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Source link: http://archive.mises.org/11332/john-cassidy-fails-in-his-critique-of-markets/

John Cassidy Fails in His Critique of Markets

December 28, 2009 by

Cassidy first caricatures the case for free markets, then tries to demonstrate the hypocrisy of a “free-market” financial bailout. He even admits that what happened was anything but the free market. FULL ARTICLE by Robert Murphy


EIS December 28, 2009 at 8:40 am

Ah yes, the interventionists get to centrally plan interest rates, altering the price of producer goods, and then consumer goods, over-tax capital, retard business activity and voluntary cooperation with thousands upon thousands of regulations, arbitrarily set prices in the labor and real-estate markets, and then blame the “free market” for the inevitable crises. This argument gets boring real quick. I’m sure philosophy and English teachers worldwide will cite his world-shattering revelations!

Barry Loberfeld December 28, 2009 at 9:04 am

Dear EIS,

Bull’s eye! As always:

In a mixed economy, it’s the market element that takes the blame. (See BAILOUT.) Statism is eternally innocent.

Bill Anderson December 28, 2009 at 10:38 am

This is an excellent commentary. There is something I would like to add, however, and that is that the very interventions by the Fed and the government (one and the same, I realize) also create whole new “markets” or at least provide both incentives and a mechanism by which to “game” the system.

However, these new “markets” clearly are not sustainable, as the interventions lead to outcomes that are built on phony foundations. These are the “markets” that utterly failed.

Much of what Cassidy has written is based upon non sequiturs in which he assumes that a “market” that forms around a government-caused financial bubble is built on “free-market” foundations. That is not true. Free markets do not lead automatically to the behavior of which he writes, not that I think Cassidy cares about being intellectually honest.

Bernd December 28, 2009 at 10:43 am

Strangely your agruments remind me of the defense of communism by die-hard communists : “You cannot say communism failed, because communism in its pure and proper form never really existed anywhere”. (hint: replace communism with ‘free markets’).

The all important question is: What good is a concept/philosophy (think free markets) if unless you implement it perfectly you will be subject to great instabilities (from an equlibirum theory perspective).

To continue to say we continue to need a purer and purer form of it could be likened by some to unyielding religious fanatism and it is thus questionable (at least in my view) whether it (free markets that is) will serve mankind best.

I woudl argue at a minimum the nature of the inherent instabilties of any real world free market economy deserve to be closely examined and analyzed (thank you Hyman M.) and if nesessary stabilizers that will prefent negative feedback loops need to be instated to prefent any unfortuious escalation in the presents of free markets that will forever be only imperfect images of its platonic ideal.

John B December 28, 2009 at 10:57 am

It is amazing that so many people can be so stupid.
The arguments of John Cassidy are so evidently flawed as arguments against the truly free market that I am surprised he does not blush as he utters them.
I suppose his self interest comes into this somewhere, for it is truly profound how stupid intelligent people can become, in order to further their interests, when those interests are furthered by being stupid.

EIS December 28, 2009 at 11:06 am


“The all important question is: What good is a concept/philosophy (think free markets) if unless you implement it perfectly you will be subject to great instabilities (from an equlibirum theory perspective).”

This is pure equivocation. Who’s talking about anarcho-capitalism? Let go of the straw-man and stick to substance. How about we eliminate the government created and backed central bank, which centrally plans every economic activity, directly or indirectly. The institution which pushes down interest rates, destroys savings, perpetuates capital flight, and sends incorrect information signals to producers who engage in unwarranted economic activities.

MilanM December 28, 2009 at 11:17 am

Free markets cannot exist when fractional reserve banking (which is a fraud) is not only legal by government statutes, but also guaranteed by them either through FDIC or bailouts. Banks or insurance companies placing large bets with other peoples money they can’t cover, but know the government will, is such a huge distortion of the market process, the effects will take decades to unwind even if it stops today, which of course it will not.

Ash Navabi December 28, 2009 at 11:19 am

Bernd (Schuster?), the way to analyze free markets in today’s society is to compare freer markets to heavily government regulated ones. Between medical surgery and cosmetic surgery, which has been experiencing falling costs with increase in quality, making it more affordable to people?

Why have prices for electronics been falling every single year for the past 6 decades, but the same cannot be said for, say, automobiles?

Furthermore, on the topic of ‘stabilizing’ the ‘inherent instabilities’ of free markets: how can you assure that the stabilizing measures won’t themselves cause further instabilities in the future? That lowering the interest rate in times of financial crisis, say, won’t lead to misallocation of resources in the future? Or subsidizing one industry, like agriculture, lead to great price distortions?

jalankatz December 28, 2009 at 11:34 am

RE: Bernrd, I’d agree with you that these arguments have the same form, except for one important dissimiliarity. In each case, you need to identify (economically) just what factors caused failure. In the case of communism, no one seriously maintains, on economic grounds, that the system failed because of its market elements – rather, it failed precisely because of the communist elements. Here, on the other hand, what we are saying is precisely that non-market elements are what caused the failure, specifically, the Fed.

Bob Roddis December 28, 2009 at 2:37 pm

I know we’re supposed to be polite in our critiques of our opponents, but this is pathetic. The inability of these guys to comprehend the extremely simple to understand difference between laissez faire with sound money and the Fed induced corporate state is pitiful. They wouldn’t be this indifferent to a comparison between US and Canadian football or football where the forward pass was banned and how the different rules in each instance would affect the games.

I guess they get to win because they are so irredeemably stupid.

jerry December 28, 2009 at 5:32 pm

I agree Bob, it is hard to be polite in the face of such lame critiques.

Bernd – there is one other way in which the two situations are fundamentally different. The argument for more communism (ie. more and better central planning) can ALWAYS be made, no matter what the scenario or the level/quality of planning. How then can you ever know you are wrong?

The argument for free markets not like this – once you leave a system free, we can see how it behaves. This claim is at least in principle falsifiable and so in a different class to a “theory” which is, essentially, a faith.

P.M.Lawrence December 28, 2009 at 6:18 pm

‘For a different example, the economist A.C. Pigou used a hypothetical illustration of traffic congestion to show that the government could raise total welfare by imposing a tax on drivers who wanted to take a route that could accommodate only a limited number of vehicles. Frank Knight, however, showed that if the road were privately owned, then the alleged “market failure” would disappear — the private road owner would maximize his profit by charging a toll exactly equal to the hypothetical “optimum Pigovian tax.”‘

That happens not to be the case. The market failure only disappears when the entrepreneur owns the whole road system, in which case his incentives and fee structures match those of the government. When entrepreneurs only own single roads the Tragedy of the Commons mechanism can still emerge, in the form of Braess’s Paradox, as individual road owners face incentives more similar to those of individual drivers.

Vanmind December 28, 2009 at 6:24 pm

I agree, jerry. There are nearly-infinite ways to undermine free markets with aggregate “planning” and then, upon the inevitable failure of the “plan,” claim that the wholesale intervention wasn’t “pure” enough. Free markets, on the other hand, work on the basis of individual entrepreneurial ventures being “pure” enough only within their own sphere of operation — which results in much less damage to society when such an individual venture fails.

Yes, that’s “when such an individual venture fails,” for every free-market enterprise fails at some point — but in that time countless other enterprises get their own opportunity to be even more successful, so the impact of one business going bankrupt remains minimal compared to mixed economies and their bailouts for companies that became “too big to fail” only because of previous intervention that destroyed competition. Indeed, central planning allows for no competitors to its own pretense of “wisdom,” and when that kind of failure finally arrives it’s much more devastating than a failure of an individual free-market business could possibly be.

Eric December 28, 2009 at 9:32 pm

How can you expect an understanding of what a free-market truly means when these (non Austrian) writers don’t even understand what inflation really is.

As Orwell said, if you can change the meaning of words, you can limit what the public can comprehend.

Think of how many people and economic writers confuse wealth with money.

Discussing economics with people that don’t understand these basic terms is useless.

And how hard is it to tell when a system is free or not? One need simply look for the use of force. Not exactly rocket science. It’s likely a result of government school systems (which uses force naturally).

Bill December 28, 2009 at 10:14 pm

I agree with most other bloggers: just how stupid can some people be:

“More generally, the believer in laissez-faire isn’t forced to renounce all forms of airline inspection or product safety. But these procedures can be supplied privately, either by the companies themselves, by outside watchdog groups, or by insurance companies”

Yep, we saw what happened with this when airports checks were done by private companies paying people on very close to minimum wages in order to be the winning bid, and tempting the mafia (and it is a matter of time, al qaeda itself) to bid even below cost, because its cost is being recovered by the “friendly” inspection.

T. Ralph Kays December 29, 2009 at 12:12 am


Yep, what you “saw” at airport security checks was government controlled and mandated security that the government farmed out to favorite “private” contractors who were required to do their jobs in exactly the way the government dictated. That is not the free market, it is in fact fascism. This assumption of yours that the only thing that defines the free market is the private ownership of companies is, although common, completely wrong.

Shay December 29, 2009 at 4:10 am

The fact that the airlines are required to do this shows that it’s not free-market. If it were, the first airline to eliminate this bullshit would rake in profits.

JoeR December 29, 2009 at 1:14 pm

One of the prevailing omissions most people make when they attempt to compare regulated capitalism with free-market capitalism is the division of liabilities. Taking for instance, airline security… the government regulates it but assumes no liability for failures. If the whole of airline security (including the sole responsibility for liability) were invested in airline companies, we would have intelligent, sophisticated, expensive security mechanisms alongside outdated, primitive, inexpensive mechanisms from which we passengers could choose to our credit or dismay.

As it is now, the airlines only have to be able to say that they observed and met their regulated mandate to avoid liability and the regulators accept none. Without the liability that goes along with owning, maintaining and protecting private property we’re faced with an moronic recipe for disaster.

Bob Murphy December 29, 2009 at 4:16 pm

PM Lawrence wrote:

That happens not to be the case. The market failure only disappears when the entrepreneur owns the whole road system, in which case his incentives and fee structures match those of the government. When entrepreneurs only own single roads the Tragedy of the Commons mechanism can still emerge, in the form of Braess’s Paradox, as individual road owners face incentives more similar to those of individual drivers.

I just glanced at the link, but it looks like this is just stating Pigou’s original problem. The Wikipedia example is precisely the thing Pigou was analyzing, and then he proposed imposing a tax on the drivers taking the short route in order to yield a Pareto improvement.

The analysis in that link assumes the drivers only act to minimize travel time, not that they balance travel time against fees for taking the special roads.

Like I said I just glanced at this, but I’m pretty sure you are missing the whole point. In any event, if you are right, then it applies also to any argument for a road fee imposed by the government.

P.M.Lawrence December 29, 2009 at 8:30 pm

No, that article on Braess’s Paradox isn’t just stating Pigou’s original problem and suggested solution. It goes into that area, covering the paradox as a special case of that, but it also covers how Braess himself first went looking for it after he noticed how a purported improvement had actually made things worse. Other researchers spotted other cases, and yet others showed that random systems were quite likely to have the problem. So there’s evidence that it’s a real issue.

So it’s not something that makes assumptions about drivers’ behaviour, it’s based on their observed behaviour. And I am not “missing the whole point”; the thing is, if an entrepreneur owned just the one road that, when open, increased congestion – he would have an incentive to open it for a fee. So the idea of this post doesn’t work when different entrepreneurs own different roads but only when they own whole systems. And that objection doesn’t apply “to any argument for a road fee imposed by the government”, just to those where governments only own individual roads rather than whole systems (say, with different municipalities charging for their own roads).

Dan Sirks January 9, 2010 at 12:02 am

John Cassidy did convince me that markets fail if they are not “free”. If we have government guarantee of deposits, as we do, there is no “free market” in banking. It is true that if one or a very few banks participated in the errant policies that caused the problem, ethically they should be allowed to fail. But they shouldn’t be using taxpayer funds or government guarantees (of deposits) in the first place. They should be gambling with their own money. But we have a different system of no “free market” when it comes to banks – all banks. There were too many of them and too large a portion of the U.S. wealth tied up in bank funds to let them all fail without causing very severe hardships. Therefore, if that is the system, large banks cannot be allowed to fail since the hardships to consumers would be unconscionable in the U.S. In the realistic world we have here, there cannot be any other solution except to alleviate the suffering of the masses. Free markets in the Western world are nearly non-existent. We must regulate this very unfree market very strongly or do away with it entirely and regulate to keep it “free”.

Christopher Bare March 5, 2010 at 11:51 am

Asking whether the financial crisis was a market failure or a government failure is a misleading question. The market (free, mixed, or otherwise) and the legal and political environment in which it’s embedded can’t be considered in isolation of each other. Adam Smith saw this and devoted a section of the Wealth of Nations to political economy. The same players that compete in the market compete in the political sphere to influence the rules of the economic game. That feedback loop was the central cause of the crisis. So, it’s neither a market failure nor a government failure. It was a failure of the political economy and it’s causes are obfuscated by ideology on either side and generally are going totally unaddressed in the proposed reregulation. We’ll apparently have to see more of the same before anything real gets done.

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