.

As to this quote in particular, I'd say that your point confirms mine. Without government intervention, idiocy from academia can still ruin things. Government isn't the source of the problems, ideas are. Wrong ideas in government and business created the problem. That is to say, the explicit incentives offered by government intervention weren't the primary source of the problem, and firms could have still made better decisions with those same incentives in place. I stress this argument because I am reacting to the attitude of my school's economic department about incentives ruling. Ideas rule, ideas create incentives, ideas trump incentives. That's my point!

In 'criticizing' the free market, I'm saying that a free market can only create incentives in the context of ideas but not ideas themsleves. There's the incentive to not fail, if magically you could impose a free market on a society not prepared for it, but without the idea that you should strive to succeed, and some known method for doing so (thinking), you will fail in spite of the incentive. Incentives are the product of ideas, I say redundantly.

I am confused by your statement, "Take the example of the United States during its most free period of economic development." My understanding of American history is just the opposite. Please expand your comment and tell me what period you had in mind.

I mean only to say that free market conditions were responded to by political conditions that have slowly eliminated a free market. A very free market did not guarantee its own success. Political forces took over. The economic actors are the same as the political actors: society. I am following Jake Ellison's suggestion of not removing ethics from the context of reality (while acknowledging that I claim no endorsement of my result). I meant this as proof a concept: ideas come first, not after. People must accept that capitalism is moral before they will accept capitalism. They will not accept capitalism before they accept that it is moral. How else do you explain the rejection of such an astounding success?

I have come to consider knowing American economic history as vital. Many of the arguments against capitalism depend upon completely wrong history. I am reading How Capital Saved America by Thomas J. DiLorenzo and can recommend it. I like that it is organized by subject. Read the articles on economics in The Objectivist Newsletter and The Objectivist.

You said that a free market does not guarantee prosperity. I am not really certain what you are saying in your remark. My statement is that if prosperity can be achieved it can only be so in a free economy. Freedom allows people to pursue their own values and be creative and productive. From what I know, only catastrophic conditions will prevent mankind from achieving prosperity. I think that the history of the last century underscore my viewpoint. In spite of all of the barriers place in our way, Americans have produced prosperity. We could do so much more if we were free. The liberals have held us back. That is why my avatar is the flying car. We were promised flying cars, as my girlfriend has pointed out to me, we don't have flying cars because we have been held back. We would have so much more, and more happiness. Mainstream economists have concluded that a mature economy can achieve at best a 3% rate of growth. Just watch our mature economy when it is freed. We will blast their 3% to bits!

Thanks for the great reading suggestions. I particularly look forward to the DiLorenzo book you mention. Ayn Rand, in CTUI, mentioned that she had never heard of an honest and comprehensive history of actual capitalism in America and its effects. I'm glad history has caught up with her.

I have answered the bit about the free market, but in case it is still not clear: the incentives of the free market are meaningless without the right ideas to create them. I still like Jake Ellison's response the best; that the ideas that create wealth are the same that allow a free market to exist in reality. It explains my practical conclusion: that politicians and activists shouldn't promise that a free market will create the right incentives for prosperity. The free market only allows these incentives to operate.

All this is in the context of those who claim regulation is absolutely necessary to create proper incentives that the free market cannot. I think it is true that without the massive problems with the mixed economy, the incentives for this current crisis would not have existed, if the crisis would have even been possible at all. However, there are examples when normal free market 'incentives' can create inefficiencies. Take an industry where demand suddenly rises. While there is room for meeting supply, there is not enough room for every firm to meet it. Yet, businessmen raise production in their firm to keep pace with the industry as a whole, in order to compete. In the end, there is excess supply, and the firms all lose money, and fire employees. This sort of example is behind the arguments for regulation and monetary intervention. Everyone responded properly to incentives in an nondistorted market.

That is why I say ideas matter more than incentives, because I am exposing the logical flaw. If businesses stopped counting exclusively on the wisdom of inexperienced young business graduates despite their energy, or were willing to take a long term view, or were able to recognize the superior abilities of a few firms to ramp up production temporarily over their own and live with that... or if people were to purchase actually unemployment insurance, or save, and on and on... the 'business cycle' or 'systemic risk' or 'externalities' wouldn't be a problem. When someone makes the argument of 'systemic risk', just ask them whether Bears Stearns would have been worse off keeping cool during 2004-08, and ask them to prove that no one could have predicted what has happened (which many did convincingly). You can ignore the government if you want - idiocy was the cause - and is it moral to force someone to pay another's idiot's insurance? (Hmm, what a business idea...)

Ideas before incentives, that was the correction of their error I exposed, and spoke of in the context of this thread.

I also want to disclose that I think pointing out the pragmatic benefits of the free market is a good thing, in the context of the moral argument. I also think that overall the free market will allow incentives that are 'natural' - i.e.: unthinking man's pursuits - to operate efficiently and create wealth. Work = bread, not work = stomach growling, steal = whip = worse pain than stomach growling. Joking aside, I hope I am understood now.

And the flying car - yes - I am waiting for my moon vacation please. I recommend this fantastic and exciting overview by Rand Simberg of the nature of the Space Industry. I'm hoping for the economic/moral "Discovery of America" moment this decade, maybe. Here's to hoping it's not a "Holocaust" moment. I watched a Peter Schiff debate from another thread, his predictions are frightening.

[philosopher]

Even if the market consisted of 100% rational participants, it would still not guarantee success, since human being not omniscient. Perfect reason can be based on bad and/or incomplete knowledge and therefore fail. But if failure comes from error of reason or fact, it can be learned from, and success next time. Unlike failure due to government edict. Don't these people know that we survive by thinking and learning? They interfere with our process of learning, and cause disaster after disaster, god damn them.