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Charles Wheelan, Ph.D. The Naked Economist

Charles Wheelan, Ph.D., The Naked Economist

The Twilight of Free-Market Ideology

by Charles Wheelan, Ph.D.

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Posted on Friday, October 24, 2008, 12:00AM

When I heard Alan Greenspan's testimony before Congress last Thursday, I had one immediate thought: This is the beginning of the end for the free-market ideologues.

According to press reports of the testimony, Greenspan told Congress that he "had put too much faith in the self-correcting power of free markets." That's no small statement.

In fact, it struck me that if 1989 was the year when no reasonable person could still believe in communism (or any of its government-intensive relatives), then 2008 will go down in history as the year in which the free-market zealots saw their "wall" come crumbling down.

Too Free to Last

You don't have to take it from me. Just look around. One by one, the economic meltdown is slaying one shibboleth of the uber-free-market camp after another.

Here are some of the inflexible, hardcore beliefs that are crashing along with the stock market:

• Individuals always know best

Not so much, it turns out. The whole financial crisis is rooted in irrational personal decisions. Consumers borrowed more than they could afford based on the naive assumption that housing prices would always go up. Not just a few people -- lots and lots of them.

• Firms always manage resources better than government

Let's take a poll of Lehman Brothers shareholders to see how they feel about that statement. One of the most remarkable things about the whole crisis is the amount of wealth destroyed by private firms. The shareholders and managers of firms like Bear Stearns, Lehman, AIG, Countrywide, and others destroyed themselves.

That can't be blamed on flawed regulation. No matter how bad the regulatory scheme, it's never rational for private firms to destroy themselves along with all of the wealth of their shareholders.

It's definitely true that government incompetence deserves a share of the blame (e.g., Fannie and Freddie, or the push to put low-income citizens in homes they couldn't afford), but that doesn't make blindly eliminating regulations the answer. Deregulation and sensible regulation are not synonymous.

• Tax cuts are an economic miracle balm

I suppose one could argue that the economy would be in even worse shape right now without the Bush tax cuts -- but that's pretty thin gruel. The more reasonable argument is that the deficits that have accumulated over the last eight years -- during relatively good economic times -- are a hugely destabilizing force going forward. Everything happening right now is made much worse by the fact that the United States is highly indebted to the rest of the world. The ideologues pushed tax cuts without demanding corresponding spending cuts, and that's just plain irresponsible.

Three entities borrowed recklessly over the past decade: homeowners, Wall Street, and the U.S. government. So far, only two of them have had their reckoning.

• Less government is always better

I don't think most Americans are prepared to tell Hank Paulson and Ben Bernanke to leave the markets alone right now. Nor are they pushing for the FDIC to scrap the insurance on bank deposits. And many of us are wondering: 1) What is a credit default swap? 2) How could something I've never heard of be destabilizing the economy? and 3) Why didn't someone do something about this?

Does all of this mean that economics books should be burned and Nobel Prizes returned to Stockholm? Absolutely not. The free-market zealots were never right in the first place; they twisted, bastardized, and oversimplified conventional economic thinking. They saw simplicity where the bulk of economists saw tradeoffs and qualifications. They clung to simple and elegant views despite all evidence to the contrary -- and the analysis in the first 10 chapters of any basic microeconomics text.

A colleague of mine, who worked in (and was frustrated by) the George W. Bush administration, coined a term that summarizes it best: faith-based economics. That's not supposed to be how it works.

• Mainstream economists have a profound belief in markets

But they also understand that markets fail in some cases. And they recognize that most markets work better with some government infrastructure, whether it's information, modest regulation, or just a place to sue someone who cheats you.

Mainstream economists recognize the costs of taxation; taxes take money out of people's pockets and distort behavior in ways that can have serious economic costs. But the non-ideologues also recognize that tax revenues can be used to provide government services that make people better off. Good policy is about managing that messy tradeoff.

Mainstream economists recognize that individuals have a pretty good idea of what they want -- but that those same individuals sometimes make systematic errors of judgment, which can lead to things like bubbles and panics.

Mainstream economists recognize that too much regulation can harm innovation and diminish prosperity. But they also recognize that sensible regulation provides information and security, both of which make it much easier to do business with strangers. Regulation also protects third parties from market behavior that has negative spillovers, whether it's the guy who drinks too much at the bar before getting into his car or the paint factory that cuts costs by dumping lead in your drinking water.

A Monument to Self-Interest

There's now a museum in Berlin where visitors can go to see a remnant of the Berlin Wall and learn about the damage done by an overly rigid, poorly conceived ideology.

Maybe there should be some kind of 2008 Meltdown Museum. It would have a large subdivision of homes, all with "for sale" signs out in front. And there would be a quotation from Alan Greenspan inscribed over the arch at the entrance:

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."

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  • Yahoo! Finance User - Friday, February 6, 2009, 7:05PM ET  Report Abuse

    • Overall: 1/5

    I just one point Thunder Pants. Isn't this what happens when the government fixes prices? Government fixed the price of money/credit which gave false signals to businesses and individuals. The artificially low cost of financing resulted in massive malinvestment. The bust is the price we all get to pay. The US mercantilist society lets some pay a little bit more.

  • Yahoo! Finance User - Friday, January 9, 2009, 1:52AM ET  Report Abuse

    • Overall: 1/5

    Anyone educated in the Austrian School of Economics saw all this coming. And they are about as free market as you can get. Government actions will only make the economic ride a lot wilder - up and down. Fasten your seat belts.

  • CraigT - Tuesday, January 6, 2009, 12:09PM ET  Report Abuse

    • Overall: 1/5

    It's obvious to anyone who understands basic economics that these so-called experts who claim the reason for the economic crisis is the free market are either misguided or being paid by someone behind the scenes. If you think this article is disgraceful, I just read an article that Wheelan wrote for the Dartmouth Alumni Magazine for the Jan.-Fe. '09 issue, called "Live Free or Die." He starts out by saying that he was a libertarian when he attended college, then he suggests that libertarians don't believe in stoplights! I can't think of a more inacurate discription of how free market economics works in the real world. Karl Marx couldn't do any worse!

  • Yahoo! Finance User - Wednesday, December 31, 2008, 3:41PM ET  Report Abuse

    • Overall: 1/5

    You should put this excellent writing up on the home page for your Congressional bid website. That way, everyone will immediately know that you have absolutely no idea what you're talking about and shouldn't be trusted with OUR money or our votes.

  • Yahoo! Finance User - Monday, December 22, 2008, 3:34PM ET  Report Abuse

    • Overall: 1/5

    Anyone who thinks we have a free market in the United States simply doesn't know the meaning of the term "free market". We haven't had anything even resembling a free market for about a century.

  • Yahoo! Finance User - Monday, December 15, 2008, 4:38PM ET  Report Abuse

    • Overall: 1/5

    This is a typical attack on a straw man. Few if any people believe that anyone believes that "x" is ALWAYS right, so an attack on such a mind set is a waste. First, were the individual decisions really so irrational? Many of them, were, in fact, entirely rational. What was irrational was a government that subsidized stupid behavior and protected people from its consequences, encouraging, even forcing banks to lend to people who couldn't afford to payback the loans. Next, less government is "always" better. Again, few people say it's "always" better. Note that Wheelen doesn't mention specific examples. I wonder why. What exactly IS a free market ideologue? Someone who believes in the free market? Wheelan claims in his profile that his two most respected economists are Becker and Friedman. If they're not free market ideologues, who is? Wheelen is running for Congress as a Democrat. I wonder if he'll use his economics training to expose the fallacies of the minimim wage and other Democratic policies few mainstream economists support.

  • JuanD - Tuesday, December 2, 2008, 7:48AM ET  Report Abuse

    • Overall: 2/5

    Assumption number one: we had a free market society where these banks, mortgage companies, and insurance companies were allowed to function. I do not think that is true. It was not the smallest of firms that created this mess, it was the largest with the largest lobbying groups. Did executives structure their rewards to benefit themselves over the (stock) market participants. You better believe it. How is this the free market. It is capture. Their own self interest? Greenspan is so wrong. It is not the self interest of the executives that should have stopped this, it is the self interest of the investors. Why could they not alleviate these effects? Not because of the free market. It is because of government regulation and larger and larger masses of "corporationation" with such things as pension and mutual funds. I cannot continue to write not because of the death of the free market, but because of the battle that we will have to wage against fools in the future. On the plus side, this "professor" is right. Markets are distorted. They are distorted by government, unions, executives who are not stake holders, and funds. It is a sad time that we live in.

  • Yahoo! Finance User - Friday, November 28, 2008, 1:36PM ET  Report Abuse

    • Overall: 5/5

    This is a very balanced viewpoint that will upset only the intellectual free market "zealots". Capitalism and free markets economies are the best systems known to man. But always there are flaws in free markets when taken to extremes. It is not new or just American. The first widely recorded "bubble" occurred with the Dutch several hundred years ago with the Tulip. Supply and Demand do work; it is a recognition of most economists that limited government interaction, when done correctly, can help avoid the extremes. When done incorrectly, it can multiply the problem. Had regulations still required a reasonable downpayment for homebuyers, we might have avoided this mess. Government chose to promote homeownership by loosening the regulations on both consumers and lenders. I find Dr. Wheelen correct in his assessments but the title of the article is correct only if one is a purist of free markets.

  • Yahoo! Finance User - Monday, November 24, 2008, 4:35AM ET  Report Abuse

    • Overall: 5/5

    Dear God, just reading a lot of the reactions to this article seem to validate Mr. Wheelan. People, the Austrian school of economics has always been on the fridge, not the mainstream. Markets assume rationality, and people are not always rational. And if you really don't believe in market failures like externalities or the flaws of Says law, you really are an ideologue. If only more economists like Charles Wheelan would go on the offensive against these dogmatists. The fact is that the great majority of economists around the world and within the United States agree with him. It's only the myspace intellectuals who are under the false impression that their anti-modern gold-standard religion is commonly accepted as fact.

  • Joe S - Friday, November 21, 2008, 2:07PM ET  Report Abuse

    • Overall: 1/5

    Please study Austrian economics (you can start at www.mises.org) and write a carefully thought-out article from what you glean from your study.

  • Grodge - Saturday, November 15, 2008, 2:45PM ET  Report Abuse

    • Overall: 5/5

    Perfectly articulated, Dr. Whelen.

  • Michael - Saturday, November 15, 2008, 10:45AM ET  Report Abuse

    • Overall: 4/5

    Less government is a good goal, but some government is important.

  • RichardH - Sunday, November 9, 2008, 11:42PM ET  Report Abuse

    • Overall: 1/5

    I believe that a fundamental premise for a free market economy is that the market is allowed to choose the medium of exchange. Since our legal tender laws do not allow for this, we do not have a free market economy.

  • Platonic_indecency - Saturday, November 8, 2008, 2:36AM ET  Report Abuse

    • Overall: 1/5

    The U.S. doesn't have a free-market economy. Government interference in the market is the cause of current economic conditions. So what we have actually learned is we need less government and more freedom in the market. I think you need to rewrite this article. Do you really have a Ph.D in Economics?

  • Don - Thursday, November 6, 2008, 11:37PM ET  Report Abuse

    • Overall: 1/5

    Again: Tool. I am amazed this guy still is allowed to write and carry a PhD at the end of his name. Perhaps if I send $19.99 to UofChicago I can get one too. Lets begin with point number 1 - Individuals know best. I sort of agree with this. Add: People are stupid and fall for marketing schemes. How do you think Obama got in? People are told they can "afford housing and cars" because a salesman says so and not because they talked to a Financial Advisor or are even able to do the math by themselves. 2 - One sentence - $2000 hammer. If the government didn't have the ability to print money, they would have been out of business a long time ago. 3 - Tax cuts inspire investment not make people aspire to indebtedness. Idiot. 4 - The government need to be PC and try and get everybody into a home whether they can afford it or not is the cause of this whole collapse. At least in this point you make it clear you don't much as well as carry an all or none perspective when it comes do differing opinions. 5 - This really isn't even a point. Economists have different views on the economy. The good economists are never liberals. 6 - No point here either, just a stab at Greenspan, who overall did a noteably great job with the least amount of mistakes in that position. Chucky - please give your PhD back. Read about this thing called Austrian economics, which is something I am sure you haven't heard about either, and go home. You are a pathetic example of another liberal complaining and offering of no solutions except "More Government!". Again I say, "Pathetic!"

  • Yahoo! Finance User - Thursday, November 6, 2008, 3:01PM ET  Report Abuse

    • Overall: 1/5

    The Community Reinvestment Act encouraged banks to make risky loans, Fannie and Freddie guaranteed the loans, Wall Street built a pyramid of investments on top of the loans, and the Fed provided the artificially cheap credit to finance the whole thing. Calling Greenspan a free market economist is like saying that fries are from France. He talks some of the talk, but his actions tell a much different story. His role in this government-caused failure of our government-controlled economy is undeniable. It's the same with buzzwords like "deregulation" and "free trade". Under the guise of free market economics, a rich and powerful few have used government as a shield, allowing them to take enormous risk at the expense of the rest of us. They have then used the public perception of this supposed "failure of the free market" to gain public support for even more control over the economy, and more cheap credit. This will only lead to more pillaging by those in government, and those with connections to them. Mr. Wheelan, I suggest you read some Mises, Rothbard, and Hayek so you'll know what a free market truly is. It's meant to prevent the very circumstances that lead to the current crises. And this crisis happened because we don't have a free market. What we have is much closer to Mussolini's "corporatism" in a fascist government. Oh, then read some Karl Marx, to see where we're headed.

  • casey - Thursday, November 6, 2008, 2:25PM ET  Report Abuse

    • Overall: 1/5

    This is a pathetic article. This crisis is not because of the free market. Its because of a manipulated market. All these problems would vanish if we obeyed Constitutional law and abolished the Federal Reserve and returned to gold and silver coin as legal tender.

  • BenS - Thursday, November 6, 2008, 12:45PM ET  Report Abuse

    • Overall: 5/5

    Thank you Dr. Whelan for your on-target commentary. We need more people like you ‎courageous enough to tell the truth and maybe help protect what's left. I don't think there ‎is a better proof for the failures of current government and business than current market ‎conditions. So please before anybody starts talking about the lack of faith in the next ‎Obama government to look seriously where Busch's "faith-based economics" have gotten ‎us so far. Remember he has over 2 more long months to wreck it even further. From ‎Algeria to Zimbabwe, the whole world is welcoming the new change, so let’s rise to the ‎occasion (us American) and give our newly elected president the benefit of the doubt ‎and if we don’t have anything positive to say, please keep quite (zip it).‎

  • d c - Thursday, November 6, 2008, 11:46AM ET  Report Abuse

    • Overall: 5/5

    children children children. if the future of this country is so terrible, take your toys and move to another country like many of the superwealthy (the ones not in the news) are doing or have done.

  • KurtP - Thursday, November 6, 2008, 11:05AM ET  Report Abuse

    • Overall: 1/5

    Dr. Wheelan is misguided at best. Anyone who believes that the government will mange resources with ANY measure of efficiency is a fool. I was buying into this market. No more. Although I'm not selling what I have until the market rises, I'm not buying any more. Now that the election is over, I can't trust the new administration to look out for the best interest of the country or the individuals in it. With B.O. threatening to take away 401k's, and talking about creating a civilian security force like the military, taxing achievement and creating unprecedented spending programs while not really having any real opposition in the house or senate, there is no incentive to do so. We just cut our retirement contributions down to $100/ month... just enough to keep the match. Everything else will pile up in the bank account until I can find someplace safe to put it. I suggest that anyone else interested in self preservation of their wealth over the next several years do the same. The governemnt doesn't have the ability to take care of the people. The only way they can level ANY playing field is to make it equally difficult for everybody. They should be there to take the hurdles to achievement out of the way, not create more of them.

  • Yahoo! Finance User - Thursday, November 6, 2008, 9:59AM ET  Report Abuse

    • Overall: 5/5

    Excellent article. It's not that it's some kind of New Apocalypses because every single point is obvious to anyone with positive IQ... unfortunately neither the current US government nor their corporate buddies happen to possess that IQ level.

  • John - Thursday, November 6, 2008, 9:02AM ET  Report Abuse

    • Overall: 1/5

    So during the current crisis and the preceding ones, you think the public chose them. No the economy itself is always self correcting from over spending, greed, double digit growth, and self inflicted stupidity from ignorance. No the free economy is doing its job right now and it is painful. It is purely amazing that you can write an article like this when we are in one of the most dramatic market adjustments in history along with the fact if the government and individuals with out a sense of any financial logic make decisions. On top of it all the Congress was voting on the sentiment of their constituency without regard for what should be done. Everyone is at fault and when you borrow from the future sooner or later you have to pay up.

  • Yahoo! Finance User - Thursday, November 6, 2008, 8:53AM ET  Report Abuse

    • Overall: 1/5

    This is a sad analogy... Too much government and interference into everything that has to do with money. Than again, guess who owns the Political Puppets inside the DC Beltway. Yeap the Banks and financial institution write the legislation to profit and the government pushes the laws through, for their reelections, kickbacks, and future considerations. the whole system is Cooked and Conjured up... but what do I know, I'm only a Senior economists and see all the SCHEMES, everyday. Igronance is Bliss Whelan!

  • Tony RB - Thursday, November 6, 2008, 7:41AM ET  Report Abuse

    • Overall: 5/5

    There have been comments made elsewhere about some companies being 'too big to fail'. Let's apply an old phrase - 'too big for their britches' - to these situations where the free-market zealots ruled ruthlessly. After all, the financial system is a place where exploitation seems to happen far more than real investment, and this time the rich exploiters got burned by the poor exploiters. And another way to look at this mess is the simple boom and bust scenario that plays itself out over and over throughout history. The financial institutions thought they were immune to it, and they weren't.

  • Abc - Thursday, November 6, 2008, 7:32AM ET  Report Abuse

    • Overall: 1/5

    The mortgage crisis was caused by too much government (Fannie and Freddie) not too little government. Yes, individual borrowers made stupid decisions, but these stupid decisions were enabled by the government. Under true free-market capitalism, the government would not be there to bail out mortgage investors, so maybe these investors would think twice about loaning money to individuals with poor credit.

  • hlsj - Thursday, November 6, 2008, 5:29AM ET  Report Abuse

    • Overall: 5/5

    Human nature is a double edge sword, and we have leaned a bit to far to the darker side. Greed has its price hidden beneath "irrational exuberance" - there is no free lunch.

  • Gregory S - Thursday, November 6, 2008, 12:13AM ET  Report Abuse

    • Overall: 4/5

    This guy is dead on! Hey, no one forced lenders into bad mortgages. Sure, the Govt set the stage for all this to happen. Mortgage institutions failed to do the math -- and so did consumers. The natural consequences of poor decisions on the part of all three parties are to blame.

  • Angie - Wednesday, November 5, 2008, 11:45PM ET  Report Abuse

    • Overall: 1/5

    Ok that was a waste of my time. Do you not understand that the free market has been dead since 1913? No mention of the bogus Federal Reserve? You have got to be kidding if you think that NOW is the twilight of the free market. LOL its been long gone.

  • R S - Wednesday, November 5, 2008, 11:26PM ET  Report Abuse

    • Overall: 1/5

    Are you kidding me? Phd and experts are fools... I only have a degree in economics from Princeton U. (grewup in Woodbridge, did the Wall st crap. Ideology and theories are all wrong. END THE FEDERAL RESERVE... Simple! You "so-called" experts just don't get it. Go get yourself educated... gesus, such ignorance is quite annoying... or are yah's bllinded by the GREEN KoolAid? Time for you guys to go get "Edge a mah kated" Very Embarrassing Article

  • Austin - Wednesday, November 5, 2008, 10:02PM ET  Report Abuse

    • Overall: 1/5

    The government created this mess NOT the free markets. Had the free markets been allowed to work we would not have this mess. Get your facts straight!

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