The last eight years have been especially difficult for capitalists like myself. A lot of nonsense has recently been written about the alleged free-market activities causing our current instability. To me, this view is comical. But for the populace as a whole, it’s not only damaging but potentially fatal.

In the first place, a free market is an economic system in which the means of production are entirely privately owned. We do not operate under a free market, as evidenced by the fact that I attend a public university.

But it gets worse when one turns to the financial sector. The basis of our financial system is a government cartel of private banks with the Federal Reserve having the sole monopoly on the creation of money and credit. To put this in perspective, the only comparable sector of the economy would be passenger train service, which is controlled by government-owned Amtrak. These are examples of private corporations owned and controlled by the government — hardly a market institution.
Under a free market, there obviously would be no central bank, and interest rates would be set by the amount of savings. With our savings rate going negative in the last few years, we should have seen a massive rise in interest rates. Since this didn’t happen, it’s safe to assume the free market has not been setting interest rates.

By setting interest rates low, the federal government has decreased the amount of savings in the economy. This has resulted in the destruction of our industrial base, fatal weakening of our currency and the accumulation of massive amounts of debt. But the current macroeconomic policy espoused by most economists is still that spending “drives” the economy and all we have to do to become wealthier is buy more things.

We are consuming capital — we are diverting resources away from savings and toward consumption. This leads to a higher standard of living in the short run but eventually will lead to economic collapse. Suppose my car was not running well and I needed to get it fixed. I could decide to delay spending money to fix my car and spend the money on something else, like a new TV. Eventually, my car would stop working and I would need to pay more to fix it. Saving money allows for a higher standard of living in the future at the expense of the present. Our current economic philosophy says that saving money is unimportant, which destroys our future standard of living for the sake of the present.

As I mentioned in a column a few weeks ago, our current banking arrangement of fractional-reserve banking is not a market institution. Even if it were permitted, however, banks in a free market would have to pay depositors on demand. This means that under a free market, eventually fractional reserve banking would eventually become 100 percent reserve banking.

Since the government guarantees money market funds, bank accounts and other financial instruments, there is little incentive for investors to do due diligence on where to put their money. There is also little incentive for banks to be honest or to act prudently, which leads to incredible moral hazard. Do you honestly believe that George Bush’s minions were that competent?

And of course, government paper would be the market’s last choice as a monetary arrangement, as evidenced by the fact that it took until 1690 for government paper money to be created. There is also the fact that a central bank has never existed without express consent of the government, i.e. banks have never taken over the economy without the direct help of government. This should make it clear that manipulation of money and credit is impossible on the free market.

The important question is not how to get out of this mess, but rather how the mistakes could have been made in the first place. Why was there suddenly a massive rise in housing prices at the same time as a massive expansion of credit? Why is it that there was enough credit for those companies to expand that way? In a free market, if you extend your position, you become riskier and thus less credit is available. By doing the opposite of the market, the Fed made speculation a costless venture, and thus investors who were risky became the successful ones. This promotion of speculation was a result of government intervention into the market. Add in the fact that the government was unwilling to shut it down and it’s no wonder we’re in our current predicament.

Would you still say capitalism abounds, comrades?

Vincent Patsy can be reached at vapatsy@umich.edu.

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