J Brauer | © Stone Garden Economics
The world is awash in a wave of demonstrations by the economically discontented. I am amazed at some of the folly I hear. The world financial and subsequent economic crisis was only proximally caused by business and its bankers. The ultimate blame lies with (re)election-greedy politicians and with their ignorant voters, now so lively engaged in demonstrations. What we need is more “free” market economics, not less of it.
Every economist knows that the phrase “free market” is wholly misunderstood. Not at all does it refer to an unregulated free-for-all, to a money-grabbing feeding frenzy whereby “bad” business buys off government to exploit “good” people. Quite to the contrary, “free” refers to a minimally sufficient and well-regulated market, and to create this is the proper role of government. In turn, it is the role of voters to elect political representatives who understand that a free market is never an unfettered market. When markets crash, at fault is a political system which has failed to properly fetter (meaning to “bind”) business with appropriate regulation, supervision, and enforcement.
In free societies, the role of markets is to fulfill a larger social purpose, namely to provide for the livelihood of its people. There are many ways to organize economic activity, and over the millennia we have learned that the best way to do so is via competition. But we have also learned that competition, when left unregulated, can be predicted to get out of hand, can be predicted to become unfair, can be predicted to lead to failures. Thus people, in their role as voters, need to decide just what limitations they wish to impose on their own competitive spirit. In this, they need to ensure that whatever regulation they do impose is purpose-drive, incorruptible, coherent, equitably applied, and minimally costly.
The notion that today’s “government” somehow can solve the current problems is absurd as it was “government” that caused the problem in the first place. The current ongoing crisis started when on a certain weekend in late September 2008 John McCain, then a presidential candidate, refused to return to Washington, D.C., for a Senate meeting of utmost importance. Too busy to run his campaign, the Senate then couldn’t conduct business, and the markets lost confidence in the regulatory role and apparatus of government. This, and nothing else, is what caused the already wobbly markets to crash. Because linkages among the world’s banking houses and financial centers had grown during the 1990s and 2000s, it only then became clear that a crash in the U.S. economy implied a crash in the world economy as well. It turned out that politicians, in their role as creators and monitors of the regulatory systems they built, had failed to keep up-to-date to more closely monitor the business sector as the world economy globalized. And just as it seemed that the world economy was beginning to turn around for the better, the euro-zone countries got themselves into a tangled tiff over bankrupt Greece where voters had put in place politicians who, in the voters’ name, kept borrowing and spending far beyond what the people of Greece could ever repay.
It is not the business class but the voters, through the political class they elect, that write the rules by which business is compelled to operate. Business merely competes to obtain and maximize profits within the rules laid out by the political process. If there are loopholes, it is not the job of business to close them. In fact, it is the duty of business to exploit any such loopholes as finding loopholes serves an important information function for legislators to then sharpen the rules.
The political process has been hi-jacked, of course, by business as much as by labor and other special interests. In the end, there is no such thing as “government” as distinct from the people. If people want sensible rules by which to compete and create economic wealth, they need to rewrite the rules by which politics functions, need to elect a different kind of politician, one less interested in power and reelection, less interested in serving special interests, one more in tune with the common interest. It is a triumph of politics to have managed to turn people’s ire against the very businesses that employ them and that provide ever more efficiently produced goods and services. We do not need more regulation; we need smarter regulation. And for that, we need smarter voters to put in place smarter politicians to more smartly monitor the commonweal.
Yet, the brand of democracy championed in the twentieth century has had its time. Instead of a reflection of people’s wishes, government has become a contested power unto itself. Any trust people once might have placed in their elected officials as reasonably impartial, forward-looking legislators of rules aimed at society’s greater purpose has long since been lost. Politics itself has become a badly regulated marketplace. Politicians have become playthings of special interests, no longer able to look out for the interests of society at large. It is time to reconstitute politics to serve the common good. The confusion of the economically discontented lies in looking for answers to a corrupt political process. Instead of blaming business, people themselves, as voters, need to rewrite the social contract, the rules by which business, labor—and politicians—are regulated.
J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.