The Free Market Myth

I love the NY Times headline "Bush Emerges After Days of Financial Crisis." It's like he's not even running the country anymore. Oh wait, he never was.

Well, that was too easy -- so let's move on to something seemingly more challenging: the conservative argument that the free market can cure all. You'd think after the recent spate of financial crises, the Republicans would cede a little on this front -- but instead they criticize the bailouts. There's plenty out there right now about the current AIG disaster so I want to talk about the regulation of the economy.

Conservatives think that the best strategy is to let the market take care of everything -- it's more efficient that way -- whether it's health or education (vouchers) -- competition is the end-all be-all solution. Unfortunatley, it's a simplistic way of thinking and it's simple to see why. First of all, just because there is demand for a product doesn't mean the government produces it. For example, I've always wanted a computer which doubled as a toaster -- demand satisfied. But nonetheless, the market doesn't produce it. It's like public education or roads in the inner city. There's a demand -- but without the sufficient potential for profitability the market won't provide.

Here's another problem: asymmetrical information. This is what allows the CEOs of companies like Enron to take advantage of their employees and the market.

How do we solve these problems? Regulation. The market can provide the incentive to produce goods for which their isn't sufficient demand. And, in the case of CEOs taking advantage of asymmetric information, regulation can make the market more efficient -- not less.

And for all the conservative talk about the woes of big government, a recent study found that over the last several decades the economy has actually faired better under Democratic presidents than under Republican presidents. The study isn't perfect, but it certainly casts further doubt on the Republican claim that more regulation leads to a worse economy. The only thing the Republicans did "better" on? Slightly lower taxes.

Finally, if regulation is the answer, than this brings me back to my original post on this blog. If McCain is elected and puts one more conservative justice on the court, we can say good bye to any chance at meaningful national legislation aimed at reform. Now that Obama is back in the lead, maybe we won't have to worry.