The recent wave of accounting fraud allegations marks the end of an era. Disillusionment with American capitalism may result in a tectonic ideological shift away from laissez-faire and self-regulation and toward state involvement and regulation. This would be a reversal of a trend that began with Thatcher in the United Kingdom and Reagan in the United States. It would also call into question certain fundamental – and far older – concepts of free-market economics.
Markets are seen to be self-organizing, self-assembling information, product, and service exchanges. The “invisible hand” of Adam Smith is the total of all the mechanisms that combine to produce the best allocation of economic resources. Because of its randomness and lack of self-awareness, the market has a significant edge over central planning.
Market members go about their egoistic business, attempting to maximize their utility while being completely oblivious to the interests and actions of everyone except those with whom they directly contact. Despite the chaos and commotion, a framework of unrivalled order and efficiency arises. Man is incapable of consciously achieving greater results. As a result, any intervention or interference is seen to be harmful to the economy’s healthy functioning.
It’s only a short leap from this idealized perspective to the Physiocrats, who came before Adam Smith and preached the ideology of “laissez-faire, laissez passage,” or “hands-off.” Their faith was based on nature. They thundered that the market, as a collection of persons, was certainly entitled to the same rights and liberties as everyone else. In his influential and well-timed “Principles of Political Economy,” published in 1848, John Stuart Mill argued against the government’s participation in the economy.
Undaunted by accumulating evidence of market failures – such as the failure to deliver affordable and sufficient public goods – this erroneous idea reappeared in the last two decades of the previous century with fury. Privatization, deregulation, and self-regulation became trendy buzzwords that were advocated by commercial banks and multilateral lenders alike.
Self-regulation was based on the belief in long-term self-preservation in the professions – accountants, stockbrokers, lawyers, bankers, insurers, and so on. The long-term utility of rational economic players and moral actors is expected to be maximized by adhering to the rules and regulations of a level playing field.
Unfortunately, avarice and vanity, as well as an immature unwillingness to delay satisfaction, seemed to have tainted this admirable proclivity. The failure of self-regulation to conquer human nature was so spectacular that its collapse spawned the most intrusive state stratagems ever developed. The government is far more extensively and pervasively involved in the minutia of accountancy, stock trading, and banking in both the UK and the US than it was only two years ago.
However, the ethos and myth of “order out of chaos” – which had adherents in the exact sciences as well – went much deeper. The fundamental culture of commerce had been infiltrated and changed. It’s no surprise that the Internet thrived during this period, as a chaotic network with an anarchic operating model.
The dot-com revolution was more about new ways of conducting business than it was about technology. It was about combining a slew of incompatible components, stirring thoroughly, and hoping for the best. No one, for example, has proposed a linear revenue model for converting “eyeballs” – the number of visitors to a website – to dollars (“monetizing”). It was dogmatically believed that traffic, chaotic phenomena, would suddenly transform to profit, which had previously been the result of arduous labour.
Privatization was a huge leap of faith in and of itself. State-owned assets, including utilities and providers of public amenities like health and education, were transferred wholesale to profit-maximizing investors. The underlying assumption was that the price mechanism would fill up the gaps in planning and regulation. In other words, greater costs were expected to ensure that service would not be interrupted. Failure followed, from electrical utilities in California to railway operators in the United Kingdom.
The simultaneous demise of these urban legends – the liberating power of the Internet, self-regulating markets, and the unfettered benefits of privatization – ultimately resulted in pushback.
In the decades since World War II, the state has grown to enormous dimensions. It is about to expand and digest the few sections that have remained unexplored thus far. To put it mildly, this is not good news. However, we libertarians – proponents of both individual liberty and individual responsibility – have brought it upon ourselves by obstructing the market’s function.