The Road to Serfdom – Free Market Edition
“GIANTS OF WALL STREET, IN FIERCE BATTLE FOR MASTERY, PRECIPITATE CRASH THAT BRINGS RUIN TO HORDE OF PYGMIES.” (New York Herald, 1901)
“I owe the public nothing!” (JP Morgan, 1901, after bankrupting thousands to protect a monopoly.)
“We can have a democracy or we can have great wealth in the hands of a comparative few, but we cannot have both.” (Justice Louis Brandeis)
“If the American people ever allow private banks to control the issue of their currency…the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.” (Thomas Jefferson)
This is a post about our free market system. It’s not a post against the free market – that market enabled me to become reasonably successful despite very humble beginnings in a Montana trailer park. However, like many Americans, I feel that something beyond the normal business cycle is wrong with our society today, that hard work, dedication, and talent are no longer enough to live the American Dream. The homeless on seemingly every street corner are a daily reminder that there are millions of people in similarly desperate situations. I rejoice in the happiness that my daughter has brought into my life, but cry when I envisage her as 1 of every 6 children in our country today – impoverished, with little hope or future. There is nothing worse than hopelessness in a country founded on hopes and dreams.
There are different ways to measure the success or failure of an economic system. I’m going to use wealth inequality because I believe that there’s enough evidence to support this as a prime contributor to our economic and cultural dislocation today. I know that some will disagree, including several close friends and relatives. They believe that recent economic, political, and legal trends, as reactions to what others see as social wrongs, signify an all-out assault on the American way of life, an attempt to replace the interest of the individual with the interests of the State. I don’t mean to demean their perspective – in fact, I will do my best to address and incorporate it, as it is based on a fear I share: That we risk a loss of personal and economic freedom to an extent rarely seen in the history of our Grand Experiment.
Most Americans believe in the founding principles of this country – freedom from economic and political tyranny. The founders, as political refugees, understood that the concentration of wealth, taken to an extreme, could lead to vast political power and render republican rule impotent. Were the Founders alive today – where 10% of the people control 80% of the wealth – they might wonder what their Revolution accomplished. Certainly George Washington would reconsider a winter spent at Valley Forge.
Enough data exists so that we can make several arguments against the inequality of wealth that exists in the U.S. today. The first and most obvious argument is that the allocation of wealth is undeserved, that there’s a
rigged mechanism whereby the winners decide who wins. The ongoing debacle that passes for our Banking system makes this point clear (see here, here, here, here, here, here, here). It has been persuasively argued, and several studies appear to show, that such concentration of wealth leaves the overall economy worse off. (see here, here, here). And then there’s this: Extreme inequality of wealth inexorably leads to the loss of personal and economic freedom for everyone.
There’s a seemingly potent counter-argument to this skewing of income and wealth. To some, these inequalities are unfortunate but natural outcomes between those who work hard and those who do not, those who are extraordinarily talented vs. those who are not, those with perhaps a bit of good luck vs. those who never catch a break. Oftentimes, Adam Smith’s invisible hand is referenced as an impartial arbiter of success, as the best way to maximize economic utility in a fair and unbiased way. But few economists (or households) consider Adam Smith particularly relevant 3+ centuries later, and certainly not in a rigged game.
Regardless of how we got here, even if this skewing of wealth is somehow justified, the consequence is a loss of freedom for all of us. A seminal book on the danger to freedom of concentrated economic power was Friedrich Hayek’s, The Road to Serfdom. Hayek’s insight was that the centralization of economic power into the hands of elites (of any political persuasion) leads to a political and economic dependence hardly distinguishable from slavery. Hayek saw that a loss of economic freedom leads to a loss of personal and political freedom, as individuals become reliant on and subservient to the state. Importantly, Hayek didn’t distinguish between “good centralization” and “bad centralization.”
Hayek argued that centralized planning is inherently undemocratic because it enables a small minority to impose its will on the people. What gives the minorities this power is the disproportionate share of wealth they control – wealth that directly translates into coercive power. To the defenders of the free market, Hayek’s warning about the dangers of collectivization (appropriation of private property) rings true, and helps explain their visceral reaction to taxes of all kinds. However, what they fail to appreciate is that Hayek’s warning is applicable to every type of concentrated economic planning, whether the politicians themselves do the planning for political ends or if they’re beholden to financial oligarchs with profit motives. Hayek’s view was that by its very nature, centralization was repression by (or through) the state over the individual.
Let’s look at a recent consequence of wealth inequality – the Affordable Care Act of 2010. To some of my friends, this law is a nearly unprecedented reach by the state into the economic freedom of the people. And I’m personally uncomfortable with the precedent set by the individual mandate. Yet I believe the ground from which this law sprung was made fertile by distorted free market principles, a symptom of and response to a much deeper malady, rather than the malady itself. We start with the vast transfer of income from those who desperately need it to those who don’t.
But this is just the beginning of the story. We add in skyrocketing medical costs from the insurance, medical, legal, and pharmaceutical industries – taking more money out of the average American’s pocket and transferring it to the top of the pyramid via wages or investment income. The cost situation is further exacerbated by a decades-long fight against any restrictions on tobacco or junk food – waged in the name of individual/corporate freedom – that leads to epidemics in cancer and obesity-related diseases. Lastly, the reduction in the safety net further reduced accessibility to increasingly needed health care. The confluence of all of these factors led to a humanitarian and fiscal crisis from which sprung the Affordable Care Act.
It’s important to our story, and of no small irony to note that the healthcare law passed only with the support of the Insurance industry. That this law was opposed by so many of the fervent free market advocates is telling. Someone with deeper pockets got what they wanted – guaranteed, consistent profits. A careful reader of Hayek would be unsurprised – even if you think your interests matter most, there’s always someone with deeper pockets whose interests will trump yours. In a true Democracy, a bigger checkbook wouldn’t impact legislative outcome. The fact that it so clearly does today shows just how far we’ve strayed from our Founding ideals, and why all of us – not just the poor or middle class – should be worried about increasing economic inequality.
The seeming paradox of how a large majority is ignored in a democracy is of course explained by the outsized impact of money. Studies have shown that politicians respond directly to whomever is writing them the biggest check (regardless of party; both Democratic and Republican politicians ignore the voter except during campaigns). If we can’t remove money’s influence from politics (and Citizens United guarantees that), then we need to adapt to that reality, play by those rules. I think that can be done in several ways, which I’ll explore in a subsequent post.