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Reality Catches Up to the Free Market
Karl Marx, were he still about, would surely be interested in the report that unregulated free-market capitalism has died in a flash, by its own hand; whereas it took 70 years and a Cold War to bring down the Marxist economy established in the Soviet Union following the Bolshevik Revolution.
The Marxist economy died of its internal contradictions.
This was the fate Marxism (or Marxism-Leninism) had predicted for capitalism, not for itself. Unregulated free-market capitalism may be said to have killed itself by greed, vanity and excess, all amply evident before and at the death scene, but the ultimate guilt must be attributed to the vacuity and perversity of market ideology, which contradicts human nature.
In this, it exactly resembles the American national foreign affairs ideology, that democracy will always eventually triumph over all else. Regrettably, this is an illusion, clung to in American governmental, political and, to a considerable degree, academic circles. It is stubbornly adhered to because everyone would like to think it true, since it is very reassuring to Americans, and an uplifting idea.
Both market and democratic ideologies rest on a belief in the essential goodness of mankind, admittedly blocked from time to time by institutional or intellectual obstructions, which have only to be removed for harmony to be restored.
Market capitalism rests on the observation that, all things being equal, a free market is the most perfect known mechanism for setting priorities in an economic system manufacturing goods or providing services.
It declares that in free-market conditions, everyone will make, sell and buy within an equilibrium established by the coincidence of their true interests. People will buy what they need or want according to the value they place on the good or service, and manufacturers or service providers will meet these needs according to whether the value offered incites them to do so, rather than to do something else.
It also is assumed that the employer will pay the true value of the employee's work, since otherwise the worker will go to an employer who will do so, who naturally will understand that paying a higher wage is in his competitive interest vis-à-vis his competitor.
Owners and managers will be rewarded according to the true value of what each contributes to the common interest. Otherwise they will lose business and fail.
Those last two clauses demonstrate how artificial this theory is. That artificiality-that remoteness from how the real world functions-is why the market has to be regulated, a lesson last learned in the United States 80 years ago in the Great Depression, and progressively disregarded or discarded during the Reagan, Clinton and George W. Bush administrations.
What is this perfect and all-wise free market composed of?
Legitimate actors with legitimate goals, plus speculators, swindlers, confidence men, guys trafficking in inside information, and criminal actors. Yes, the defenders of the market say, but it all averages out in the end. So we see, as the market today destroys global credit and global value. Everyone currently acts as if all this happens as the result of an act of God or the will of the law of averages, or is the result of forgivable miscalculations. President George W. Bush said it's all been very simple. They built too many houses.
Of course "they" didn't build too many houses. "They" swindled too many people who bought those houses, or wanted to buy them, by giving them the money to buy them, or to refinance them in order to have a cash gain, with mortgages or second mortgages that these people could not responsibly be expected to repay. That is where it started.
The subsequent manipulation of the funds, so as to bundle bad debt with good debt and pass it off on the international financial market as "securitized" good debt, has had more than enough discussion since the crisis blew up this summer.
The financiers, as Joseph Stiglitz has observed (in a recent CNN interview), were doing what the system demanded of them. They were assured generous rewards for managing risk and allocating capital so as to improve the efficiency of the economy enough to justify their generous compensation. "But they misallocated capital; they mismanaged risk-they created risk. They did what their incentive structures were designed to do: focusing on short-term profits and encouraging excessive risk-taking."
And this does not take account of an Iraq war financed by debt, and the unconscionable Bush tax cuts to the wealthy, the president's perverse punishment of the very working- and middle-class voters who had elected him.
As Stiglitz says, the first measures in recovering from the disaster must be to reconstruct the system of corporate incentives to serve the public interest rather than private interests.
Prior to that, however, public policy must be reconstructed on the basis of a historical understanding of how people actually behave rather than on theories about how they might be presumed to behave in the world of abstractions.
This understanding is called realism, and in American public affairs during the past two decades it has been scorned. However, one good thing about realism is that being realistic eventually turns out to be right. The distinguished Protestant theologian and political philosopher Reinhold Niebuhr once remarked that of all the doctrines of the Christian religion, only one is invariably self-validating: the doctrine of Original Sin.
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27 Comments so far
Show AllAnother misnomer article. What was "free-" about this market? The market was, and remains, obviously carefully rigged.
Oakknot
Pehaps the author uses the term loosely, in an ironic sense. Of course the market is rigged.
It is better to die on your feet than live on your knees. Zapata
Twelvepax
Thanks, I was about to put free in quotes as well. I believe the author should have done so as well.
Love
Zero
This is the myth that we are all raised on, that the market will take care of itself, that those people playing the game are honorable and should be left alone to make Ame(u)rica strong. I agree with the idea at the end of the piece that man is not necessarily good, especially when it comes to money. So far, under the Republicans, we have been fed this economical pap as part of the American way. Perhaps with proper oversight, the barbs of our "honest" economical fathers will sting less to the innocent and voila! no more terrorism. Could the two be possibly connected? But Ame(u)ricans are so goooood!
billiam1 September 19th, 2008 2:54 pm
...the myth that we are all raised on, that the market will take care of itself...
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I believe that back in 1923, when he was told that markets will correct themselves in the long run, John Maynard Keynes responded with his now-famous quote: "In the long run, we are all dead."
And I think it was Ralph Nader's father who said, "Capitalism will always survive, because socialism will save it."
Sioux Rose
Love the article, but the last line in my view is not accurate, and doesn't substantiate the case made above, lest GREED be the original sin (as opposed to the carnival of carnal expressions).
Sioux Rose
I'm getting flashbacks of Fellini's ROMA.
Very good article. Is this guy good or what?
Yes, William Pfaff is an excellent writer and analyst.
He used to be a widely syndicated columnist in mainstream newspapers in the USA, but his persistent tendency to focus on basic truths (he is a historian by training and well versed in examples of human folly) rather than noise and bluster made him unacceptable.
or What
The theological concept of "original sin" is based on the Biblical myth that humankind is morally "fallen" from some Edenic level of purity. Humans, who were once "good," are now prone to "evil" and needed to be "saved" by someone sent by God.
Interestingly, conservatives distinguish themselves from liberals by claiming liberals are naive in thinking humans are essentially "good" while the allegedly wiser conservatives "know" that humans are essentially "bad" and so we need law and order and discipline and rules to keep us in line, EXCEPT when it comes to the area of economics, strangely enough.
In that one area, humans can supposedly trust the "Invisible Hand" of the Market (a post-biblical myth) to keep things in equilibrium. "We don't need no stinkin' regulations!" was conservatives' cry. "Government IS the problem" claimed Saint Ronnie Reagan. This obvious self-contradiction in conservative ideology and "morality" has never been satisfactorily reconciled.
Like all creatures on this planet, humans have a strong instinct for survival, for self-preservation, including the powerful illusion that "greed is good" even if you're not Gordon Gekko. That's why we evolved moral systems, to temper these selfish tendencies, and laws and regulations, to codify these moral systems. Conservatives seem unable/unwilling to understand that "fallen" humans need systems of regulation, ESPECIALLY when it comes to economics.
Will the current crisis force them to grow up and be realistic? I doubt it. We can already hear the rationalizations and scapegoating.
But always remember, only liberals are naive about so-called "human nature." Conservatives know best.
The market/capitalist approach to social/economic organization has within it the seeds of its own destruction. The approach requires a focus on the short-term, as the competitive nature of the market means that those who do not focus on the short-term probably will not be around for the long-term. Also, for similar competitive reasons, the approach requires a focus on narrow self-interest.
So the market/capitalist approach leads to a short-term narrow self-interest view, which means that those who become leading players in the market have an interest in influencing market rules to benefit themselves in the short-term (whether influencing the rules directly or indirectly through a government they hold sway over because of their market power). And as they benefit themselves in the short-term, they gain more power to influence the rules to an even greater extent, in a positive feedback loop, on and on until they have warped the rules to such an extent that the system comes crashing down.
Another approach that would reward personal evolution that leads to the development of broader views of self-interest, and that would lead to more emphasis on the long-term, would allow more individuals to see their broadened self-interest as merging with the community interest and would offer the promise of a more stable, healthy, and productive social/economic organization.
But how to get there from here remains the difficulty, as the market capitalists with a focus on the short-term always seem to have an advantage in a short-term competition, and they can use that advantage to prevent the competition from becoming long-term.
These are interesting and thought provoking philosophical views, thanks for sharing them.
But I can't help but think that the wealthy just want to keep and grow their wealth. They'll strongly support any positions that do that. Along came Ronnie Reagan and Maggie Thatcher with the Chicago economic theories that they sold to their people. It wasn't a philosophical or rational sale. It was more a "divine right of kings" type of argument and acceptance by the people. And the American aristocrats and oligarchs vigorously supported and perpetuated it.
American ideas, to this day, center around elitism, leadershipism and economic class.
Democracy as displayed by the New Deal and American unitedness during and after WW2 is America's strength. I hope we find it again.
The market is not a democratic institution. On its production side, supply is an active participant, determining what to offer and on what terms, while demand is a passive participant, compelled to fill its needs from whatever supply finds it beneficial to itself to offer. On the labor side, demand is the active participant, determining what to offer and on what terms, while supply is a passive participant, compelled to fill its needs from whatever demand finds it beneficial to itself to offer.
Supply on the production side and demand on the labor side are roles filled by the same social player: the corporation. Demand on the production side and supply on the labor side are also roles filled by the same social player: the public. Corporations are organizations encouraged and chartered by the government; organizations of the public are obstructed and chaperoned by the government.
The public provides funding to the government and the corporations provide staffing for the government so that the government provides funding to the corporations in fair weather or foul. The public must become militant in its demands that the government enact and enforce meaningful regulation upon capital, and that it actively encourage the consumer and labor unionization of the public to bring the potential for democracy to the marketplace.
That Ralph Nader guy sure is smart. Seems a lot smarter than the other guys. How about we vote for him for president?..................lizard
Where were the Democrats when Reagan, Bush I, Clinton, and Bush II were eviscerating the New Deal protections of the American People? Now I remember...they were telling us what a wonderful world it would be if only we deregulated everything and signed free trade agreements with every country in the world. We now see the outcome, but there were those among us who read the handwriting on the wall and did everything in their power to warn us. They call them Greens.
Vote McKinney-Clemente on Nov. 4.
John M. Wages, Jr.
Candidate, US House of Representatives, MS-01
www.VoteJohnWages.com
Yes that vote will certainly make a change from the last eight years, by bringing us four more years of the last eight years. Would it were that we had a parliamentary system. It seems that the Republicans push for us to vote for third party candidates to increase the probability that we will not vote or that we will not vote for the Democrat so that they can win by a plurality.
I've been hearing this for thirty years now, and each wave of practical "democrats" gives more ground to the right, backpeddles constantly, makes no effort to work with third party activists to rally an actual grassroots base for public empowerment, and in fact, works to stifle any such effort which isn't completely under the aegis of the "democrats". Further, they insist on putting the onus for the Bush victory not on people who vote for Bush, but on people who want a wider range of discussion within the so-called democratic party, and during the last two conventions, went out of their way to use police force to isolate and arrest dissenting factions forced to demonstrate outside their "democratic" convention. The "democratic" party is now led by realists who'd rather lash out to their left then take on the right. They are made up of the same mindset that arrested and murdered Rosa Luxemburg and Karl Liebnecht in Germany in 1919, and further, if Martin Luther King Jr. were alive today, they'd be painting him with the same brush they tarred Jeremiah Wright with back in the spring. Any real democratic resistance will begin as a minority movement, just as the Sons of Liberty, the Abolitionists and the early labor and civil rights movements did. That movement will have to work quietly and consistently, shrug off all criticisms from our so-called allies among "progressive" democrats, and work to raise the tenor of this struggle beyond the "either-or" mentality that has governed the "democratic" party for way too long now. The future is with such an independent, grassroots movement, oriented towards the working class majority and its allies, or there is no future. NO more of their fucking imperial wars and economies for billiionaires which they only want to talk about during election years. From now on, we have to set the terms for this struggle, and let the chips fall where they may.
"Karl Marx, were he still about, would surely be interested in the report that unregulated free-market capitalism has died in a flash, by its own hand; whereas it took 70 years and a Cold War to bring down the Marxist economy established in the Soviet Union following the Bolshevik Revolution."
Really. Was the economy of the Soviet Union a Marxist economy?
Splain Lucy.
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"Both market and democratic ideologies rest on a belief in the essential goodness of mankind, admittedly blocked from time to time by institutional or intellectual obstructions, which have only to be removed for harmony to be restored."
Really. Perhaps we can just take your word for this vast and unsubstantiated generalization.
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""One ought to be skeptical. One ought to be skeptical regardless of the source. Until proven conclusively one ought to remain skeptical. An open mind is a skeptical mind." - Robert
Pfaff has been a sterling journalist for years. But this piece is all over the place.
As noted, the Soviet economy was not Marxist. American foreign policy is not directed towards the establishment of democracy abroad (what a joke that one is!), and market ideology is not based on the essential goodhness of humanity. It is based on the claim that the market will harness the essential self-interest of humanity. But of course because the assertion is demonstrably false, market ideology has been exposed as just that - ideology.
Having started so disastrously, Pfaff gets on to some reasonable statements.
But most telling over the lasat year has been the dominance of white noise in the media re the financial crisis. The Dow Jones is down yesterday, today it is 'recovered' and there's hope. Brilliant. Meanwhile where are the succession of spivs and criminals who sold the shit and packaged the shit and re-sold the re-pacakged shit, etc.? Mostly doing quite nicely thank you.
Another glaring fact. Business schools all have major divisions teaching 'finance'. Those academics have been distinguished by their complete absence in the current upsurge of proffered 'explanations' of the crisis. Why isn't their 'expertise' being brought to the force. Is it just possible that their 'expertise' has contributed to creating the crisis in the first place? Notable in the finance syllabuses with which I am familiar is a complete absence of any history of hte finance sector and a complete absence of any treatment of the regulatory apparatus.
Albert Einstein put forth the idea in his essay "Why Socialism" that mankind is simply not evolved enough for "True Socialism".
If you are interested in reading the essay click on the link:
http://www.bigissueground.com/politics/einstein-socialism.shtml
Rick, that's not what Einstein concluded at all. He put the question of bureaucracy versus the individual forth as an open question, and in the concluding paragraph of this essay, which doesn't appear here, originally appeared in the first issue of Monthly Review back in 1948, welcomed the appearance of the magazine as an important tool for an open discussion of the problems of bureaucracy within socialism. But he did not put forth the idea that mankind wasn't evolved enough for socialism, if that was the case, why even discuss the matter? Nor would he have wasted his time implying that we never will be.
i often worry for the rich.
Thank God we still have socialism for the rich. How would they make the payments on their multi-million dollar mansions and Mercedes’ without a little helping hand from Joe Middle Class American Taxpayer. Like you, I often worry for the rich too.
The American Dream is failing because the American Dream has become the world's nightmare.
http://blogoffanddie.wordpress.com
So long Dubya, we'll always have debt and Guantanamo
It is foolish to assume that you could even call this system we have now a free market. It's a money cartel. Their meeting place is the Federal Reserve. It might was well be the Satriale's of the people who control our money.
I totally agree a free market has it's faults and some saftey nets can be proven to help economically, the system we have and the events that are unfolding are not a free market. This is our collection of Ivy League Sopranos.
Nothing wrong with being old fashioned: don't spend more than you can afford.It might shrink economies, but look at the alternative we have now...the entire world economy is based on debt thanks to 'free market' idiology.
The US is so full of deadly contradictions. Free market capitalism which is anything but free depends on constant growth. Cancer is characterized as out-of-control cells which eventually destroy their host. Until everyone appreciates that out-of-control growth will kill the planet we will continue with these short-term time horizons which take no responsibility for the long-term costs. The best thing that could happen is for the US to go bankrupt. Then the rest of the world would have a wonderful example of what rampant materialism and blind greed get you.
snydly
It's time to x-reference the short sellers of S&L, 9/11 and this looting and see what pops up.