Market commentators and the White House have been quick to blame last year’s economic meltdown on a free market run amok. And they’ve used that false assumption to justify their unprecedented response of government intervention and increased regulation.
But we’ve never really had free market capitalism in this country. The last 30 years of America’s market system is better described as “mixed crony capitalism” – one part capitalism, one part government intervention through various programs, and one part corporate cronyism where officers and directors of big businesses pay themselves more, lobby politicians on both sides of the aisle and gain more power through favorable governmental regulations including mergers.
In such a three-way shared system, it shouldn’t surprise anyone that true free market capitalism always appears to be outnumbered by the interests of the government and corporate cronies.
For example, despite the billions in taxpayer dollars that have helped prop up a slew of “too big to fail” banks, and unprecedented government ownership of them, the powerful bank lobby has somehow convinced the current administration that little needs to be changed about how those banks operate. It’s as if the bankers and politicians are saying “let’s just call last year a mulligan and move on". Not surprisingly, most of the CEOs and directors of the banks that drove their institutions over a cliff are still in place.
If Standard Oil or Ma Bell existed today, it’s hard to imagine there would be the political will to break them up. Instead, politicians and their corporate donors would argue that what’s good for Ma Bell, GM, Bank of America (NYSE:BAC), Citigroup (NYSE:C), or any other company is good for America. Politicians would never support programs that curtail spending, because it would give them nothing to go back home and talk about to get them re-elected.
There are many critical thinkers arguing why even more government intervention is needed today than ever before. Unfortunately, there are no critical thinkers arguing why our system needs more emphasis on free markets with clear “rules of the game” and less state involvement in our economy and less protections for corporate cronies. This paucity of ideas is something that greatly troubles me and other investors I know.
Milton Friedman and Ayn Rand are no longer around to argue for their vision of free market capitalism. Instead, we only hear alarmist libertarian rantings of Ron Paul or populist sloganeering to “keep the government out of our business”, providing no clear direction for what changes should take place.
We need a renewed focus on the ideas of individual choice championed by Friedman and Rand. Both argued for a free market system built by entrepreneurship and small business and against abuse of power by “robber baron” CEOs. Government’s role in their eyes should be limited to police, defense, and the legal system. The importance of a market system following enforced rules is critical. The ideal market system the US should be striving to attain here is not Russia but Hong Kong.
The economic problems our country face are great, but they won’t improve by further deteriorating our federal balance sheet by short-term spending and tax breaks. Instead, we need to:
- reduce excessive government spending and restore fiscal balance to the federal and state governments,
- break up companies that are “too big to fail” including the big banks,
- force over-leveraged banks to undergo debt-to-equity conversions that allow them to get credit out to real entrepreneurs sooner,
- bring back Glass-Steagall that separates commercial and investment banks,
- prosecute insider trading and other white collar crimes when they occur,
- get the government out of the business of setting executive pay - in favor of giving shareholders more direct powers to remove directors not doing this appropriately, and
- eliminate special tax breaks for homeowners and cars which only prolong the pain of an inevitable correction until later.
The heroes of free market capitalism are the entrepreneurs who create real value and real businesses. Those people are the antithesis of “fat cat” capitalists who ensconce themselves in money, power, with government protection. We need more people championing well articulated pro-market, pro-entrepreneurship policies in Washington.