Are "Free Markets" Really Free Without Morality?


If the truth sets people free, why is America becoming less free on the heels of twenty-five years of “free market capitalism”? Granted, banks could not do every last thing they pleased (although hedge funds pretty much could). But banks did receive enormous breadth of latitude for self-regulation. The theory was that the free market profit motive would facilitate naturally functioning checks and balances. Instead, the whole world got a taste of what happens when virtue sits on the sidelines while greed is empowered as the referee.

What did the world witness in the past several decades if not powerful corporate and private wealth forces combining their political influence to distort the laws that keep markets prudently free! What did we see if not a revelation that markets are not “free” when laws tumble down and the wicked use markets as instruments of exploitation? Indeed, we learned that without constitutional guidance to require good conduct in capital markets, grievous excesses will develop — excesses that hazard the common good. The result of these hazards is regulatory interventions and inefficiencies. Before long, the interventions morph into bureaucratic usurpations and a long march toward police state bondage. This concern is supported by the fact that in the first quarter of 2010 the private sector generated just 42% of the nation’s personal income.

Warnings Against Abuses Of Freedom From The Past

The Federalist Papers are pertinent to these concerns. Hamilton argues that the injudicious exercise of authority may “provoke and precipitate the people into the wildest excesses” (no. 27). Indeed, world history shows that too much authority leads to revolt while insufficient guidance produces excess and anarchy. This appears to be James Madison’s concern, too, for he says, “...liberty may be endangered by the abuses of liberty, as well as by the abuses of power” (no 63). Can the insight be stated any plainer?

The Apostle Paul argues that freedom blindly pursued leads to destructive outcomes, for freedom to be constructive of our best interests must be spiritually informed (e.g., Galatians 5:13-21). The Apostle James speaks of “the law of liberty”: the inner law of enlightened self-restraint that is necessary for liberty’s sustenance. Indeed, the American theory of states’ rights (early federalism) is based on the pragmatic realization that every unchecked liberty potentially diminishes a counterpoint liberty. Hence, freedom in an interdependent society is only possible if the laws are wise — an idea possessed by the original colonists of Massachusetts (see “Colonial Origins of the American Constitution: A Documentary History,” edited by Donald S. Lutz, 1998).

America's Abuse Of Freedom

Social conservatives have long placed a premium on civil and community order. But something began changing in the 1980s. Whatever the cause, many conservatives began believing we have no obligation to pay down government debt — even if our debt load robs the prosperity of future Americans. What kind of morality is this? A morality taught by history’s best lessons? A morality to be conserved? If not, this thinking cannot be “conservative.” It must be a deception.

By the late 1990s this neoconservative financial view was the dominant view among Republican Party elites. About the same time another revelation was received in the camp: Financial markets did not need a virtuous architecture. Markets could be left to themselves, self-regulation being most consonant with the spirit of free markets. Allegedly, the power of money would check the power of money. All would be well that ends well. But that’s not what happened! The “Invisible Hand” ended up being a lot of invisible hands — hands responsible for the most disgusting, reprehensible deeds ever witnessed in financial markets.

Wall Street — An “Entitlement”?

What happened is that financial speculation, largely shielded from tax exposure, evolved into massive entitlements for people perturbed with the growth of entitlements for other interests. The “right” to leverage inflation with capital instruments (thus exploiting the working man’s retirement savings) became the sweetest of all entitlements — the ultimate way to “puff-up” money. Thus, the Wall Street entitlement (shielded by the “free market” mantra) became the most exploitative entitlement created by corrupt and near-sighted American legislators.

The Wall Street crowd soon realized that the ongoing evolution of open market finance capitalism stood to provide exponential profits. All they needed to do was increase their leverage through derivatives while mathematically hedging risk. Hence, Wall Street bet the universe on continued growth. As it turned out, too many ‘wizards’ bet too much: The foundation was not big enough to support such leverage.

When the Ponzi scheme began to unravel, the Wall Street crowd turned to their geniuses in government, the result being a massive blackmail initiative — ‘the world will end if you don’t make taxpayers liable for our mistakes.’ Politicians without sufficient creativity failed to create an end run around Wall Street. They could have destroyed debt (and Wall Street’s wicked claims on wealth) through new laws that replaced Wall Street’s functions with financial operations on Main Street. However, in their cowardice they blindly capitulated to Wall Street, worshiping the idols of moral hazard by privatizing the gains of wantonness while socializing the losses of elites. If this wasn’t dastardly enough, the Fed then embarked on a plan of extended negligible short term interest rates so as to provide another wealth entitlement for the banking class.

We are left with important questions: Are “free market entitlements” for banks any less culpable than undeserved entitlements elsewhere — entitlements that reflect unfairly acquired political largesse? Are unfettered free markets good for the world, especially when so few powerful people have a true fear of God? In an era of global interdependence, is it wise to create open financial architectures that only check and then destroy the power of wicked interests through devastating market collapses — financial debacles that bring far-flung economic depressions as well as debt destruction?

Current Free Market Debate Misses Target

The free market debate taken up by congressional candidate Rand Paul and his critics needs a new analytical lens. Free markets are not physical properties like precious metals or ‘land, sea and sky.’ Free markets express national culture, the evolving state of the public mind, traditions, fears, hopes and so much more. It is unintelligent to claim that free markets are “good” or that they are “bad.” Generalizations do not address the dynamic variables inherent in markets, for markets are no better than the people who participate in them. Consequently, in times like these, market freedoms must be constrained. Scurrilous motives must be hemmed in by vigorous laws. Even so, the Founders said our constitutional liberties are only fit for a virtuous people.

Simplifications about free markets are more problematic than simplifications about fossil fuels, renewable energy or even federal taxes, for financial markets are dynamic and complex. The same goes for political parties, although the bad karma in recent times outweighs the good. Thus, if we’re to intelligently to discuss contrasting perspectives about markets, we need to dismiss simplifications and unsupportable claims.

No living person has observed a national free market, at least in the sense that free market advocates claim markets must be liberated to work their serendipitous magic. Every market failure is due, according to free market purists, to some complicating burden, some untimely intervention or some serial contamination of principle that prevents real market magic from breaking the economic sound barrier and proving its eternal reliability (and potential for listing on physicist charts of Periodic Elements).

Free Marketism — Religious Dogma?

It is bizarre how free market visions have warped into doctrinaire claims held more firmly by some — and with even less evidence — than Big Bang theorists use to explain universal history. Talk about a speculative overreach: Free market theorists make Lehman Brothers look like reach out novices.

Thomas Jefferson and James Madison generally had little difficulty identifying sophists’ arguments — specious ideas not subject to normal evidentiary examination because the conditions are never “right” to allow claims to be tested. Even so, the free market mantra has become a devotional religion to some. Likewise, the “government-as god” secular dogma has become religion to others. These “faith as politics” outcomes are consonant with the spirit of the age where temperance is broadly discounted while performance on extreme measures is lauded. Our heroes are the fastest, strongest, slyest, most propagandistic or whatever. They’re not the most balanced, controlled, even-handed or non-partisan. Sadly, that part of religion is on its deathbed. Consequently, national character flaws are driving the free market debate into polarized madness, with the public interest at stake! Maybe the state of the debate is providential punishment for sins of ego.

If Jefferson and Madison were present with us they would give a tongue lashing to both camps — free market and regulatory socialism. Republicans and Democrats alike would face criticism. Nevertheless, the right answers do not lie half way between the two sides. Political compromise is not the answer. The right answer is to think about markets and regulations in new, realistic ways. The market debate must be put on a multi-dimensional plane, variables and assumptions being re-evaluated as warranted by the facts.

How Markets Can Be Truly Free

Markets can only be as free as culture, character and wisdom allow. Conversely, markets should be set as free as possible within the constraints of the most prudent guidelines that can be devised. The key is to avoid regulation as much as possible, turning instead to the proper design of the market architecture and fundamental rules that create fair and economically productive playing fields.

Government cannot regulate the world into a higher realm, for inefficiencies, injustices and police state dynamics flow from excessive regulation. On the other hand, a world without prudent government regulation becomes a fearsome world, especially where culture tolerates foolhardiness. Good government minimizes the bureaucratic burden while maximizing the design benefits of proper architectures.

For example, put the bulk of the rewards of paper asset speculation into the public domain, thus reducing the burden of taxation on productive contributions. Put an end to fiat money by matching the size of the money supply to the most economically salient statistics, such as changes in productivity rates, business efficiency progress, population size, aggregate hours worked, and such. Link corporate tax rates to the prudence and sustainability of sector endeavors. Shift economic rewards from those who plunder public markets to those who meritoriously advance the public good. In sum, build incentives for markets to function for the common good rather than for markets to demonstrate dysfunctionalities as they’re gamed.

It takes a sophist to deny that national and international laws are broadly responsible for what markets are. If laws are so important to what ‘free markets’ are, then get the right laws to help free markets perform at their best. Shrink the regulatory growth of government by building markets that are innately resistant to wanton speculation. Crush big government, along with calls for government intervention, by creating simple, powerful laws that force businesses to compete for all they’re worth with parameters that ensure the national good. The regulatory burdens in this country are onerous because laws are written to create and protect lucrative opportunities for the few at the expense of the many.

We Need Virtuous, Prudent Markets

The answer is not to rail against law but to fight on behalf of honorable law! Free markets are no more the answer to our problems than are extensively regulated markets. Prudent markets are what we need! We progress toward “prudent markets” and virtuous capitalism by committing to a higher economic ethos — an ethos that honorably matches merit and reward regardless of irrelevant demographics. This means the left gives up affirmative action and the right gives up its grudge — both enervating to the common good because they create a disjuncture between deservedness and reward.

When all is said and done the argument is really about unearned income and the acquisition of undeserved wealth. When so many people on earth have so little, in spite of their productive contributions and human decency, is it right that others massively expand what they possess by exploiting financial systems? Fair financial systems are needed just as much as healthy food production systems and efficient transportation systems. Free markets should not be an tax-sheltered entitlement for the banking crowd. The world’s financial markets have more important work to do.