People sometimes say that the Republicans are the pro-business party, and the Democrats are the pro-consumer party. I would prefer to think of it, perhaps naively, that the Republicans are pro-market, and the other guys are pro-regulation. When given the chance many business people will do whatever it takes to make money, skirting as close to the law as possible, seeking favors from powerful politicians to defeat their competitors, and generally trying to maximize their personal wealth at the expense of their customers. That’s human nature, and conservatives recognize that. We trust the market to help the better products thrive and punish the losers. As Arnold Kling and Nick Schultz say in the introduction to “From Poverty to Prosperity“:
Traditionally, the debate over markets has been between the “Chicago school” and the “Harvard-MIT school.” The Chicago school says, “Markets usually work. That is why we need markets.” The Harvard-MIT school says, “Markets often fail, that is why we need government.”
Economics 2.0 says, “Markets often fail. That is why we need markets.”
I love that formulation. Instead of reflexively saying that since people are flawed we need other people, who presumably have no flaws, to watch them, Kling and Schultz argue that markets will take care of the problem better than government regulation.
Here’s Deirdre McCloskey describing the distinction between High Liberalism, as she calls it, and free market capitalism:
The story is, in a few brief mottos to stand for a rich intellectual tradition since the 1880s: Modern life is complicated, and so we need government to regulate. Government can do so well, and will not be regularly corrupted. Since markets fail very frequently the government should step in to fix them. Without a big government we cannot do certain noble things (Hoover Dam, the Interstates, NASA). Antitrust works. Businesses will exploit workers if government regulation and union contracts do not intervene. Unions got us the 40-hour week. Poor people are better off chiefly because of big government and unions. The USA was never laissez faire. Internal improvements were a good idea, and governmental from the start. Profit is not a good guide. Consumers are usually misled. Advertising is bad.
Thus Anderson: ”Externalities, asymmetrical information, and other collective action problems are . . . pervasive in economic life. Countless ways of conducting business reap gains for some while imposing unjust costs on others. Create a cartel. Stuff rat feces in sausages.” Thus Freeman: “It is a truism to say that in order to achieve the benefits of an efficient market economy (increasing productivity, greater economic output, increasing productive capital, etc.), the basic rules of property, contract, and exchange must be structured [by government] to realize efficient market relations.”
Dr. McCloskey answers such nonsense:
No. The master narrative of High Liberalism is mistaken factually. Externalities do not imply that a government can do better. Publicity does better than inspectors in restraining the alleged desire of businesspeople to poison their customers. Efficiency is not the chief merit of a market economy: innovation is. Rules arose in merchant courts and Quaker fixed prices long before governments started enforcing them.
I know such replies will be met with indignation. But think it possible you may be mistaken, and that merely because an historical or economic premise is embedded in front page stories in the New York Times does not make them sound as social science. It seems to me that a political philosophy based on fairy tales about what happened in history or what humans are like is going to be less than useless. It is going to be mischievous.
As I read that, I felt my pro-market, pro-competition, pro-wealth heart soar. And then I read this in Rolling Stone. You might have missed it:
The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from “virtually every state, district and territory in the United States,” according to one settlement. And they did it so cleverly that the victims never even knew they were being cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.
A slightly less literary description in the Wall Street Journal:
A federal jury convicted three former employees of a General Electric Co. GE +1.43% unit for their role in an alleged bid-rigging conspiracy the government said deprived municipalities of competitive investment returns.
Dominick P. Carollo, Steven E. Goldberg and Peter S. Grimm were each found guilty of various counts to commit wire fraud and to defraud the United States, the Justice Department said Friday.
They face up to five years in prison and a $250,000 fine for each count, though the maximum penalties can be raised to twice the gain or loss stemming from each crime.
Prosecutors had accused the three former employees of GE Funding Capital Market Services Inc. with helping manipulate the bidding process used by cities and states to invest the proceeds of municipal bond offerings.
I have to ask: What market could possibly have ended the scheme? We clearly need the rule of law on top of markets. But knowing where to draw the line between regulation and law is sometimes challenging.