Free Markets?

Sorry no picture with this post.  I spent the better part of today navigating Seattle's snow, slush, and ice, but mostly avoiding people who haven't a clue how to drive when they are scared.  Clearly, most of Seattle has never rented a car in Italy!

But sitting in my SUV washing my own mouth out with soap gave me lots of time to think about free markets.  Finally yesterday's Wall Street Journal arrived this morning.  In it was an editorial about how regulation is stifling innovation and hence capital infusions in Silicon Valley.  My first thought was this op-ed piece must be a joke, then I realized that I have been hearing the "free markets" drum beat for awhile.  

I keep waiting for someone like Paul Krugman to finally blow a gasket and give a succinct lecture on how not only are there no "true" free markets in complex economies, but in fact, those who promote free markets are often the worst abusers of regulation and incentives.  

Someone who has latched onto the idea of free markets is environmentalist Robert Kennedy Jr.  A few years ago he did some interesting writing about how free markets might actually cause companies to clean-up their toxic wastes.  You see, dumping chemicals into a river is considered an externality in economic terms, in other words, it is not figured into the costs of production because our markets, our economy doesn't or hasn't required it to be considered a cost to the business.  Because we do regulate, usually the externality cost is picked up and paid for by, yep, you guessed it, us, the taxpayer.  So, Kennedy thought, what if we actually had free markets where we the taxpayer didn't pick up the cost, but rather leveled the playing field by saying to every company they had to pay the full price of production and we the consumer would pay the full price of the product?

Let's think about this.  In Washington State every few years one of the largest employers, Boeing, lights a fire under our governor or state legislature, saying they will take their production overseas or to some southern state.  In order to stay, they need more tax breaks.  Washington does not have an income tax, so we rely on a sales tax and business and occupation tax.  Indeed, Boeing pays far less tax than a small family run business.  Same thing for the other powerhouse, Microsoft.  Obviously the benefits to the state are keeping people employed, and those employees spend money which the state collects sales tax.  I would guess that the amount of sales tax isn't equal to what those two companies garner in tax breaks.  

Our former Chairman of the Federal Reserve, Alan Greenspan, was a free marketer.  In fact, many free marketers really do believe in the economic theory that people will act in their own economic self interest.  But in October this year, Greenspan finally admitted  that people (more particularly companies) don't always act in what he thought would be their own economic self interest.  The variable that he didn't take into account was the short term self interest rather than the long term well being of companies or even individuals.  

All this is to say think twice when you start hearing the drum beat of free markets need to remain free.  First all, there is no such thing as a free market.  And second, the grey area of semi-regulation either not enforced or non-existent, clearly has failed us.  Often companies use the existence of regulations to nudge or shove competitors out of business (think large timber companies during the Pacific Northwest spotted owl issues), or use the lack of enforcement to continue their short term gluttony (think mortgage brokers selling the now infamous sub-prime mortgages).  Whenever someone talks about the need to keep markets free just think about these past 12 months.  

Quite frankly, my guess is the economy will be a lot healthier if we all admit that there are no free markets and we finally figure out ways to regulate and monitor that enhance creativity in capital and innovation but don't subject the world to these now all too familiar booms and busts.  It seems to me that the Lords of Wall Street can channel their innovation to figuring out how to have a sustainably growing economy rather than how to make a cool million selling toxic securities even they would be better off...maybe proving to Alan Greenspan that people can act in their own economic self interest as well as everyone else's.