Debunking the Myth of a Free Market Run Wild

A question for you, Fellow Reckoner: Why do people so frequently demand more of the same poison to cure what ails them? Is it because they are stupid? Are they too busy with their workaday lives to notice the difference? Or are they being persistently lied to and indoctrinated?

Most likely, it’s a mixture of all three. Today, we address the third point.

One of the more pervasive myths, perpetuated – either ignorantly or maliciously – by the mainstream media, is that the market tumult witnessed over the past few years is somehow a result of the free market having “run wild.”

The argument, as you are surely familiar with it, goes something like this…

Until recent and heroic intervention by the Feds, the world had been aimlessly bobbing about on a sea of unregulated, laissez-faire capitalism. Adrift in the cold, harsh, dog-eat-dog seascape, where rules were callously discarded and government vigilance eschewed, we clueless individuals simply made our way as best we could. Of course, it wasn’t long before we lost sight of the horizon. Then, the clouds of capitalist deceit obscured our view of the stars, by which we had previously been navigating our way across the perilous oceans. Sensing our vulnerability, the greedy capitalists stealthily moved in under the cover of “free market anarchism” to rock the markets and capsize our tiny, unguarded vessel.

What followed – around 2007-08 – was the painful aftermath of a great era of free market irresponsibility. Lessons were to be learned. Regulators, it was said, had failed to protect us (mostly from ourselves). The markets had been allowed to “run wild,” fleecing all and sundry of their earthly wares. The whole system was in danger of collapsing under the weight of its own free reigns and pundits from every corner of the boat were soon crying out for some form of central guidance, some direction, some calm. This, we were told, and not without a wag of the finger, is what happens to modern, mixed-market economies when they become adulterated by the blinding whims of free market capitalism.

And it would be a nice story, with a presumably easy remedy…if only it were true. Alas…

“All these claims [about us living in a free market] are wrong,” asserts Jeffrey A. Tucker, editorial vice president of the Ludwig von Mises Institute and author of the refreshingly insightful Bourbon for Breakfast: Living outside the Statist Quo. “We live in the 100th year of a heavily regulated economy; and even 50 years before that, the government was strongly involved in regulating trade.”

Continues Mr. Tucker: “The planning apparatus established for World War I set wages and prices, monopolized monetary policy in the Federal Reserve, presumed first ownership over all earnings through the income tax, presumed to know how vertically and horizontally integrated businesses ought to be, and prohibited the creation of intergenerational dynasties through the death tax.”

Contrary to what interventionalists would have you believe, the government has not been repealing its influence in and control over our lives at all. Quite the opposite. We can see this by tracking the mammoth growth of the beast during the past century.

In the decade leading up to WWI, government spending as a percentage of GDP averaged a relatively minuscule 2.5%, give or take. By the time FDR had finished prolonging the Great Depression through the 1930s, that percentage had jumped to double digits. And today, government spending accounts for one-quarter of all economic activity in the world’s largest economy, or one in every four dollars spent (25.32%). Never during time of peace has government spending occupied so much of the GDP pie chart.

(We’ll leave aside the spurious nature of the GDP computation itself for another day but, suffice to say, GDP, as measured by the preferred “expense” method, actually rises when government spending increases. Ergo, GDP went through the roof during both the First and Second World Wars as the nation allocated capital to the manufacturing of military machinery. This led “top down” Keynesian economists to believe they had real economic growth on their hands, the origin of the “WWII cured the depression” myth. Of course, anyone familiar with Bastiat’s “Broken Window” knows this to be an entirely fallacious argument and that the destruction of capital is certainly no way to achieve prosperity.)

The very existence of the Federal Reserve itself flies in the face of any notion of free market capitalism. “For the government to authorize a counterfeiter-in-chief is a direct attack on the sound money system of a market economy,” Mr. Tucker observes.

The “alchemic temple,” as Mr. Tucker aptly describes it, used its monopoly on currency creation to pump trillions of dollars worth of credit into the supposedly laissez-faire system during the 1990s and early 2000s. This led, inevitably and with the direct collusion of Government Sponsored Enterprises (GSEs), Fannie Man and Freddie Mac, to the unsustainable expansion of the mortgage loan sector. Effectively, the government intervened to encourage – and for a while even reward – rampant malinvestment through the creation and distribution of money the free market never would have tolerated. And they have the hide to blame a free market that never existed for the subsequent implosion!

“With ‘free markets’ like this,” quips Tucker, “who needs socialism?”

Is it any wonder then that those who support the fictitious narrative above are now wondering why the financial storm the state gave birth to has not yet passed? If government intervention is the cure to crises and not their cause, surely then with Bernanke pulling levers at the Fed, Obama barking orders from the ship’s helm and Krugman spouting his Keynesian gibberish from the NYT’s editorial pulpit, we ought to have already witnessed the remarkable recovery they promised last summer. And yet home prices continue to fall – one percent per month, at last count. Unemployment, too, is in the dumps with job creation unable even to keep pace with population growth. Meanwhile, that oft-referenced statistical go-to for Keynesians – GDP growth – is lower than when Bernanke unleashed his now infamous $600 billion QE2 program.

O Recovery, Recovery! Wherefore art thou Recovery?

They say the free market had “run wild,” the implication being that if we could only elect a group of all-knowing, all-powerful bureaucrats to somehow train this savage beast, we would surely all be better off. But the free market is not like a domesticable animal; neither are the hundreds of millions of individuals, engaging in billions of individual interactions and transactions daily, who comprise it. To say that the free market ought to be tamed is really to say that those individuals who drive it ought to be tamed; that they ought to be taxed, regulated and herded along like beasts incapable of thinking for themselves.

This is, quite obviously we would think, the exact opposite of freedom and the liberty and prosperity for which free men and women strive. As such, it is surely something to freely oppose.

Joel Bowman
for The Daily Reckoning