Savitri Era of those who adore, Om Sri Aurobindo and The Mother.

Saturday, April 24, 2010

Participate in a market economy governed by profit and loss

Free market economists are not necessarily defenders of business.  Crony capitalism has a long history.  Mercantilism was a form of crony capitalism, and was the main target of Adam Smith's critical abilities.  And while modern Smithians understand how important a vibrant financial market is to the advancement of generalized prosperity, the crony capitalism of Wall Street is not given a pass from the critical analysis of economics and political economy.  Rent-seking run amock is one way to describe the revolving door between iconic finanical giants such as Goldman-Sachs and postions of power in both Republican and Democratic administrations.  But new regulations on the financial industry is not the answer.  Instead, constraints on the ability of government to concentrate benefits on favored groups is the way to go.  New regulations will only be subjected to the same political football game that all regulations are, which means in the end they will be captured by the group supposedly being regulated and governed in a way which benefits that group at the expense of the consumer.
Moreover, in all this talk of the excess of Wall Street and the fats cats taking excessive risk a few points are overlooked by the Obama administration.  First and foremost, look to the Federal Reserve System that provided the easy credit upon which the investment structure in the economy was built.  Yes people got crazy in terms of their financial decisions, but somebody gave them the crazy juice.  That somebody was the Fed.  John Taylor's work on the deviations from the "Taylor Rule" deserves more recognition from policy makers.  Second, there was a host of public policies which steered the craziness in a certain direction, and Fannie and Freddie certainly played a role, but there is more to the story than that.
Yes in an era of excess the fat cats will rule, but the biggest fat cats of all are those who sit in power.  It is the 'aristrocracy of pull' that must be eliminated if we hope to fix our problems and move toward a freer society with rules of governance that are more responsive to the needs of the people and enable us to live better together.  It ain't about a populace rhetoric and enlightened government intervention, but effectively tying the hands of those who govern so they can not exercise discriminatory politics and subjecting those in the marketplace to the discipline of profit and loss.  We want to live in a society of free and responsible individuals, and participate in a market economy governed by profit and loss.  When you give individuals freedom without any corresponding responsibility, and you allow individuals to privatize profits but socialize losses, then don't be surprised when irresponsibility and excessive risk characterize the world.  An era of excess does not arise due to a shift in psychology, it arises because the rules of the game shifted to make such behavior rewarding to engage in.  The problems rests not with the fat cats of Wall Street, they need to be skinned, but by the penality of the marketplace when they don't satisfy consumers.  It is the fat cats in Washington that led to the fat cats on Wall Street.  Skin those cats in Washington, and the fat cats on Wall Street will be forced to behave diferently.  Unfortunately, Obama's rhetoric scolds those on Wall Street without addressing the underlying cause of their excessive behavior.

On April 6, well known New York Times columnist and celebrated authour Thomas Friedman penned a missive asking, "who's up for building bridges?" Friedman suggests, as have others, that with the passage of health care reform, both major American political parties have, essentially, achieved their major policy goals of the twentieth century. What remains now, Friedman says, is for those parties to, "build America's bridge to the 21st century."

As always, Friedman's writing is inspirational. It is vaulted and forward thinking and, in many regards, trail blazing. But I worry.
I worry into whose 21st century it is Mr. Friedman's goal to build bridges. I worry that, as much as I admire Mr. Friedman's challenge, the picture he paints about the future of the country and the future of the world is drastically partial. I worry that by articulating the same vision of a globalized world that he has for more than a decade, Friedman commits Santayana's age old sin of failing to remember history -- and thereby dooms himself to repeat it.

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