The Fourteenth Banker Blog

December 9, 2010

Free Market Upside Down

Filed under: Running Commentary — thefourteenthbanker @ 6:25 AM

This article by Michael Hudson (h/t Zero Hedge) does a nice job of discussing the hijacking of the notions of Free Enterprise or Free Markets. The context is a discussion of the Deficit Reduction Commission and the implication that there are commonly held beliefs about what is the nature of the free market. The general discussion is worth reading, but the highlight for me, which also relates to the just negotiated tax break extensions, is this discussion on financing in times of war.

Smith: Wars should be financed on a pay-as-you-go basis, not by borrowing
If the shade of Adam Smith were to reappear today, he would be equally disturbed by the failure of the Bowles-Simpson commission to address the issue of war debts dealt. Smith’s argument against waging foreign wars was basically an argument that they were not worth the debt burden and the associated taxes to pay interest on it. These payments transferred income from taxpayers to creditors – largely foreign creditors, the Dutch in Smith’s day, Asians today.

Neither Bowles-Simpson nor President Obama acknowledge the extent to which the federal debt – and indeed, most of America’s rise in foreign debt for decades on end – has stemmed from overseas military spending. During the Vietnam War years of the 1960s and ‘70s, the military deficit accounted for the entire rise in U.S. foreign debt, as private sector trade and investment was exactly in balance.

Smith wrote that even a land tax could not finance governments or “compensate the further accumulation of the public debt in the next war.” His argument was that to free the economy from taxes, nations should avoid wars. And the best way to do this was to wage them on a pay-as-you-go basis. Borrowing rather than taxing led the population not to feel the real cost of war – and thus deterred it from making an economically informed choice.

So the Bush-Obama administration has taken a fiscal stance diametrically opposed to that of the patron saint of free enterprise. While escalating war in Afghanistan and maintaining over 850 military bases around the world, the administration has run up the national debt that Smith decried. By shifting the tax burden off property and off rent-seeking monopolies – above all, off the financial sector – this policy has raised America’s cost of living and doing business, thereby undercutting its competitive power and running up larger and larger foreign debt.

Robert Reich also has relevant commentary that provides some statistical information that is relevant to Hudson’s article.

Here’s the real story. For three decades, an increasing share of the benefits of economic growth have gone to the top 1 percent. Thirty years ago, the top got 9 percent of total income. Now they take in almost a quarter. Meanwhile, the earnings of the typical worker have barely budged.

The policy positions taken by the USG in continuation of the policies of the last couple decades and most recently in a bow to the Republican wave, do not represent free market principles. Free market principles would not allow a combination of government policies and market abuses to concentrate wealth so much at the top of the spectrum that the vibrancy of the economy and the engines of small business growth are in permanent peril. A free market would permit creative destruction, promote competition, break up oligarchy and give the average citizen a fighting chance.





  1. Where to begin? First, thanks for this – you always come up with excellent material and food for thought.
    Free markets – have we ever had them? More so in the past than today, surely (not counting the Gilded Age of monopolies). But from farm subsidies to corporate factory agriculture to other forms of corporate welfare (Ernest & Julio Gallo used to get help staving off those awful Frenchies), culminating with TBTF, we have been going down this slippery slope my entire lifetime, it seems. I don’t have a beef with American companies getting protections, I have a beef about them pretending it’s not happening.
    I heard a movie review last night about a new indie film called The Company Men, about how suddenly unemployed white and white collar men are dealing with the recession. Director John Wells was first going to do a story on how the recession affected blue collar workers, but found that they are more accustomed to the vagaries of the job market. He soon learned white collar white men are far less accustomed to having to cope, and how they do so became the story. Robert Reich and others have been pointing out how wide the income gap has grown between the executive class and everyone else. Maybe some of these guys are learning there’s no free market, too. Maybe if enough of them come face to face with losing everything, things will change, but doubtful in my lifetime.
    On a different note, how many people understand that by cutting payroll taxes for two years, Obama just gave the Republicans an early Christmas present? In two years, when the rate is scheduled to go back up, it will be touted as a “tax increase”. How better to chip away at the hated Social Security safety net, if it can’t be destroyed outright. Machiavelli would be proud.

    Comment by Sandi — December 9, 2010 @ 11:49 AM | Reply

  2. The idea of Free Markets, especially in financial transactions is a worthless nostrum . Theoretically, the free market generates efficiency. The market sets the perfect price and on and on Clinton Yadda Yadda style. There might be some claim for the nostrum if all transactions were open outcry. As it is, the majority of transactions are computer trades. Thus their are two competing types of efficiency. Computer logic driving prices and human decisions via open outcry. The Free Market Nostrum depends on human activity. Program Trading is not human. Program trading obviously can drive any market. So either all trading is by program trading or all trading is by open outcry. That or every seller has access to computer systems run by an independent third party ( HaHa) or ni party privately trades using software.

    Comment by Jerry J — December 11, 2010 @ 1:30 PM | Reply

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