It's an agonizing time to be a laissez-faire capitalist.
Many folks who fancy themselves free marketeers are aghast as they watch the Obama administration taking the wheel at failed automakers, drafting a sweeping overhaul of healthcare, dictating salaries at bailed-out banks, and preparing stringent new rules for the whole financial sector. The U.S. Chamber of Commerce is mounting an ad campaign touting the virtues of free enterprise, as if it's a foreign concept. Fox News frets daily about a socialist takeover of the economy. Some Americans who begged for government relief a year ago, when the economy was in free-fall, have buyer's remorse now as they watch the public sector swell.
[See how the government is swallowing the economy.]
Americans have historically been skeptical of big government, with a preference for market solutions and private initiative. But Americans also reject free markets when they concentrate too much power in the hands of a few or fail to serve the basic needs of the middle class. The bumper-sticker concept of free markets is a cheerful ecosystem in which everybody plays fair and the little guy always has a chance. But in the real world, capitalism is a ruthless blood sport in which the powerful seek to become more powerful, using every advantage to eliminate competition and charge the highest prices possible.
We lionize business geniuses such as Andrew Carnegie, John D. Rockefeller, and J. P. Morgan, for example, but these titans all fought bitterly with government trustbusters as they gained and exploited monopoly power over their industries. Electric power was once a luxury, offered at rates set by the free market, but high prices eventually led to public outrage and made electricity a regulated utility (which few people complain about today). Banks were largely free to do as they pleased in the 1920s, which helped produce the Great Depression—and a set of new rules severely restricting the behavior of financial firms.
It's actually a myth that America has always had a free-market economy. What we've had is a series of experiments with free markets. When it seems as if consumers are getting a fair deal, there's no reason for the government to intervene, and it usually doesn't. But when free markets fail to police themselves and consumers get the shaft, voters scream and the government gets involved—whether the regulatory solution is better or not.
That's what is happening now in big chunks of the economy. Few Americans feel the government should sit on the boards of banks or auto companies, telling CEOs what to do. But the companies struggling under the government's heavy hand are abject failures that would have become extinct in a true free market, without government bailouts. Citigroup, AIG, General Motors, and Chrysler are no longer capitalist enterprises; they're welfare recipients. Populist rage over the bailouts of these so-called companies shouldn't be directed at the government. It should be directed at the executives, unions, creditors, and shareholders who ran these companies into the ground or abetted their demise.
We're likely to end up with a whole new government bureaucracy to keep the financial industry penned in, which enrages people who feel the government should stay out of business's way. That's like blaming the police for arresting a bank robber. The financial industry has proved that it's driven by self-interest, unable to regulate itself, and capable of catastrophic destruction. Everybody wishes there were a nifty free-market solution—but we just tried that, with horrible results. Ten years ago, Congress repealed some of the key regulations enacted during the Great Depression, giving bankers more freedom in the belief that they're more responsible today, and the system more robust. Wrong. So now that the bankers have blown it, the government must come racing back in with ham-handed fixes. That's too bad, but we should really be enraged at the bankers who caused the whole problem, not at the government for doing what governments do.
[See why more competition won’t fix healthcare.]
Healthcare represents another free-market failure. Sure, there are pockets of the system that work, allowing people to get good care for a fair price. But we've crossed a threshold where too many people can't afford healthcare or pay too much for the care they get. That has finally created a political imperative to do something to solve the problem. The "solution" devised by politicians might not be very effective. But if the free market had been able to solve the problem in the first place, politicians never would have gotten the chance to foul things up even worse.
It's easy to vilify government for these woes, but at the core this isn't a failure of government; it's a failure of the free-market principles so many Americans blithely support. Silicon Valley entrepreneur Sramana Mitra argues that there's a fundamental flaw in our capitalist system, because it offers greater rewards to speculators who spend their careers gambling with money than to innovators who use their talents to create new things. "We need the innovators, the entrepreneurs, the creators, the scientists, the technologists—those who build value, those who create jobs—to lead us out of this nightmare," she wrote in a recent column for Forbes. "Not a bunch of speculators who make money regardless of whether value gets created or destroyed."
If she's right, we've got a much bigger problem than the risk of bad regulation or too much government. Whether big or small, the government will never produce a healthy economy. That's up to private-sector companies able to produce innovative goods and services at fair prices, without screwing up so bad that voters become outraged and send in the feds. The best kind of free market is one that never needs to be regulated. And they're in short supply.
Corrected on 11/24/09: A previous version of this story incorrectly spelled Sramana Mitra's name.