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Source link: http://archive.mises.org/15107/rise-of-the-free-market-zombies/

Rise of the Free-Market Zombies

December 23, 2010 by

If we are going to look at the current, dismal economy and blame somebody’s policies for it, surely we can acquit Ron Paul. That doesn’t by itself prove that Ron Paul’s views are correct, but it certainly casts doubt on Krugman’s constant claims that he himself has been a beacon of clarity over the years with his accurate Keynesian modeling. FULL ARTICLE by Robert P. Murphy

{ 22 comments }

Bogart December 23, 2010 at 9:33 am

Krugman is trying to associate free market folks with zombies in preparation for the real zombies that will be coming out of their bankruptcy graves to steal wealth funneled to them via the Fed and Congress. The first really big ones Fannie, Freddie and GM along with the Fed member banks themselves were hidden by the media. But more are on the way, there is a slow going bust in the government sectors that will leave entire states: California, Illinois and New York come to mind, as well as cities: NYC, LA, etc all as zombies unable to pay their creditors living off of the Federal Government on money created by the Fed. Krugman is trying to set the terminology in an attempt to prove these zombie banks, companies and governments are zombies because free market folks are zombies.

Alan Furth December 23, 2010 at 10:10 am

I think a similar argument can be made about other issues related with the financial meltodown, beyond the macroeconomics of it all. Take fraud for example. Keynesians tend to blame the massive amounts of fraud on rabid banksters that were left to operate without any government supervision, but they fail to acknowledge that the incentives for fraud were fueled by the bubble psychology created by massive money printing. Besides that, a minarchist, free-market perspective allows for government to provide the framework for fair-dealing among market participants and enforce basic rules against fraudulent behavior. So basically what Greenspan et. al did was completely reverse the role that government should have according to a free-market perspective: they were way too active in creating moral hazard through guarantees, etc., and they did nothing in terms of fraud-prevention and punishment.

Daniel Hewitt December 23, 2010 at 10:23 am

A quick lesson on credit rating agencies from Mish:

Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years.

Establishment of the NRSRO did three things (all bad):

1) It made it extremely difficult to become “nationally recognized” as a rating agency when all debt had to be rated by someone who was already nationally recognized.
2) In effect it created a nice monopoly for those in the designated group.
3) It turned upside down the model of who had to pay. Previously debt buyers would go to the ratings companies to know what they were buying. The new model was issuers of debt had to pay to get it rated or they couldn’t sell it. Of course this led to shopping around to see who would give the debt the highest rating

http://globaleconomicanalysis.blogspot.com/2007/09/time-to-break-up-credit-rating-cartel.html

Krugman’s take on this yesterday? It was the failure of free-market policies. He endorses an article where the author asserts that “Governments….[a]cknowledging that rating agencies were incompetent without doing anything to regulate them was inexcusable.”
http://krugman.blogs.nytimes.com/2010/12/22/arsonists-prosecuting-firefighters/

Matthew Swaringen December 23, 2010 at 11:45 pm

I looked this up a few months ago due to an article at HuffPost, but I think this point should be pushed, since the ratings agencies are a mess and a “private” one that people will like to point to.

Ben Ranson December 23, 2010 at 11:00 am

“It is true that many opponents of massive deficits and money printing gave warnings of interest rates and price inflation that at best were premature…”

No worries; there’s still plenty of time for the predicted price rises to appear.

Joshua_D December 23, 2010 at 11:54 am

Price rises are appearing now, in the grocery store and utility bills. All the semantic arguments of ‘inflation’ and indices aren’t to prevent the increasing pain people are feeling (I’m not saying Mr. Murphy is making any semantic arguments).

You can’t eat little pieces of green paper and I’m sure they make sucky firewood.

J Cuttance December 24, 2010 at 1:01 am

and inflation is manifest in property price drops not happening, that otherwise would have, had it not been for for the centrally directed flood of money into this sector

Ohhh Henry December 23, 2010 at 12:33 pm

Good old Krugman … he’s arguing that you can print and borrow money for the foreseeable future without any significant inflation or lenders demanding higher interest rates. He hasn’t seen these yet, therefore they will not occur.

It’s also worth pointing out that everything the right said about why Obamanomics would fail was wrong. For two years we’ve been warned that government borrowing would send interest rates sky-high; in fact, rates have fluctuated with optimism or pessimism about recovery, but stayed consistently low by historical standards. For two years we’ve been warned that inflation, even hyperinflation, was just around the corner; instead, disinflation has continued, with core inflation — which excludes volatile food and energy prices — now at a half-century low.

Or to put it another way:

It’s also worth pointing out that everything the right said about why jumping out of an airplane would fail was wrong. Ever since we jumped we’ve been warned that we would be smashed against the ground and every bone in our bodies would be broken; in fact, no impact has been felt and none of our bones is broken. Ever since we jumped we’ve been warned that a smashing collision, a catastrophe, was looming; instead, the pleasant, weightless feeling has continued, with only a slight increase in the volume of rushing, whistling wind noises.

When interest rates do leap up and inflation skyrockets, don’t expect any mea culpa. He’ll blame everything on “speculators” and lack of sufficient regulation. He won’t be simply urging the government on to a socialist takeover of the economy but screaming for it, blaming “the right” for everything.

Ondrej Moravec December 23, 2010 at 1:21 pm

The only one puzzled is Krugman himself and his friends who do not understand the context of Ron Paul’s remarks. Yes, the financial and banking system “failed”, but it is (almost) as far from being a free market system as Krugman is from being a free market economist. Mr. Krugman, what is the right step to end this “free market” in banking? Yes, we know, it is a nationalization of all investments to combat the “paradox of thrift”. Well I think you will have much more work combating the “paradox of free market economists” during the upcoming decades, because the zombie movie is just coming to the cinemas!

ET December 23, 2010 at 4:31 pm

Speaking of the GM zombie, check out this from the Chevy dealer around the corner from me. I have a GM credit card that earns points towards buying a GM car. I have $1500 I can apply to a GM car. EXCEPT the Chevy Volt, for some unknown reason:

http://www.lovemychevy.com/VehicleDetails/new-2011-Chevrolet-Volt-Hatchback-Glendale-CA/920064903

A mere $43,700 (plus another $4000 in sales tax in CA, plus license and registration). When all is said and done, the car for the masses will be nearly $50k. I guess all those farmers that got a check for $50k can buy one.

If they can force us to buy health insurance, what’s next, we all must buy a Chevy Volt?

Charlie Virgo December 23, 2010 at 4:34 pm

I just don’t understand how anyone can claim there is a free market in the presence of a central bank. The very purpose of a central bank is to curtail the effects of a free market.

Henry Chisholm December 23, 2010 at 5:58 pm

Many thanks for another excellent article Robert. However I feel your defence of Paul Krugman is misplaced. You say…

“It is true…that many opponents of fiscal stimulus and Quantitative Easing were warning of high interest rates and price inflation. These threats have not materialized (at least yet) and on that score Krugman understandably can pat himself on the back”

What Paul Krugman doesn’t understand (or doesn’t want any of us to understand) is despite the interest rates only being 3% we in the real business world are struggling to make even 3% profit which makes even a lowly 3% rate excessive. It follows also that, if my profit was only 1%, a 3% rate on my business loan would wipe me out.

The height of the interest rate is relative.

I quote von Mises in Human Action page 552,

“Public opinion has definite ideas about a “normal” rate (of interest), something between 3 and 5 percent.”

And on page 533….

“People are, in dealing with these problems (inflationist policies), for the most part misled by comparing merely the market rates of interest as they are determined on the loan market”

Yourself and the Austrian school were always, and are now, spot on.

Jonathan M. F. Catalán December 23, 2010 at 8:41 pm

A comment, if I may, that I hope is taken as constructive.

Murphy writes,

But the free-market fundamentalists were certainly correct when they said that the Obama stimulus package would not pull us out of recession. It was not just Austrians but many Chicago School economists who were reminding the public of basic observations such as “the government can only spend what it first takes from the private sector.”

If this is the argument, then the argument suffers from a large lacuna in logic. Namely, we are in a period in which there are large pools of unused non-specific capital goods. So, if the government seizes control of these goods and uses them, they aren’t really (at this point in time) taking them away from the private sector in the sense that you mean it (as opposed to in the ethical sense). The private sector isn’t using them, and so it’s not so much of a problem of crowding out.

The real argument is that government use of these unused resources will not be used efficiently, and that government cannot use these resources efficiently because they lack the ability to coordinate through the price the profit/loss mechanisms.

Iain December 23, 2010 at 9:50 pm

Lol you’re not using your house (much) mind if I take it?

Jonathan M. F. Catalán December 23, 2010 at 10:23 pm

Note that I purposefully leave out ethical considerations. This is not an argument on whether or not wealth redistribution and taxes are ethical, it is whether or not economic theory (which is value-less) concludes that government expenditure is inherently unproductive and why.

IAin December 23, 2010 at 11:20 pm

Presumably those unused goods belong to someone. If thats the case then you’re arguing about taking someone’s property.

Dave Young December 25, 2010 at 4:50 pm

I have said this to you folks before and its time again.

THE CONCEPT OF THE FREE MARKET DOESN’T WORK WITH CONSUMER CREDIT!
the idea of consumer credit is the ability to charge more that the market will bear, that IS the only purpose of consumer credit and this flies in the face of the concept of the free market.

to put it very simply, the propaganda of the free market is nothing more than a replay of the fascist propaganda of world war II, you keep blaming the poor for the inability of the money lenders to enslave the masses as is your main agenda!
you can’t have a free market society with out removing the massive profits that the corporations make through consumer credit, and until you grasp this reality, you are doing nothing more then lieing to the people you push this propaganda on!

the main reason your concept is completely flawed is the idea that a free market allows heavy profit, this is completely false, the way the true free market works is the profit margin is EXTREMELY minimal, because of COMPETITION by producers for the purchasers of that market in a cash on the barrel for the product society, that is how a TRUE FREE MARKET WORKS!

If you want those of any inteligence to listen to your ways you have to give up the fascist idea of a ruling class and your desire to bring back caste systems, and yes folks, you are very transparent, and those born with a mind can see exactly what your up to and this is the reason that the only people that take what you say as reality are virtually retarded, as in the religious right of the United States!

Mike S December 26, 2010 at 12:26 am

Are you saying consumers should be forcefully prevented from voluntarily financing their voluntary transactions?

Jonathan M. F. Catalán December 26, 2010 at 9:04 pm

Consumer credit is abstaining from future consumption favor of present consumption.

Dagnytg December 28, 2010 at 4:25 am

Dave,

What you’re referring to is fractional-reserve banking. Consumer credit is just another example of that concept. If you’re claiming retail prices are reflective of consumer credit, I would agree. Just as housing prices are related to Fannie Mae, tuition prices are related to student loans, and so on.

PS>I think you misjudge most of the people who blog on this site (at least the ones I’m familiar with) and words like fascist, ruling class, retarded and much of your second and last paragraph are not going to gain their respect or reply.

Leave out the emotionalism and your points might be better understood and accepted.

babybell December 25, 2010 at 6:19 pm

“Buy at least 10, save $2 each” Do your part in stimulating the economy! Buy more stuff you do not need!
Mises happy, Krugman happy. Win-win.

Merry xmas!

Chris December 27, 2010 at 10:20 pm

I am so surprised (and dissapointed) that now even Austrians (Robert Murphy in this article) are not elucidating that we indeed have very inflated prices. Just because the the delta in the CPI (or any price aggregate) is unchanged, does not mean we do not have inflation. The fact is that is that absent all of the monetary inflation, prices would have declined substantially, and not just in housing or industries tied to housing. Propping up prices, or preventing them from falling, is every bit as inflationary as having prices increase. If Austraisn fail (and thus far they are failing) to get this message across, then this will go down historically as being the great failure of Austrian theory (which is precisely what the Keysians would like).

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