has the free market failed?

I am really tired to turning on the news or reading an article talking about the evils of the “free market” and how we need to put more regulation in place to prevent business from taking advantage of consumers.

When someone says “free market” what do they think of? We’ll, they probably think of the United States and the New York Stock Exchange. More recently, they also probably think about corruption, greed, the big banks, bailouts and absolute failure. Unfortunately, the United States doesn’t actually operate a free market. What we think of as the “free market” today is really a carefully orchestrated process which when you really think about it, no one should have tried to interfere with in the first place.

A truly free market means:

  • No Acts of Congress to make buying a house (or anything) more affordable.
  • No bailouts for Citi Bank, Bank of America, AIG and Detroit
  • No Fannie and Freddie
  • No Federal Reserve
  • No Federal “Stimulus” program aimed at restarting an unsustainable cycle of consumer spending
  • No artificially inflated housing market (prices must decline to the level at which people are able to consume them)
  • A currency which is actually based on something other than government decree (e.g., the gold standard)
  • Falling prices and a rising standard of living, just like we had before 1914

However, since we have none of that, we do not have a free market. We have a managed (and chaotic) market. Legislation is passed which misallocates resources which results in an unsustainable boom. This boom eventually busts. This bust is then followed by MORE legislation which attempts to artificially prolong the boom…

The biggest culprit in ALL of this has been the ever expanding, and completely misguided Federal Government. The (hopefully) well-meaning yet continual intrusion into the lives of individual citizens and organizations has caused a serious misallocation of resources and risk. Every-time a subsidy or tax is placed on something a decision is made by investors and consumers. Subsidize or tax something too much a misallocation of resources occurs. For example, provide a subsidy on corn and all of the nations farmers will produce corn, even when it wasn’t profitable before. Next thing you know, corn is in everything because it is suddenly cheaper than other alternatives. Take a look at the food you eat and the products you put in your car, more likely-than-not whatever you consumed today probably contained a good portion of corn-product in it. (Ethanol, Corn Syrup, Corn Starch v. Gasoline, Sugar, Flour)

How about another example? Lower interest rates to zero (a range they would not normally be in if the market dictated terms) and suddenly it becomes very cheap to invest in long-term projects such as buying a house or expanding machinery in a mill. The problem is, everyone now makes the mis-informed decision to take on these large scale investments, however the underlying economic fundamentals are not there. Meaning, there are only so many resources which can be consumed at any given time. Eventually the number of houses, or number of machines you can put in your plant will run out creating scarcity where they never should have been any. This in turn raises prices to a level they should never have been at. With no underlying economic fundamentals to support this artificial growth and inflation, and with a limited number of dollars to go after certain things eventually it will all come crashing down. So, we can see here where a simple thing like trying to stimulate the economy by setting an artificial interest rate, eventually causes collapse. Had the economy been allowed to set its own interest rates and prices, everyone would have been better off.

We were told since children that the business cycle is part of what a free market means. And that we need good economic stewardship (read: regulation) in-order to prevent the bust. One thing is for certain, you can not eliminate the boom-bust cycle without eliminating the factors which cause this cycle. Get over the notion that inflation is just something caused by rising oil prices and deflation is the devil. Rising prices are the result of the managed monetary policy put in place by the Federal Reserve. (i.e., Too much cheap money chasing too few actual goods and services.)

Everything world governments have done to date only serves to prolong the eventual day of reckoning. Suddenly those commercials where people are paid in gum (something tangible) don’t seem like such a bad idea.

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