All This Utter Distortion

Tibor R. Machan

The following letter appeared in my local paper:

"GREENSPAN’S GOOFS It’s nice to see that former Fed chief Alan Greenspan is finally taking the blame for starting the worldwide economic collapse [‘Greenspan,’ Marketplace, Oct. 24]. Former President Ronald Reagan shares in that blame since it was their combined plan to deregulate everything and let the free market ‘take care of itself.’ This has proved that the ‘free market’ without regulations is anarchy."

First, look at the dishonesty: Greenspan did not take blame "for starting the world wide economic collapse." Why should he? He took blame for mistakenly assuming that the self-interest of those running financial institutions would fully coincide with the clients of those institutions and for some of the results of making this assumption. As to Ronald Reagan, he barely managed to deregulate anything at all. His rhetoric was for more individual initiative in the economy and less government involvement but Congress would not budge so nothing much happened.

Then there is the nonsense about the supposedly unregulated free market during the Greenspan and Reagan eras. Government regulation, especially of the financial portions of the American economy, has been in place since the early 1900s. (The very existence of a Federal Reserve [or central] Bank is a regulatory measure that would not be part of a genuine free market!) Regulations were increased enormously during FDR’s ill conceived and ultimately ineffectual New Deal. (The economy recovered because of World War II’s war-time government spending and labor furor.)

Nearly every profession in America, other than the press and the ministry, is highly regulated. Occasionally there is some experimentation with bits and pieces of deregulation but no one escapes all government regulations by the various federal, state, county and municipal bureaucrats who fill government offices throughout the land. The percentage of the wealth in America that has been spent by all these governments has been steadily growing and has never, never substantially subsided.

The other evening I went to hear a fervent champion of government regulations and critics of the free market, Professor James Galbraith, (author of the bizarrely titled book, Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too), and in his talk he also kept saying that the free market has failed even while he admitted that there has been no free market in place ever, despite some of the rhetoric supporting such a system. He went after the late Professor Milton Friedman for advocating greater economic freedom but then said that Friedman’s views failed to have a serious impact. And he implicitly admitted that he and his fellow champions of government meddling in the country’s economic affairs have been triumphant beyond expectations both in America and elsewhere (e.g., in China where he has been a consultant to that country’s utterly despicable tyrannical government).

This oft-repeated mantra about how the free market must have been responsible for the current economic fiasco is a colossal distortion probably meant to confused instead of inform. That’s because America has been a mixed economy throughout its existence, with periods of greater dosages of capitalism and greater dosages socialism but always a mixture of the two. When such a system experiences maladies, it is understandable that supporters of one part of the mixture will jump at the chance to blame the other part for the mess. But it would be reassuring if there were just a bit of honesty in the debate.

For example, I have been arguing that the various government interventions in the mortgage industry--Fanny Mae and Freddy Mack were both created and given orders by the federal government to ease the terms of loans for millions of home buyers--have fueled the current mess but I have never argued that Wall Street hasn’t been complicit or that America has had a socialist system which is to be blamed.

Why can’t those championing more government planning and regulation admit that there hasn’t been any free market in place in America for over a century? It is no easy task to assess the soundness of economic theories. There are no controlled experiments that can be conducted, no laboratory tests, only the very messy history that needs to be studied and untangled to learn the needed lessons to avoid similar messes in the future. But only if the students of history will be honest, will not taint the evidence with their wishful thinking, will it be possible to learn from their work.