Wednesday, March 4, 2009

Greenspan's argument in favor of Capitalism

Capitalism Magazine has an article by Michael Hurd, "Alan Greenspan, Meet Reality" which demonstrates that Alan Greenspan's latest comments on the failure of the current system are actually evidence in support of a return to the free market. Here is a key excerpt:

Let’s examine Greenspan’s reason for abandoning what he considers the free market. His reason is that free markets cannot be entirely trusted, since government regulators in charge of free markets cannot forecast with 100 percent accuracy. “Yes, I found a flaw,” Greenspan said in response to grilling from the House Committee on Oversight and Government Reform.

“That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.” He went on to say: “We cannot expect perfection in any area where forecasting is required.” He also said: “We have to do our best but not expect infallibility or omniscience.”

The media spun this as Greenspan abandoning free market principles. Maybe that is what Greenspan intended to convey, or maybe it wasn’t. But one thing is certain, regardless of his motives. Greenspan is not condemning the free market and capitalism. He is simply acknowledging the obvious:

That government regulators – even the chief government regulator, the Federal Reserve Chief – cannot be omniscient, cannot know everything, and cannot predict everything.

The irony of these comments is that Greenspan, whether he intends to or not, is providing one of the best arguments in favor of free markets and capitalism by demonstrating that man is not capable of controlling and forecasting everything. Therefore, it’s best to leave man alone, on an individual case-by-case basis, to assess what makes most economic sense.


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2 comments:

Harold said...

This is a variation of a common criticism of objectivism, or more specifically, free markets.

"Well, people can't or don't act rationally all the time, so in a free market they'd make bad decisions, and someone might be affected, etc."

That's true. However, the fact is that to the extent to which a person is to live, they (or the person they depend on) must live rationally. It's in their nature as a human being. If, as in a free market, the (mostly) rational are not coerced into having to deal with or associate with the (mostly) irrational, it serves as a check on that irrationality. For example, if I don't have to worry about being sued if I give a loan to someone who really can't afford it, that person may find themselves re-evaluating their assumptions (if this happens often enough). If a young woman knows she cannot rely on taxpayer money if she has more children than she (and/or her man) can support, then I would submit that she might reconsider getting pregnant so often. A free society seems to be more morally uplifting than any other construct because you have to rely on yourself.

Beth said...

Harold,
Thanks for the comment.
Another way of putting it is:
A free market will provide essential, real feedback by keeping actions and consequences connected. Government interventions distort that feedback, or protect people from the consequences of harmful choices, thus depriving them (us)of the ability to identify and learn from mistakes.
These uncorrected mistakes accumulate and lead to bigger problems--which then are used to justify further government intervention--all in the name of "helping."
The damage this intervention does is compounded further by the fact that in order to "help," government must take wealth from those who have made better choices. This not only sets up perverse incentives, but it violates the justice of being able to keep what you have earned.