"The Libertarian Delusion--What the Free Markets Can't Do"--Robert Kuttner

Perspectives
The Libertarian Delusion
February 27, 2015
by Robert Kuttner


This article appears in the Winter 2015 issue of The American Prospect magazine.

What the free market can't do

The stubborn appeal of the libertarian idea persists, despite mountains of evidence that the free market is neither efficient, nor fair, nor free from periodic catastrophe. In an Adam Smith world, the interplay of supply and demand yields a price that signals producers what to make and investors where to put their capital. The more that government interferes with this sublime discipline, the more bureaucrats deflect the market from its true path.

But in the world where we actually live, markets do not produce the “right” price. There are many small examples of this failure, but also three immense ones that should have discredited the libertarian premise by now. Global climate change is the most momentous. The price of carbon-based energy is “correct” — it reflects what consumers will pay and what producers can supply — if you leave out the fact that carbon is destroying a livable planet. Markets are not competent to price this problem. Only governments can do that. In formal economics, this anomaly is described by the bloodless word “externality” — meaning costs (or benefits) external to the immediate transaction. Libertarian economists treat externalities as minor exceptions.

The other great catastrophe of our time is the financial collapse. Supposedly self-regulating markets could not discern that the securities created by financial engineers were toxic. Markets were not competent to adjust prices accordingly. The details of the bonds were opaque; they were designed to enrich middlemen; the securities were subject to investor herd-instincts; and their prices were prone to crash once a wave of panic-selling hit. Only government could provide regulations against fraudulent or deceptive financial products, as it did to good effect until the regulatory process became corrupted beginning in the 1970s. Deregulation arguably created small efficiencies by steering capital to suitable uses — but any such gains were obliterated many times over by the more than $10 trillion of GDP lost in the 2008 crash.

A third grotesque case of market failure is the income distribution. In the period between about 1935 and 1980, America became steadily more equal. This just happened to be the period of our most sustained economic growth. In that era, more than two-thirds of all the income gains were captured by the bottom 90 percent, and the bottom half actually gained income at a slightly higher rate than the top half. By contrast, in the period between 1997 and 2012, the top 10 percent captured more than 100 percent of all the income gains. The bottom 90 percent lost an average of nearly $3,000 per household. The reason for this drastic disjuncture is that in the earlier period, public policy anchored in a solid popular politics kept the market in check. Strong labor institutions made sure working families captured their share of productivity gains. Regulations limited monopolies. Government played a far more direct role in the economy via public investment, which in turn stimulated innovation. The financial part of the economy was well controlled. All of this meant more income for the middle and the bottom and less rapacity at the top.

Clearly, a more equal economy performed better than a more unequal one. Families with decent incomes could recycle that purchasing power back into the economy. Well-regulated financial institutions could do their job of supplying investment capital to the real economy rather than enriching their own executives with speculative schemes — ones that left the rest of the society to take the loss when the wise guys were long gone. In the case of labor, there was not a single, “accurate,” market-determined wage for each job, but a wide range of possible wages and social bargains that would attract competent workers and steadily increase the economy’s productivity.

The free market doesn’t live up to its billing because of several contradictions between what libertarians contend and the way the real world actually works. Fundamentally, the free-market model assumes away inconvenient facts. Libertarians presume no disparities of information between buyer and seller, no serious externalities, no public goods that markets can’t properly price (Joan Fitzgerald’s piece in our special report in the Winter 2015 issue of The American Prospect magazine discusses one — water), and above all no disparities of power. But in today’s substantially deregulated economy, bankers have far more knowledge and power than bank customers (witness the subprime deception); corporations have far more power than employees; insurers have more power than citizens seeking health insurance. Labor markets can’t compensate for disparities of power. The health insurance “markets” created by the Affordable Care Act can’t fully address the deeper problem of misplaced resources and excessive costs in our medical system.

(Long Article..But Good Read...better than my snips)

http://billmoyers.com/2015/02/27/libertarian-delusion/


Robert Kuttner is co-founder and co-editor of The American Prospect, a professor at Brandeis University's Heller School and a distinguished senior fellow of the think tank Demos. He was a longtime columnist for Business Week and continues to write columns in The Boston Globe. He is the author of Obama's Challenge and other books.