Economic Freedom in Crisis
On October 15, I shared some reflections on freedom, while on September 29 I spoke of the seven concrete theses on freedom enumerated by Doctor Ulrich Wacker. Here’s a recap:
“Freedom always respects mans belongings. A person should be free to decide on what he has acquired with his own effort. The right to property is one of the most important conditions for freedom. Without the right to determine one’s fate, without the right to property, and without the right to privacy, man is exposed to other men or collectives and loses his independence.”
This leads us to the key issue of economic freedom. Today, more than ever, we should be alert and willing to defend economic freedom, since its exisitence is considerably more threatened in times of crisis.
Market vs. Government
As institutions created by man, both markets and government can fail. However, the market has a better track record when it comes to the economy. The way the present global crisis is resolved will define the frontiers between the market and government on a world level for now and years to come.
When markets fail as they so spectacularly did this time, politicians –especially populists and protectionists— seek to further restrict our economic freedoms: the booty –our money— is terribly attractive to them. A European head-of-state recently declared that “the invisible hand is dead,” referring to the market’s capacity to achieve equilibriums that increase society’s well-being. These words were probably pronounced with the veiled intention of justifying greater limits to economic freedom. This is just an example of what has occurred and what is to come.
Daniel Kaufmann, director of Global Programs and Governance at the World Bank Institute recently argued that in today’s world “there is even the danger of over-regulating the financial system itself, to such an extent that credit and entrepreneurial activity (which unavoidably involves risk taking) are choked for a much longer time.
Meanwhile, Erik Berglöf, Chief Economist at the EBRD, expressed his concern over the possibility that the anti-free market impulses will spread to the developing countries, “since populist politicians try to blame not only the financial markets but also free enterprise and trade.”
Taking risks is essential for a businessman. Today, there is a certain vogue for the “Benefactor State,” the one that allows us to have an abortion, but prohibits us from smoking; that allows us to have weapons and go to war before reaching 21 years of age, but forbids us from having a glass of wine (in the United States, for example). It is absurd, but above all, it is DANGEROUS. In terms of taking risks, the government should not restrict businessmen, for this is precisely a key contribution that businessmen make to society. The danger of these types of restrictions is the possibility of a global economic heart attack.
Populists will try to convince us “to protect people from the dangers of the market” and protectionists will urge us to “defend industry from the risks of globalization.” If these or other variants of such arguments are put into practice, this could indefinitely prolong the global crisis and lead to the ruin of our economies. This is exactly what occurred after the stock market crash of 1929. The stock market crash in and of itself was not the cause of the most terrible economic depression in modern times, but rather the populism, protectionism, and over-regulation that followed in its wake.
The market is not perfect, but it is the best way to resolve our economic affairs. Even taking into account the recent failures of certain financial institutions, which we should not attribute to the market as such, but rather to the uncontrollable ambition of some Wall Street criminals, the lack of transparency, myopic regulatory policies, and to a defective supervision, in the best in the cases, and as an accomplice in many others (see note on Corporate Governance).
Epilogue: Bank Rescues Program and the ‘Happy Bureaucrat´
When the financial system fails, it is natural that some governments take an equity stake in or even assume control of several banks. This is, in fact, what is happening in the United States, the United Kingdom, Ireland and Iceland, and is what occurred in the wake of the Mexican bank crisis of 1995.
Nevertheless, this situation should only be temporary, and banks should return to private hands, under better regulatory policy and supervision. Let’s hope that this takes place in the developed countries, for the good of the global economy. If this is not the case, we could seriously harm the international banking system since capital would not flow efficiently.
Let’s for a minute imagine a happy bureaucrat, dispatching orders from a bank suite on a upper floor with a magnificent view of the city… from which he can distribute posts to his friends and money to politicians…the money of the shareholders, depositors, and taxpayers…all this without being accountable to anyone. It is a dream for them, but a nightmare for everyone else. The citizens of the world should be on the alert to prevent this and other nightmares that could materialize in this environment. Global prosperity is at stake.