Market Fundamentalism

January 12, 2010

But there’s also, it seems, growing opposition to cap-and-trade from people who should be on the side of progress — but whose reaction is basically “Eek! Markets!Wall Street! Speculation! Bad!” [..]

So let me talk a bit about why this reaction is 99% wrong, and bad for the planet.

Any time you have a market, there’s some opportunity for speculation. [..]

For example, the fact that wheat is traded means that there’s also a wheat futures market; and because wheat can be stored, futures prices affect spot prices.

So, should fear of speculation lead us to ban trading in wheat? Nobody would say that. Yes, sometimes speculators will get it wrong — but the advantages of having a wheat market vastly overshadow the possible harm that may sometimes come from speculation.

– “Is the Threat of Speculation…

I worry that, as they see more clearly the flaws in America’s economic and social system, many in the developing world will draw the wrong conclusions. A few countries—and maybe America itself—will learn the right lessons. They will realize that what is required for success is a regime where the roles of market and government are in balance, and where a strong state administers effective regulations. They will realize that the power of special interests must be curbed.

But, for many other countries, the consequences will be messier, and profoundly tragic. [..] Many countries may conclude not simply that unfettered capitalism, American-style, has failed but that the very concept of a market economy has failed, and is indeed unworkable under any circumstances. Old-style Communism won’t be back, but a variety of forms of excessive market intervention will return. And these will fail. The poor suffered under market fundamentalism—we had trickle-up economics, not trickle-down economics. But the poor will suffer again under these new regimes, which will not deliver growth. Without growth there cannot be sustainable poverty reduction. There has been no successful economy that has not relied heavily on markets.

– “Wall Street’s Toxic Message

Look at those bolded quotes. “Nobody would say” that market trading of wheat should be banned? “There has been no successful economy that has not relied heavily on markets”? Who are these crazy market-loving ideologues?

Oh, they’re Nobel prize-winning economists Paul Krugman and Joseph Stiglitz, respectively. These men are also known as the most prominent liberal critics of the so-called “free market fundamentalism” represented by Milton Friedman and others.

If Paul Krugman had his way, we’d have single-payer healthcare, a 90% top marginal tax rate, a 35-hour workweek, and being a Republican would be a capital crime. But we’d still, at a fundamental level, be using markets to allocate resources.

So when I recommend Hayek’s “The Use of Knowledge in Society” as helpful for understanding the argument for markets, it is not analogous to someone excitedly saying, “Hey, I just read Atlas Shrugged. It’s awesome, you should read it, too!”

I am a libertarian, so you know that I’m going to defend markets and Milton Friedman and all that crap. So don’t listen to me. Instead, notice that as much as economists disagree and have their own individual biases and ideologies, there is something that all economists, from the most liberal to the most conservative, agree on, and that is the importance of markets. If you don’t feel like you can explain why markets are important, then you are missing something about markets that everyone who does this stuff for a living agrees on. Isn’t that a situation you’d like to change?

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