Monday, February 16, 2009

Free market - use, misuse, and an explanation

In a recent editorial (Shut Up, They Said Feb 13, 2009) The Wall Street Journal claimed that Congress should not restrict companies, which receive bailout money, from using this money for lobbying Congress. A reason it gave was that it is unfair to prevent corporations from lobbying when unions, which receive bailout dollars indirectly through workers’ wages and dues, aren’t restricted from lobbying Congress. Supporting the idea that companies could use federal handouts to lobby congress for more federal handouts is decidedly not a free market principle.

‘Free market’ is an oft misunderstood notion. As I wrote in an earlier post, all markets are free. The issue here is that in much of the public’s mind ‘free market’ is essentially a fascist idea, a state of affairs in which the government supports big private businesses at the expense (it is always at someone's expense) of everyone else. The public is basically right: such was the state of economic affairs under fascism. It is wrong, however, to associate it with the ideas of individual liberty and free market capitalism as advocated by Adam Smith, Friedrich von Hayek, and Milton Friedman. The WSJ, a supposedly free-market leaning paper, contributes to the confusion by defending privileges for big corporations at the expense of taxpayers.

Free markets mean that businesses compete for consumers’ attention and dollars, and the government does not support one business or another, nor interferes in the economic activities of citizens and businesses, except to enforce the don’t lie, don’t cheat, and don’t steal laws. (Where was the government when Madoff was lying to his investors and stealing $50 billion of their savings?)

Laissez faire, that economic concept of leaving people alone refers precisely to letting companies compete for customers’ business and not having government support one corporation or another. It does not mean letting the hungry starve or letting the homeless freeze to death in winter. Free markets mean legal competition without government support for anyone. The WSJ-types who support government bailout for corporations and the use of bailout dollars for lobbying are no different than the populists and socialists who want massive government transfers from “the rich” to “the poor and the middle classes.” Both oppose free markets and competition, they just choose different beneficiaries. Here is how Friedrich von Hayek described these people and the situation in his classic 1945 book The Road to Serfdom:

What in effect unites the socialists of the Left and the Right is this common hostility to competition and their common desire to replace it by a directed economy...

Yet… the universal struggle against competition promises to produce in the first instance something in many respects even worse, a state of affairs which can satisfy neither planners nor liberals [of the classical type]: a sort of syndicalist or “corporative” organization of industry, in which competition is more or less suppressed but planning is left in the hands of the independent monopolies of the separate industries. This is the inevitable first result of a situation, in which people are united in their hostility to competition but agree on little else. By destroying competition in industry after industry, this policy puts the consumer at the mercy of the capitalist and the worker of the best organized industries. Yet…it is not a state which is likely to persist or can be rationally justified. Such independent planning by industrial monopolies would, in fact, produce effects opposite to those at which the argument for planning aims. Once this stage is reached, the only alternative to a return to competition is the control of the monopolies by the state—a control which, if it is to be made effective, it must become progressively more complete and more detailed.

A case in point: on Feb 16, 2009 WSJ reported "Bankers Face Strict New Pay Cap." In addition, the recently passed economic stimulus bill contains restrictions on hiring H1-B (professional foreign) workers by any company receiving TARP funds. Add these to the Congressional restriction on the use of bailout money mentioned earlier. These policies seem reasonable in light of the current circumstances, but they also validate Hayek's assertion that in order for government's efforts to be effective, government's control must become progressively more complete and more detailed.

The real problem of government control isn't government control per se. Nor is it, necessarily, that it will lead to total enslavement (serfdom) of the citizens by the government (although, historically, that's what happened in Soviet Russia and Nazi Germany). The more immediate problem with government control of industry is that, political ideology notwithstanding, it leads to inefficiency, fewer products, higher prices, corrupt practices, and lower standards of living. It sustains a minuscule class of super rich government-backed oligarchs and a fairly equal, in its misery, class comprising almost all of the population. Exhibit 1: most of Latin America. Exhibit 2: Eastern Europe before 1989.

Described accurately, supporting free markets is not supporting a policy to aid any one business. It is supporting a policy of competition among businesses. Such competition leads to innovation, more efficient use of resources, lower costs and greater availability for consumers, and a higher standard of living. Without competition a democratic nation will slide toward an oppressive and inefficient system, going through a corporative stage first, as Hayek very coherently explained. But perhaps such an idea of free markets and competition sounds a bit far-fetched and utopian?

Interestingly, there is one area of American life where this almost utopian laissez faire idea is both the law and the practice. Read the First Amendment of the US Constitution: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;” The resulting free market for religion, where the government neither regulates nor supports one faith or another, provides Americans with the largest possible choice of religious options in the world. There are no restrictions on the number of foreign religious workers as in the case of other foreign workers, and there is practically no unemployment among them. Every church, mosque, synagogue, or temple of any kind exists, competes with all others, and flourishes despite its inability to collect taxes or to force anyone to support it involuntarily, and despite the fact that for over 200 years, through wars and depressions, no religious institution in America has received a government bailout. Consequently, America today is the most religious country in the Western world, so much so that at the dawn of the 21st century only in America does religious doctrine vie to displace science as the explanation of the physical world taught in the classroom.

Imagine if we had a 28th amendment to the Constitution that read, “Congress shall make no law respecting an establishment of commerce, or prohibiting the free exercise thereof.." and if we enforced it as religiously as we do the First... Ah, but then we'd be quixotic dreamers...

Friday, February 13, 2009

Che vive! (Che lives!) - but why?

The first condition of immortality is death.
Stanislaw J. Lec, "Unkempt Thoughts"

I recently saw the 4-hour Steven Soderberg saga Che: A Revolutionary Life. I grew up in a communist country, so Che was a hero to me when I was a teenager. I've read his biographies, one of them while doing research at Senator Margaret Chase Smith Library in Skowhegen, Maine. I've bought t-shirts with his image from street vendors in Paris. I have a poster of him in my office, right above the shelf with books by Adam Smith, Friedrich Hayek, and Milton Friedman. My relationship with Che seems to be a paradox.

And so is the fact that Ernesto "Che" Guevara, the Argentine doctor-turned-hero of the Cuban revolution is one of the most successful brands (read commercial, capitalist success) today even though he led a revolution against capitalism. As the French economist and philosopher Guy Sorman wrote recently "No teenager in rebellion against the world or his parents seems able to resist Che's alluring image. Just wearing a Che T-shirt is the shortest and cheapest way to appear to be on the right side of history."

So if Che is associated with a now-discredited political and social order, why does he continue to live in the hearts and minds of so many around the world? All the arguments against him, from the coherent (see Alvaro Vargas Llosa's excellent essay The Killing Machine: Che Guevara, From Communist Firebrand to Capitalist Brand, ) to the hateful (read Sorman's article here) do nothing to diminish the power of his symbol.

It seems to me that the detractors are barking up the wrong tree. They are historically correct: Che supported an oppressive regime, he executed people without due process, his contribution to Fidel Castro's military victory in Cuba was probably immaterial, his record as a minister of industry after the revolution was dismal; his other military endeavors, in Africa and Bolivia, were utter failures. Che did not even stay to build communism in Cuba. But Che's popularity is not related to these failures. He is not a symbol of of great military leadership, nor of just legal process, nor of economic development. He is not even a symbol of successful revolutions.


Che was a free spirit. He rode a motorcycle thousands of miles across Latin America, living the adventure of a lifetime that many only dream of. Budd Fox, the ambitious stock trader from the movie Wallstreet, wanted to ride his motorcycle across China. Ewan McGregor, the real-life movie actor did ride his motorcycle around the world.

Che did have a compelling B.H.A.G. (Big Hairy Audacious Goal--you Harvard MBA-types should recognize this term. For the rest, it simply means vision.) He wanted a world where most people would have a better life. He went about it the wrong way (like McKinsey consultants, he was an idea man, not much of an implementer) but his vision was one that most civilized and honest human beings share. Every politician, from the left or from the right, believes that her policies will make life better for her constituents. Every economist, whether a central planner or a free marketer believes that his theories would lead to better lives for the people. Every parent wants a better life for the children.

Che was selflessly dedicated to his vision. He suffered with his asthma during the years in the mountains of Cuba, and later in the jungles of Congo and Bolivia. He gave up his family and the cushy life as a Cuban minister of industry to lead small, disorganized bands in some of the roughest places in the world in pursuit of his vision. He did it despite the overwhelming odds against him. Ultimately, he paid with his life. Under most circumstances we call this idealism and heroism.

It was also just a coincidence that on March 5, 1960 the young, handsome, and brooding Che was captured by Alberto Korda's lens in that memorable photograph. That image has become the logo of the Che brand. Its artistic essence and impact are far better described by Trisha Ziff here. Without it "Che" would not mean the same thing. Could you imagine Nike without the swoosh and "Just Do It"? It would be just another Chinese sneaker. And Coca Cola without its cursive script and contour bottle is just another sugary drink. Coincidences, shared dreams, and misfortunes created the Che brand.

Sure, different people interpret Che differently. But for most the logo, this image, the brand have little to do with the particular political leaning of the historical person Ernesto Guevara. They have to do with the quixotic idealism and faith that, against any odds, a better life is worth fighting for. The Argentine doctor Ernesto Guevara, called Che by his friends, with all of his shortcomings, failings, and sins has long since been killed. Che--the symbol--the 20-th century Don Quixote, has taken on a distinct life of its own. And if Cervantes's character is any guide, Che will live on.