Defending Open Markets

Amidst the banks bailout and the stimulus package being managed by president Obama's administration, there are the arguments about whether the unqualified stupidity shown by some firms on Wall Street 's imply that a market driven society is doomed. In the eyes of many, there's the thinking that to argue for the superiority of markets over government planning is an argument that cannot be won today. I must state that with the superficial analysis out there, it is obvious that few people are arguing persuasively for the immense power of markets as a superior form of organizing economic activity.

Granted that the ideologues on either side are rehashing the main arguments again and again, I have found two pieces by academics which are not only very coherent but are not intended to defend the indefensible. Kevin Murphy and Gary Becker here, acknowledge that capitalism is under strain and has demonstrated weaknesses. Among the important points of this well-argued piece is that proper cognizance must be taken for the entire record of the market mechanism. Consistent with my view is that the broad conception of the problem and the prescriptions offered lead to the risk that there will be overreach that would forestall growth in many countries.

A shared finding by the two professors and Alan Meltzer in this summary of the Bradley Lecture 2009 is that the conventional wisdom is wrong in ascribing the cause of the crisis to insufficient regulation. I am in agreement with the argument here because it is clear that banking institutions are among the most regulated commercial industries world over. That there are calls for more regulation is insufficient and my view is that it is easy to hide behind a claim for more regulation without specifying what ought to be regulated. I understand that very high leverage was indeed risky and the degree of internal risk assessment was completely underdeveloped.

Meltzer not only gives a forceful defense of capitalism but also makes the subtle point about the difficulty in arguing for it as a moral philosophy. Instead, he takes the correct view that while capitalism has weaknesses, its flexibility and dynamism makes it eschew the use of private or public coercion and that explains its suitability for democratic capitalism. While I am in disagreement with Meltzer in the suggestion that the failure of one candidate to accept funding from the public has weakened political party democracy, I am impressed by the lecture as it ties capitalism to freedom. In conclusion, the results of capitalism can be subjected to critique but it is gratifying to see dispassionate professors putting the record straight and stating that human nature and vices are not a creation or preserve of capitalist societies. Indeed, given its proven ability to inspire growth and material development, capitalism probably allows for society to have resources that enable these vices to be responded to.

Even without agreeing with everything stated in both articles, it is clear that they respond adequately to developing countries that may be tempted to fashion economic policy based on an inaccurate rendition of what the causes of the crisis are and therefore that capitalism and open market systems are not appropriate for them.