More on free markets

I received a great reply to the previous post, and it deserves to be quoted in full. I don't think there's much disagreement here, but rather this is a much clearer explication of many ideas than I could muster, and a great extension of the conversation. Enjoy (I certainly did):

Nice post on free market and evolution. A few comments:

1) I think you need to differentiate a few things.

A) First off, the difference between regulating a financial market and planning an economy. There isn't a mainstream libertarian out there who thinks markets work without regulation. The whole point of the free market is to allow the market to set the price of goods. If it takes regulation to make the market correctly set the price of goods, strong free market libertarians believe in those regulations. Adam Smith was utterly clear about this: no market system can survive without basic regulation, starting with the protection of property rights and the enforcement of contracts. And only a government can do those things effectively. Even more substantial regulation --- such disclosure laws to prevent insider trading, limitations on leveraged and margin purchases to prevent huge boom and bust cycles, central bank control of monetary policy --- are almost always supported by even "pure" free marketers. Where the real gap exists is in the difference between regulating things such that the market functions properly to set the price of goods and, on the other hand, actually planning the economy. Obviously, the traditional definition of planning the economy is either government ownership of industry or government price/production controls. The problem with planning is that it eliminates the market. And the problem with eliminating the market is not that prices can't be set by rationality, it's that the only way to discover rationality is to let people behave under the incentives of market conditions. That is to say: the market gives you the information you need to rationally plan the economy. Which, of course, is why nationalization of industry and price/production controls have never worked. No serious people in America wants to destroy the market. No serious people in America want a truly unregulated market. It's all matters of degree, which you point out.

B) The difference between regulation of the market economy and the privatizing of public goods. I think these things are distinct enough that you can't really talk about them in the same context. Regulating the economy, in the America sense, typically revolves around structure rules to ensure the market works (see #1) or arguing about how to use redistribution to buffer the natural occurrance of financial loss in a risk-based free market economy. True libertarians take one of two positions (I think) on the latter: either the government has no business ever redistributing cash directly from winners to losers, or that such transfer payments are ok, so long as they are only achieved via a flat tax that proportionally burdens all citizens at the same rate (either absolute rate or % of income). Privitization of public goods is a whole 'nuther story. Again, I think there are two libertarian positions: the radical one says that any public good could conceivable be privatized and indeed the only public good that can be philosophically defended as necessary through coercive taxation is military defense (Nozick is good on this; I basically summed up Anarchy, State, and Utopia in one sentence). Under this theory, things like FDA regulation are certainly necessary, but people would naturally develop subscription services to take their place. Instead of a tax bill, you'd just pay some well-reputed company. (Indeed, this is how people handle road-side assistance for car repair: many people choose to join AAA, others do not. But we certainly don't hear a clamor for a government based tire repair service funded by taxes.) But I think the softer position is the bettter one: there are certain public goods that would be better off if they were at least opened to market competition, rather then held in government monopoly, such as the postal service. In fact, the allowing of competition for non-letter post materials has benefitied both the consumer and the post office. And note that the vast majority of publicly produced products (like military weapons, road signs, etc.) aren't actually built by the government. They are opened to competitive market bids. Sometimes people forget how much the market is employed by government; a real socialist state, despite being the darling of many on the old left, is no treat.

2) I think you might very much enjoy reading some Hayek. He, of course, is famous for The Road to Serfdom, but you might like The Constitution of Liberty better. It's a smart outline of the fundmanetals underlying market-based libertarianism, but I think it goes to your point of rationality very clearly, which is where I disagree most with your post. The genius of the market is that it doesn't depend on anyone being able to rationaly figure out what is best for anyone else. To assume the government can rationally replace the market by smart decision making is both (a) wrong and more importantly (b) unwise. Because human liberty is not winding down a teleological path; anyone who thinks they know what the good life is for everyone else is inherently anti-liberty, and anyone attempting to rationallize an economy through government control is inherently prescribing a good life. But, of course, I think we forget this in the United States because the market underpins so much of how we operate, and liberty largely flourishes in this environment. The use of redistribution to softens the blows to losers in a capital economy might not be ideal, but I think it is justified largely by the existence of government incentives for incorporation of capital.

3) The bailout. It seems to me that the bailout must be separated from the future regulations as a concept. The latter seem like obvious good ideas even to a libertarian: clearly the market has failed here, and regulating the economy such that market competition works is job one. I'm more skeptical of the bailout, but ultimately this is why we have an independent central bank: to get smart people in charge that aren't affected by electoral winds so when a crisis hits there are some clear heads. I'm willing to trust Bernake and Paulson on this one, although I'd love to see Congres more assertive. Me being a whig and all.

4) Another book you might like is In Our Hands, which I think is probably the closest thing I've ever read to my dream-scneario for America: replacing the current entitlement system (which is bloated, inefficient, and still lets millions fall through the cracks into poverty, hunger, and no health care) with a system of redistribution that ensures all Americans will have adequate food, clothing, shelter, health care, and retirment money unless they directly and willfully fritter it away on their own, all for less than the cost of our current entitlement system. it's quite genius; you should read it.

I did read In Our Hands, and it is terribly thought-provoking. I'm not quite so willing to trust Paulson, however, as that section 8 of the original proposal was quite chilling:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

That, and the general incompetence of anyone associated with the Bush administration, and Bush's insistence that we do this NOW, lead me to believe that we're much better off in the hands of Congress, which is "beginning to show something that might, given enough time, possibly, eventually develop into something resembling a proto-spine" (thank you Votemaster, 9/23/08).