Academic journal article Libertarian Papers

Dead End Street Blues

Academic journal article Libertarian Papers

Dead End Street Blues

Article excerpt

BACK IN THE NINETEEN-SEVENTIES, inflation and unemployment were rapidly increasing together in the Western world, although according to the then ruling Keynesian priesthood they would never do so. By the end of the decade, the proudly proclaimed ability of the Keynesians to fine-tune the economy was shown to be a sham. Their performance records varied from country to country but the overall picture was bleak. Their technocratic macroeconomic management had delivered high levels of public spending, taxation, public debt, inflation, unemployment and bureaucracy and little else. (1) As the size of government expanded, the productive sectors of the economy contracted. It became clear to almost everybody that the Keynesian orthodoxy was if not a road to serfdom then certainly a dead end street.

Yet, now, in the wake of the spectacular crisis following the bursting of the housing bubble in the U.S.A., people from all over the political spectrum are clamoring for the return of Keynes. On all sides, greed is denounced as the motive that the market fosters and that drives it to self-destruction, but few remember the denunciations of envy (2) as the destructive motive in the Keynesian era.

With or without reluctance, people now claim that the market has failed. Almost all of the critics simply assume that the free market is to blame, but they do not go beyond pointing the finger at deregulation, as if that is enough to make their case. It is not--and assumptions do not prove anything. Nor do sweeping references to scandals, or to Keynes or Marx. For a series of events to demonstrate the failure of the free market, it is necessary that there is a free market. To verify that proposition, one must have, on the one hand, a coherent, theoretically relevant conception of free markets and, on the other hand, an informed grasp of the opportunities and constraints defined by the actual legal and institutional context within which consumers, producers and intermediaries have to act.

While it is easy to cite instances of deregulation in recent years, these are more than matched by numerous instances of new regulation and reregulation. The argument that a few modifications of the regulatory regime of one industry (the banks) prove the failure of the free market is a non-starter. It amounts to saying that only a handful among many thousands of regulations prevents the market from being free. Specifically, banking and other financial services, which were at the center of the 2008 collapse, are still among the most heavily regulated activities, although many regulations amount to privileges and immunities rather than restrictions. After all, the banking system is now well integrated into the fiscal and policing machinery of the state. Legal fictions notwithstanding, banks are not, and have not been for a long time, private (i.e., separate-from-government) companies--this the government responses to the crisis make abundantly clear.

Moreover, all over the Western world, legislation has linked banks into national banking systems under the guidance of a central bank enjoying a legally imposed monetary monopoly and coordinating its policies with similar monopolist institutions elsewhere, in particular with the American Federal Reserve System (the U.S. dollar having been de facto the world's reserve currency since the nineteen-twenties). Such legislation has buttressed the inherently inflationary institution of fractional-reserve banking, provoked spurts of credit-expansion not backed up by increases in real savings, and thereby created the moral hazards and systemic risks that now haunt economies worldwide. For governments, the present critical condition is an opportunity for claiming that they have to do something and then doing what comes naturally to them (namely, fleecing taxpayers and money users, now at projected rates that are unheard of in peacetime). In addition, the Keynesians and neo-liberal monetarists' shared addiction to "controlled inflation" has driven savers onto a market for investment vehicles with substantial counter-party risks, thereby exposing them even more to the instability of the state-sponsored financial systems. …

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