Wikipedia provides the following definition of free market capitalism:
“Free market capitalism consists of a free-price system where supply and demand are allowed to reach their point of equilibrium without intervention by the government. Productive enterprises are privately-owned, and the role of the state is limited to enforcing property rights”.
I’m not sure that this definition is adequate. I would add after the word “government” in the first sentence the words “or any other entity.” I believe that an unfettered free market is the most efficient market system that there can be. In a free market, production and prices are controlled through supply, demand, and competition. Any attempt by any entity to influence prices or production cause distortion in the market place (erroneous signals) that lead to the misallocation of capital investments which often lead to unnecessary boom/bust cycles and real harm to the society at large.
As far as I can tell, free market capitalism in the United States has never been free of intervention, whether that be intervention from government, financial institutions, or individuals. While researching the history of the Fed recently, I came across an article from Current.Com about the panic of 1907. Here are a couple of snips:
“On Oct. 17, 1907, panic began to spread on Wall Street after two men tried to corner the copper market. In the months preceding the panic, the stock market was shaky at best; banks and securities firms were contending with major liquidity problems.”
That’s one way to control market prices.
“By mid-October, Wall Street was paralyzed; for days, there were runs on several large banks. Millions of dollars were withdrawn, and banks closed their doors. New York City was on the brink of bankruptcy. By 1908, there was a severe but short-lived recession. The man who saved the day was J.P. Morgan, who brought together leading financiers and banks to bail out the ailing market.”
How nice of J.P. What a guy! Not long after saving the day, J.P. and some very special friends had their famous secret meeting at Jekyll Island, Georgia, where they hammered out plans to create a central bank. Afterwards he was able to convince enough congressmen and President Wilson to pass the law creating the Federal Reserve System.
“That was all in the days before a centralized banking system — and the Federal Reserve — were created to prevent widespread financial catastrophes.”
That’s worked out really well, hasn’t it? By controlling interest rate and controlling the money supply, the Fed has tremendous influence over the market place.
Our government is also a major player in the market place. By means of tariffs, subsidies, price controls, and a myriad of regulations, the government’s interventions are constantly distorting the markets and causing misallocation of capital investment.
Another element that raises havoc with free markets are speculators and the financial institutions that create the instruments for the speculators to act on. Commodities are an easy example to talk about. Hedging was originally intended to be a way for suppliers and consumers to protect themselves from price fluctuations. A corn producer, for example, may be worried that prices will fall before he can harvest his crop. So he sells his crop forward at a price that gives him comfort. The consumer, on the other hand may be worried that prices are going to raise before he can make his purchase at harvest time. So he agrees to buy the forward contract at a price he is comfortable with. No harm. No foul. The problem comes when the speculator gets between the producer and the consumer. From left-wing writer Matt Taibbi we have this:
” Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.”
The point that Matt was making was at the time that oil was trading at $147 a barrel, supplies were up and demand was down. In other words, there was no good reason that you were paying $4.00 a gallon for gasoline. The price was not a reflection of supply and demand.
What I suspect is that if one could objectively investigate every financial crisis in our history, one would find one or more of the factors discussed above, involved in causing the crisis. As a capitalist, I find these actions by government, financial institutions, unscrupulous persons and speculators to be criminal. Their actions cause direct harm to the public and government is supposed to be in the business of protecting us from criminal actions.
Also, I want to point out that none of these activities by bankers, manipulators or speculators has anything to do with capitalism. A true capitalist believes in free and open competition. So all the arguments and accusations by the liberals that all the boom/bust cycles are due to free market capitalism are dead wrong. We’ve never had a system of true free market capitalism although I wish we could for everyone’s sake.