Market Morality: Why Free Markets?

Are free markets the right answer for economic development and a moral society?

As a people, Americans have shown a stronger preference for free markets than have the people of nearly all other nations. We instinctively trust in free enterprise vs. a planned economy, and view public services as naturally indifferent to customer needs and inefficient in delivering desirable products and services. This preference is a deep-rooted element in our culture, and goes back to before the American Revolution, when the King and Parliament were in faraway London, and the early colonists had no one to rely on but themselves. Since then, fresh waves of immigrants, fleeing rigid and rickety economies in Europe and elsewhere have preserved and reinforced our ancient habit of relying on ourselves and our neighbors, rather than our “public sector”, for providing us with food, shelter, and other goods and services.

Yet today we are experiencing perhaps the deepest disillusionment with free markets since the Wall Street Crash of 1929. Last year saw the meltdown of financial institutions and financial markets across the globe. Unemployment and foreclosures skyrocketed. Meanwhile, 401(k) values and retirement investments crashed. Whole sectors of our economy, such as investment banks, home builders, and auto manufacturers, saw bankruptcies on a massive scale. What went wrong? Who shoulders the blame? How can we fix our economy to keep this from happening again?

One cry that has risen across the country is outrage over the failures of Wall Street and its high-paid managers and executives. Financial firms placed huge bets on exotic instruments, and when things went sour our Federal government had to pour billions (or maybe trillions) into insolvent firms to keep the rest of our economy from going into a meltdown. Meanwhile, the CEOs who led their firms into collapse collect hundreds of millions of dollars in “performance bonuses” and “golden parachutes”. Why are ordinary Americans being forced to pour so much money into the pockets of the same men who undermined our prosperity?

The answer, of course, is to try to protect what is left of our own prosperity. Saving the paychecks of failed CEOs is an unfortunate side effect of bailing out our nation’s credit system. These men are ruined in reputation regardless. (Many are ruined in wealth as well, as this recession has savaged asset holders with a ruthlessness rarely seen in economic downturns). But to let the nation lose its great financial institutions would be a calamity?

Why would it be so bad? Perhaps you don’t care a whit about the New York Stock Exchange, or the prime rate, or the yield curve. You just want to earn a living and put something away for retirement. The credit system isn’t something you use every day, so who cares if it has a tough year?
The reason why you care is because you almost certainly use the credit system for your personal life. I’m not talking about checking accounts or credit cards. Those are useful (almost necessary), but that’s just the mechanics of one part of our credit system. The part of the system that affects our daily lives, and that went into jeopardy, is the part that loans money. You may not be a customer for T-Bills or credit default swaps. But how many times have you paid cash for a house? Or a car? Nearly all such purchases are made on credit, and the failures of Citibank and GMAC go right to the use of mortgages and car loans for ordinary Americans to make big-ticket purchases.

The bigger question is, What Next? Was this a market failure? Or is the idea of markets a deeper failure? How can our economy serve society and its members best, through free enterprise or through public activism?

In the real world, of course, there is always some mix of the two. In the most laissez-faire state (Hong Kong is a good example), government still regulates financial markets (as well as providing infrastructure, public safety, etc.). In the most totalitarian states (North Korea, for example), private property still exists, though it is effectively limited to personal effects such as clothing, furniture, tools and such. But the emphasis between private vs. public sector is quite different for these two nations, and the results are also vastly different.

So what is the proper mix? When is the state the solution, and at what point does the state become the problem? What is the proper aim of our economic system? Is it to create prosperity or advance social justice? Is it to enable personal freedom, or generate the greatest wealth for the greatest number? Are public officials honest brokers or empire-building egoists?

It’s my aim to explore those questions here at Market Morality, and shed some light on what has become the defining question of today’s political debate.