Tuesday, June 4, 2013

Typical Misunderstanding of the Free Market (Rewritten)

In November 2008, Scott Stephens wrote his piece in response to global economic crisis. Rev. Stephens is the minister of Forest Lake Uniting Church and teacher of theology and ethics at Trinity Theological College. The title of his article is “Dishonest money: What the financial crisis tells us about ourselves”.
In the mind of Scott Stephens, the basic problem lies in the inherent flaws of capitalism. He identifies the modern economic phenomenon of monetary expansion as “dishonest money”. To him, the 2008 crisis not only exposed the faulty foundation of such system, but should also lead to self-examination as to our participation in this crisis due to greed and extravagant lifestyle. Furthermore, he said that it ought to direct us to a realization working for common good and the need for alternative community with a different economic system. He looks to the Church to provide such a community with an economic system different from capitalism.
Scott Stephens appeals to history as his basis. He identifies that monetary expansion has been in existence since the time of Aristotle in 4th century B. C. He said that Aristotle was actually “shocked to observe that the efficiency and simplicity of the market seemed to unleash something monstrous in the human heart.” He further narrates that as people perceived the potential of monetary expansion, they started to lust after unlimited profit. This seemingly unlimited increase in the quantity of money carried with it destructive moral vices like greed, dissatisfaction, and loss of self-control.  Stephens then mourned that those destructive vices in time have been turned into “celebrated virtues” serving as the basic foundation of modern economy. He then concluded, “Capitalism thrives only through these vices.”
So the above three paragraphs summarized my understanding of Stephens’ article. And now, here is my response:
Stephens’ reading is a typical misunderstanding of the real character of free market and capitalism. Reading George Reisman’s open letter to Warren Buffet dated July 26, 2012 clarifies this misunderstanding (George Reisman by the way is a Professor Emeritus of Economics at Pepperdine University and the author of “Capitalism: A Treatise on Economics”). In the mind of Reisman, it is not actually the free market that unleashed those destructive vices. It was something else. It was the government intervention appearing as “free market”.
As for me, Stephens’ hope “that those in positions of influence will find a just and effective response to the current credit contraction,” is actually a resignation. Can we really expect that those in power would initiate genuine monetary reform apart from the initiative of an informed public? As Murray Rothbard (another defender of free market and author of “Man, Economy, and State with Power and Market”) rightly identifies that due to the combination of both evil and good in human nature, those in power could actually utilize their privilege position for legalized theft.
I think Stephens’ longing for an alternative community with a different economic system exemplified by the Church could only happen on the basis of a solid understanding of what is really going on. This requires education in economics leading to concrete action. Without this education, we will buy both the mainstream and Stephens’ interpretation and capitalism will reap all the blame. Here I think the Austrian school of economics could provide the necessary tool for us to re-examine the real nature and character not only of free market economy, but also of the existing economic crisis.