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Monday, September 29, 2008

Steven Horwitz' open letter to his friends on the left

Dr. Steven Horwitz, an economist at St. Lawrence University, has written an excellent letter to those  on the left detailing why they ought not blame the free market for the current financial crisis in the U.S., and why they should reconsider demanding that the government "fix" it.

An excerpt that gets to the heart of the matter for naysayers who aren't convinced to read such a lengthy article (bolding is mine, italics are his):

One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn't there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional     incentives are such that profit is available. In a free market, firms profit by providing     the goods that consumers want at prices they are willing to pay. (My friends, don't stop reading there even if     you disagree - now you know how I feel when you claim this mess is a failure of     free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful     political actors can change the incentives to profit. Regulations can make it harder for firms to     minimize their risk by requiring that they make loans to marginal     borrowers. Government institutions can     encourage banks to take on extra risk by offering an implicit government     guarantee if those risks fail. Policies     can direct self-interest into activities that only serve corporate profits, not     the public.

Many of you have rightly criticized the ethanol mandate, which made it profitable for corn growers to switch from growing corn for food to corn for fuel, leading to higher food prices worldwide. What's interesting is that you rightly blamed the policy and did not blame greed and the profit motive! The current financial mess is precisely analogous.

No free market economist thinks "greed is always good." What we think is good are institutions that     play to the self-interest of private actors by rewarding them for serving the     public, not just themselves. We believe     that's what genuinely free markets do. Market exchanges     are mutually beneficial. When the law messes up by either poorly defining the rules of the game or trying to override them through regulation, self-interested behavior is no longer economically mutually beneficial. The private sector then profits by serving narrow political ends rather than serving the public. In such cases, greed leads to bad consequences. But it's bad not because it's greed/self-interest rather because the institutional context within which it operates channels self-interest in socially unproductive ways.

This, my friends, is exactly what has brought us to the mess we are now in.

Horwitz hopes that the left will entertain this request:

Those of us who support free markets are not your enemies right now. The real problem here is the marriage of corporate and state power. That is the corporatism we both oppose. I ask of you only that you consider whether such corporatism isn't the real cause of this mess and that therefore you reconsider whether free markets are the cause and whether increased regulation is the solution.

You can read the rest of this excellently argued and written letter in its entirety here.

Posted by Janet Neilson on September 29, 2008 in Current Affairs | Permalink


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He makes a lot of valid points. The marriage of state and corporate power might be referred to as "Corporatism", but I still call it what it is...Fascism. A tool of control.

Posted by: JC | 2008-09-30 12:26:23 PM

So long as the emphasis is on enlightened self-interest and not greed per se, I concur.

Posted by: Charles Martin Cosgriff | 2008-10-30 8:47:38 AM

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