President Obama
In a speech aimed at further demonizing Wall Street by once again failing to accept that government also bears responsibility for the much of the ongoing financial meltdown, President Obama declared, “I have always been a strong believer in the power of the free market. I believe that jobs are best created not by government, but by businesses and entrepreneurs willing to take a risk on a good idea.”
It is one thing to utter such words in a speech, and yet something entirely different to put them into action; and to date, all of Mr. Obama’s actions relative to the economy have been wholly manipulative and hostile to the idea of free market capitalism. To be fair, Mr. Obama is certainly not alone in his hostility toward true free market capitalism, for since the inception of the Federal Reserve in 1913 U.S. economic and monetary policy have been overwhelmingly interventionist and inflationary, building an faux economy with a fragile basis in easy money, easy credit, fiat.
In a very general sense, interventionism means government meddling or coercion upon the various aspects of the economy in order to effect specifically desired results. An example of a desired result is the buzz-word, “total employment,” sought by the governments of almost all industrialized nations whereby the government over-regulates and thereby influences various industries by a variety of means to “stimulate” the economy along a path of what it hopes to be a permanent state of growth, production and consumption. Yet what is missed by so many supposedly brilliant economic minds is the inescapable fact that wherever government intervenes, whether by passing mandatory “living wage” laws, price controls, or whatever, the immediate effect is to artificially raise the costs of production – and therefore raising the costs of the goods produced for consumption - above what the unhampered market (you and I) would wish to pay. If the price of the good becomes too high and consumers buy less of it, the costs of the producer increase further and ultimately end in higher unemployment. Thus, the means employed are entirely self-defeating relative to the intended goal. The law of unintended consequences thus manifests itself – what the interventionist policy sought was higher employment, but what resulted was higher unemployment.
Typically this result prompts even further interventionism on the part of the government as it seeks to correct the unintended consequence of the original policy. For example, in the case of price controls, the next move may be to decree that as the cost of the good is to too high to attract consumers, then the price of the good will be fixed even lower. This still results in high costs for the producer, who will be forced to either go out of business (because his revenues do not exceed his costs) or to seek redress from the government. Again, the typical response from government would likely be to fix the costs of those commodities employed in the production of the good to be produced. However, it becomes immediately apparent that the size and scope of the original policy has just been expanded instantly and exponentially, for in fixing the price of these commodities the government must continue fixing prices of others and mandating more and more controls over many aspects of the overall economy. Thus, interventionism, if not abandoned when the law of unintended consequences becomes apparent, must always lead to increased bureaucratic control that is wholly incompatible with free market capitalism.
A worse form of interventionism, however, is the one that has been employed by the Federal Reserve since its creation in 1913: the policies of so-called “easy money.” The name is an irony in and of itself, for in the end there is nothing “easy” for those who suffer the results of massive credit expansion (creating money out of thin air), deficit spending, and inflationary monetary policy. Indeed, the fundamental underlying cause of the current fiscal crisis, and the thing that has enabled all of the other factors to come together to form this perfect economic storm that threatens to bring this nation and possibly the world to its knees is these misguided interventionist policies of massive credit expansion and inflation. And now, as the nation waits for results of an ill planned and mostly ineffective “stimulus” bill to be manifested, the Fed has been loaning money to banks, buying debt and printing money behind the scenes, almost unnoticed. What they do now, they do in relative obscurity, but the effects of their actions will certainly be felt in the years to come. With trillions upon trillions of dollars being newly created, printed, and injected into the financial system the short-term effect may well be a temporary recovery. The effects of the massive inflation that will result have yet to be accurately estimated, as nothing on this scale has ever been attempted with success. The closest situation to ours was Weimar Germany, and the results, as we know, were not good. Inflation is bad policy to be sure. Just how bad its effects will be remains to be seen.
Throughout the current fiscal crisis we have been told over and over again, beginning with George W. Bush, that we must “change” capitalism in order to “save” it. The fact of the matter is that we are in this current financial mess because they have already “changed” it. What was changed from the first half of the 20th century was the almost universal adoption of a policy of active interventionism by western industrialized governments, based upon the misguided and now disproven theories of Keynes. Mises explains: interventionism, it was posed by its proponents, was to be neither true capitalism nor true totalitarianism, but rather, “as a third solution of the problem of society's economic organization, stands midway between the other two systems, and while retaining the advantages of both, avoids the disadvantages inherent in each.” In fact, all that interventionist theory has really accomplished is the mass deception of free peoples, and the unsubstantiated and wholly unrealistic promises of “lasting” or “permanent” prosperity. An appeal to common sense would instantly reveal the impossibility of a permanently prosperous economy as the interventionists would define it.
Ludwing von Mises
The fact of the matter is that Mr. Obama does not believe in free market capitalism and very likely does not understand precisely what free market capitalism really is, and this is no fault of his own, for when one understands that some of the most popular and influential economic minds that have advised government over the last several decades have continued to call our system purely “capitalist,” then it is logical to suppose that eventually most people will just believe it actually is. An example of such misguided Keynesian logic is found in a March 20 opinion piece in the Wall Street Journal where the author, a professor of economics and a former vice-chairman of the Federal Reserve Board, claims that England has a firmly capitalist economy. One might also believe that the Pope is not Catholic. The British NHS is currently the world’s third largest employer and subsequently controls a substantial portion of the British economy. England’s economy may well not be entirely socialist but it is far more interventionist than ours having enacted a plethora of wage and price controls, and to claim that it is truly capitalist is laughable. The fact that so many people believe it does not help. Ours has not been a truly capitalist system for many decades, but rather a hybrid, interventionist system where government influence continues to creep in increasingly in order to attempt to mitigate the damage from periodic pullbacks and contractions, and thereby creates what we know as a “bubble.” So what does President Obama believe regarding the economy?
John Maynard Keynes
He stated: “I believe that the role of the government is not to disparage wealth, but to expand its reach; not to stifle markets, but to provide the ground rules and level playing field that helps to make those markets more vibrant -- and that will allow us to better tap the creative and innovative potential of our people.” This is a telling statement. How does one expand the reach of wealth? For a fan of the free market, the answer would not be by more regulation to “level the playing field” as such a descriptive goal is equality of outcome, whereas a true free market system presupposes an equality of opportunity, unhampered by government coercion and intervention.
By speaking of “leveling the playing field,” President Obama is speaking of something that is antithetical to free market capitalism and thus to essential liberty. He spoke of what he believes more in depth in a 2001 Chicago radio interview:
“The Supreme Court never ventured into the issues of redistribution of wealth and sort of more basic issues of political and economic justice in this society. And to that extent as radical as people tried to characterize the Warren court, it wasn’t that radical. It didn’t break free from the essential constraints that were placed by the founding fathers in the Constitution, at least as it’s been interpreted, and the Warren court interpreted it in the same way that generally the Constitution is a charter of negative liberties. It says what the states can’t do to you, it says what the federal government can’t do to you, but it doesn’t say what the federal government or the state government must do on your behalf.”
“I think that there was a tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalitions of power through which you bring about redistributed change and in some ways we still suffer from that.”
The very idea of wealth redistribution is, again, antithetical to free markets and to liberty. Should not one be secure in their person and their property? Is not that a guarantee of the Bill of Rights? Should not one be entitled to keep what one earns through labor, hardship or risk? Does it make sense that if an entrepreneur should risk his or her capital in starting a business, that if the business succeeds he or she ought to be free to do as they please with what they have rightfully earned, either banking or reinvesting in the business? Does Mr. Obama not understand that when the capitalist is successful and reinvests in the business, more jobs are created, employment generally rises, employees have more money to spend and the economy will hum along far more harmoniously then with central planners planning and regulators regulating ways they believe –in theory- that they can have a more beneficial effect on the economy than those people actually managing the businesses and purchasing the products that are the economy?
Indeed he speaks the truth when he says, “the role of the government is not to disparage wealth,” because government can only consume or destroy wealth – it does not produce it, but it must subsist off the wealth of its subjects. But if he truly believes that jobs are created by “entrepreneurs willing to take a risk on a good idea,” then how does he explain his decision to arbitrarily abrogate the contract between the Chrysler bondholders – who were promised by contract law their returns as the condition of their investment – and the corporation, giving majority control of assets to the auto workers union that had no right to any such claim? Such actions seriously undermine contract law by setting a precedent for arbitrary intervention at the discretion of the President (who has no Constitutional authority whatsoever to do such things), as well as the confidence of investors who might otherwise be willing to risk their capital. This, in turn, undermines the very foundation of the free market system.
This isn’t “trickle-down” or “voodoo” economics: it is common sense. It is one thing for government to regulate aspects of the economy, for good regulation is essential to the maintenance of conditions for economic prosperity. It is entirely another thing to manage an economy, and over the last several decades in this country there has been a blurring of the meaning of these two words. A politician or bureaucrat may speak about the need for better “regulations,” but if one listens to what they are really proposing, it is clear that they really mean “management.” If the central planners, bureaucrats and government economists knew better how to “run” an economy, it stands to reason that the Soviet Union would still be intact and would be currently enjoying a robust economy and prosperity of which the world would be jealous. Everyone knows that this is not the case. Failed policy is failed policy however one analyzes it. Denying it is so and believing that one can improve upon a system that is in essence fatally flawed is foolish. Leading a nation to believe that is can be done is dishonest at best.
Images: Top, AP by Charles Dharapak; middle, bottom, Chad MacINNES
Comments