One exception who will be on Stossel’s program is John Allison, an executive at BB&T Bank, who staunchly opposed TARP, has repeatedly refused to use the law to plunder the property of others and as one might guess is an ardent Austrian-school libertarian.  In a scene reminiscent of the smoke-filled rooms of Atlas Shrugged, Allison divulged at an NYU lecture this past fall that the Feds threatened to go in and audit any bank that wouldn’t take government funds, forcing healthy banks to comply so as to cover for the fact that the government was only propping up a select few sick ones (at the expense of the solvent I might add).

In response to Stossel’s call in the aforehyperlinked column for suggestions for a follow-up show on “crony capitalism,” I posted:
John,

If you want to talk about crony capitalism, it may pay to have Burton Fulsom who wrote “The Myth of the Robber Barons” on the program.  I think the key is to delineate between political entrepreneurs and market entrepreneurs, something which he does astutely in that book.

Political entrepreneurs seek to use government decrees to profit, largely by cartelization, monopoly advantages and other barriers to entry, while market entrepreneurs generally seek to win profits in the market by merit – by producing the best product at the cheapest price.

More generally, the Mouch problem lies in the fact that while initially businessmen extol the virtues of little regulation, low barriers to entry and minimal governmental interference generally, once they become successful, out of self-interest they support any and all legislation that will cement their position in the market.  They support all of those things anathema to the free market that they had used to their advantage in the first place.

This is akin to the economic plight of America as a whole.  While up until the early 20th century (though some libertarians will argue that it was really only up until the time of Lincoln), America functioned under a largely laissez-faire economy, with the wealth and progress generated by this economy, we forgot about the virtues that led to our success and rewarded those tending towards failure.  We created a welfare state from the riches of a relatively free state, throwing under the bus the very principles that elevated to us to our position as a great nation.

A free market means that buyers and sellers can trade on any terms that they find mutually beneficial. They can trade whatever they want with whoever, whenever, however and why ever they want to. As long as fraud or coercion is not involved in the transaction, both sides trade because they believe they will be better off after the trade. It is a positive sum game.

The free market is based on property rights. People can use their property and dispose of it in any way that does not infringe on the rights of other people. Property rights are the key to economic progress in any country. Lack of strong property rights and economic freedom is the reason that less developed countries remain less developed.

The economic understanding of market failure is any situation where the allocation of goods and services in an economy is not efficient or optimized. The popular view is that any result in society that we don’t like is caused by market failure. Thus, depressions, pollution, homelessness, and shortages are examples of the infinite variety of things that can be blamed on markets.

There are many cases where the problem is a lack of adequate protection of property rights. In the case of pollution, people who’s property rights are infringed by the polluter should have the right to sue for damages. An appropriate justice system would make it expensive for a business to pollute or do other bad things because of the money it would have to pay to people who’s well being and property they damage.

The main problem with the market failure concept is the belief that benevolent politicians and bureaucrats should save the day. This approach has been energetically followed, but the reality is that the failures of government dwarf any failures of any market. In practically all cases, events that are demonized as market failures are the unforeseen and unintended consequences of prior government intervention in the markets, interventions that are invisible to everyday consumers.

The chain reaction will follow a few well worn paths. One such path is when someone perceives that prices are too high. Government then imposes price controls. The inevitable result of price controls is shortages. That means that rationing must be implemented. Black markets develop to supply the needs of consumers who can’t get what they want. Government programs are implemented to stamp out black markets, which invariably infringe on the rights of everyone. The string of cause and effect can go on for decades.

Another path may be when someone perceives that their income is too low. Government programs, such as the Agricultural Adjustment Act of the 1930’s and its many successors up to today, may destroy product and productive resources to keep prices high, subsidize the non production of crops and livestock, impose high tariffs and other protective measures. The net result is higher prices and a lower standard of living for all those not privileged enough to be in the protected industry. The protections and higher profits draw more people into production or discourage inefficient producers from leaving. The new producers increase production more, requiring further interventions.

These cause and effect chains can be followed in numerous industries, such as oil and gas, housing, banking and finance, agriculture, health care, automobile, and so on. When seen in isolation, an event looks like a random development. When taken together, they display a fairly understandable chain of events, emanating from some original intervention. The sad fact is that, even though this country is nominally free, and is still one of the more free nations , there is not one market that is not subject to massive government intervention at some level, national, state or local.

The current mortgage crisis and market meltdown are the unintended consequences of government induced inflationary credit, artificially low interest rates, lending and housing regulations and, in general, the lack of free markets in banking, housing and money creation. The present interventions of massive liquidity injections to preferred players in the market will have predictable consequences down the road. When those consequences come home to roost, people will forget about the cause of the failure and only blame the markets that failed by not being free.