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.