The Bankruptcy of Militant Free Market Ideology





Mr. Toplin is Professor of History at the University of North Carolina at Wilmington. He has published a dozen books, including Radical Conservatism: The Right's Political Religion (2006).

Now that many economists and political leaders are denouncing free market extremism and calling for greater regulation, pundits have been trying to identify the people who were most influential in taking Americans down a mistaken path towards de-regulation and lax regulation of the economy. Lots of leaders are worthy candidates for this dubious honor roll of leaders who led the country astray by serving as militant champions of laissez faire, but five individuals are especially noteworthy: Milton Friedman, Alan Greenspan, Ronald Reagan, William E. Simon, and Phil Gramm.

Friedman was the chief ideologist for de-regulation. Greenspan was its protector at the Fed, and Reagan served as the major political critic of regulation. Simon was the cause's leading strategist, and Gramm served as its most influential legislator.

The biggest intellectual contributor to American enthusiasm for extremely "free" markets was a petite economics professor at the University of Chicago, Milton Friedman. He was a brilliant and original thinker who garnered a Nobel Prize in economics, but Friedman often made radical statements against government oversight in economic affairs. He leveled blistering attacks against federal regulatory agencies such as OSHA, which protects workers from unsafe conditions, and the Consumer Products Safety Commission (Friedman mocked the Commission's agents for testing the safety of toy guns for children). Milton Friedman's zealous positions led an interviewer to ask, "Do you think there's a constructive purpose to any government regulation of commerce?" Friedman responded confidently, "No, I don't."

Alan Greenspan began to make his mark as an economic thinker when he was a protégé of the controversial novelist, playwright, and philosopher, Ayn Rand. As an enthusiast of Rand's radically libertarian economic philosophy, Greenspan asserted that the basis of regulation was "armed force." At the bottom of "all regulation lies a gun," he declared, alluding to the notion of government tyranny. Contributing to Rand's spirited defense, Capitalism: The Unknown Ideal, young Greenspan lambasted building codes, the Food and Drug Administration, and the Securities and Exchange Commission.

Alan Greenspan later moved away from the cult of starry-eyed Rand worshippers and tempered his arguments, but important elements of his early discomfort with government intervention remained. As Federal Reserve chairman Greenspan sometimes expressed anxiety about "irrational exuberance" in the stock market, but a hands-off mentality prevented him from doing much about it. During boon times, political leaders praised Greenspan's leadership at the Fed, but lately he has been coming under criticism for failing to deal aggressively with Wall Street's speculative excesses and financial shenanigans during his years at the Fed (1987 to 2006). Joseph Stiglitz, a Nobel Prize-winning economist, blasted Greenspan, saying he "didn't really believe in regulation" and often "called for self-regulation - an oxymoron."

Eventually, champions of "free" markets found a great communicator who could transform their ideas about regulation into public policy. Ronald Reagan made de-regulation central to his political messages. He told voters that government was not the solution to the nation's problems; it was the problem. "The nine most terrifying words in the English language," said Reagan, are, "'I'm from the government and I'm here to help.'" The two-term president often warned about bureaucratic regulation's chilling effects on business enterprise.

Ronald Reagan provided the popular voice of free-market ideology, but the cause's most effective behind-the-scenes operator was William E. Simon, who served as Treasury Secretary under Presidents Nixon and Ford and later became president of the conservatively oriented Olin Foundation. Like Friedman and Greenspan, William E. Simon leveled sharp criticisms of "bureaucratic" federal agencies, such as the Food and Drug Administration, but his most important contribution to the movement for de-regulation came in the realm of organization. Simon promoted the creation of right-wing think tanks that sponsored hundreds of "scholars" who promoted militant forms of free market ideology in print and in radio and television commentary. Simon wanted to sponsor a "counterintelligentia" that could challenge the prevailing views about government's role in economic affairs in university teaching and in reporting by the national news media. Some of his efforts proved quite fruitful.

Texas senator Phil Gramm was probably the most influential legislator to push for de-regulation in the Congress. He was at the center of a 1999 bill that abandoned legislation from the Depression era designed to keep commercial and investment banks separate. More important in terms of today's crisis was his success in slipping a 262-page bill below the political radar in 2000 (around the time when legislators were focused on the Supreme Court's decision about the presidential election). Phil Gramm declared his bill would "protect financial institutions from overregulation." The Commodities Futures Modernization Act prevented serious oversight of credit default swaps. Those transactions are valued at about 62 trillion today, and problems with these little-understood trades have left financial markets vulnerable to gigantic meltdowns.

Phil Gramm served as a key economics adviser to John McCain and as co-chair of his presidential campaign until he embarrassed the candidate by describing Americans as "whiners" who were suffering from a "mental recession" rather than a real one. Even though that mishap forced Gramm out of the political limelight, he is still rumored as a possible choice for Treasury Secretary if McCain wins his bid for the White House.

Recent developments help us to see the roles of Friedman, Greenspan, Reagan, Simon and Gramm in a new light. Extremism is problematic, whether it comes from the left or the right. In the 1990s the collapse of communist states demonstrated in vivid fashion the bankruptcy of militant, over-the-top, collectivist ideas about dealing with economies. Now, in the early 2000s a financial crisis is demonstrating the bankruptcy of militant, over-the-top "free market" ideology. Better than ever before, Americans can recognize that competitive markets are fundamentally important, but that markets cannot work effectively without good regulations. Today's challenges call for more pragmatic thinking about economics, not the "free market" dogma that has long been promoted by ideologues.



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omar ibrahim baker - 10/9/2008


For all the travail and agony of, particularly, the last few years and, more particularly, of the last few days America could, hopefully and beneficially, reappraise itself and consider a definite change of direction and outlook .
The fact that many things, hitherto deemed essential, in America have failed should be an un miss able opportunity for reconsideration and redirection!
For one thing the flagrant neo imperialist Bush Doctrine, the official and declared main stay and driving doctrine of US post cold war foreign policy has irredeemably failed.
Its failure was not, however, due to lack of neocon/Zionist will or perseverance as much as it is due to the simple fact of lack of resources, both human and financial, that a strict adherence to it would command.

The USA can NOT , neither militarily nor financially, wage war in Iraq and Afghanistan simultaneously and will have to abstain from meeting any emergency challenge that may arise in or with, say, North Korea and/or Pakistan , Venezuela,Lebanon-Israel/Palestine or Iran .
It, simply, does NOT have the requisite resources for that!

An equally unmitigated US failure is the near, and still possible, total collapse of the American financial system.
The latter failure is both a domestic/social as much as an economic failure that is bound to unsettle profoundly the life of the average American in the short term in such areas as public education, unemployment , social security and public heath and , longer term, its financial and political international clout and standing.

America must recognize the fact that, for all its might, it can NOT be omnipresent and omnipotent internally and externally.

Even the unchallenged American might, witnessed in the last few years , have proved to have its limitations and constraints!
That is as much of an internal debacle to neoconservatism and, externally, to neoconservatism/Zionism as much as it should be a timely eye opener to the American general public.


Arnold Shcherban - 10/7/2008

Balance. Any good idea can be driven down to absurdity.
'Cause, as it well known and historically proved, too much freedom or no freedom at all in economy and finance are equally bad.


Arnold Shcherban - 10/7/2008

The supply of anything (money, property, goods, etc.) in this world is always limited, so when some group/class of people acquires much more of it than they really need, the other groups are invariably feel the shortage, i.e. their written right to possess that valuable is "effectively" (as I mentioned earlier) suppressed in reality.
Thus, essentually, that "God given" right exist just on paper without being implemented in actuality.
That's about what I meant.


Doc MacDonald - 10/7/2008

Sir, please refrain from drinking the Kool-Aid. Our markets have been anything but free; especially since New Deal legislation beginning in 1938. In a true Laissez faire economy, we wouldn't have any of the institutions that have corrupted out financial system, the FED, the SEC, the IRS, the public school system, rotting federal highways and bridges and many other things too numerous to list.

When you mention deregulation, do you include the "Community Reinvestment Act" which seems to be the source for many of the real estate abuses by pressuring banks with redlining fines and charges of racism for not meeting lending quotas to poor hispanics, blacks and other minorities? By deregulation, do you mean moving people out public school systems and into systems that actually educate rather than indoctrinate? Do you mean we need rules that tell people to be responsible in borrowing and in signing contracts? Do you mean that we need the government to stop spending so much time telling business how to run and more time adjudicating cases of fraud and abuse? Do you mean we need more regulation to keep government from setting up quasi public entities like Fannie Mae and Freddie Mac to assist people spend beyond their means and to provide certain government officials with a piggy bank that invites misadventure? What kind of deregulation are you speaking of?

One last thing: please refrain from associating Ayn Rand with libertarians. That is about as accurate as associating her and the Objectivist movement with Marxism. If you are going to write and article or a book, you should at least spend some bit of time conducting proper research and due diligence.

Thanks for your time, but next time you get an idea to write about economics juxtaposed with Objectivism; please just take a picture of Ayn Rand into the shower with you and do what you will. Just don't write. O.K.?


William J. Stepp - 10/7/2008

In the 1990s the collapse of communist states demonstrated in vivid fashion the bankruptcy of militant, over-the-top, collectivist ideas about dealing with economies.

You mean you only figured out in the 1990s that communism didn't work?
Evidently you didn't look at the failed history of communism in Russia, China and elsewhere before the 1990s. Either that or you didn't get the memo that that god had failed a long time ago.

Now, in the early 2000s a financial crisis is demonstrating the bankruptcy of militant, over-the-top "free market" ideology.

What planet are you living on? The banking industry is one of the most, if not the most, regulated industries in the U.S., as is the brokerage industry and the market for securities. The real estate industry is also heavily regulated, with subsidies and dodgy, government-influenced if not outright directed underwriting standards galore. The supply of money in the U.S. was nationalized a long time ago by the Fed, with predictable consequences for the quality of money and macroeconomic stability.

When the alleged apostle of laissez faire Alan Greenspan headed the Fed, he acted as the de facto monetary czar of the U.S. When he presided over a 1% Fed-funds rate for over a year in 2003 and 2004, this set the stage for the current macro instability by distorting the economic calculations of entrepreneurs (including banks and their traders, as well as home builders, mortgage originators and brokers, home buyers, and everyone else in the home building supply chain). This caused entrepreneurs to borrow and to make investments they would not have made if the Fed-funds rate had reflected the prevailing time preferences expressed in an undistorted market.
This caused an overbuilding of homes and pushed prices higher than what would have prevailed in a free market.

The home building market was also distorted by the Community Reinvestment Act of 1977, which aided some nonqualified buyers in obtaining mortgages. State nonrecourse lending laws also made it easier for homebuyers to walk away from their obligations. State-mandated restrictions on mortgage prepayment penalties stacked the deck in favor of borrowers and against lenders.
The failure of Fannie Mae and Freddie Mac (Frauddie) demonstrated the intellectual bankruptcy of government subsidies of the mortgage market.

The free market didn't fail. On the contrary, it was the failure of government monopolized money, government-influenced interest rates, and government regulations and subsidies in the banking and mortgage industries, that caused the mess.
Markets work by bringing buyers and sellers together in an effort to establish market clearing prices and quantities. Blaming markets for crashing prices is like blaming gravity for crashing airplanes (and helicopters lately).


John Donohue - 10/6/2008

"prevent/suppress" the other people's respective means and rights to do the same.

You mean stealing? I would be against that. So would George Mason.

The only other kind of 'preventing/supressing' besides killing and stealing would be threat of physical force through killing and stealing and lies (coercion.) George and I are against that.

Did you have something other than that in mind?


Arnold Shcherban - 10/6/2008

..."they cannot...," unless their "means of acquiring and possessing property, and pursuing and obtaining happiness and safety", effectively prevent/suppress the other people's respective means and rights to do the same.


Gary Ostrower - 10/6/2008

If Toplin's article contained nothing more than Stiglitz's apt description of self regulation as an oxymoron, it would still be worth reading.


Harry Binswanger - 10/6/2008

What happened to the regulatory state that was supposed to protect us from financial crises? What happened to the Fed, the SEC, the bank examiners, Fannie Mae and Freddie Mac, the thousands of pages of regulations on banks, insurance companies, etc? Are you trying to pretend that the slower growth of regulations under Reagan is "militant capitalism"?!

Well, Ayn Rand is right: Capitalism is the *unknown* ideal. Just to give you a glimpse of what we should return to (or progress to): under actual capitalism, there is no Fed, no government money (private bank notes only), no SEC, no FDIC, no regulatory agencies of *any* kind, no government highways, no antitrust laws, and no taxation. None.

Try arguing that THAT has been tried and found wanting!


Harry Binswanger - 10/6/2008

Militant State Regulation is bankrupt

What happened to the regulatory state that was supposed to protect us from financial crises? What happened to the Fed, the SEC, the bank examiners, Fannie Mae and Freddie Mac, the thousands of pages of regulations on banks, insurance companies, etc? Are you trying to pretend that the slower growth of regulations under Reagan is "militant capitalism"?!

Well, Ayn Rand is right: Capitalism is the *unknown* ideal. Just to give you a glimpse of what we should return to (or progress to): under actual capitalism, there is no Fed, no government money (private bank notes only), no SEC, no FDIC, no regulatory agencies of *any* kind, no government highways, no antitrust laws, and no taxation. None.

Try arguing that THAT has been tried and found wanting!


John Donohue - 10/5/2008

When you have a mixed economic system such as that currently in place in the USA and it goes into crisis, how do you determine if it is the free market entrepreneur-capitalist half or the statist-collectivist-regulation half that caused the problem?

This author obviously has chosen!

Since his "more pragmatic view" means slamming free people and free markets with more regulation, thus depriving future generations of economic freedom, one wonders how that would sit with the namesake of this blog's University?

"That all men are by nature equally free and independent and have certain inherent rights, of which, when they enter into a state of society, they cannot, by any compact, deprive or divest their posterity; namely, the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety."
George Mason, The Virginia Declaration of Rights

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