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Free Markets for Rubes

According to a recent Bloomberg poll, “The widening gap between rich and poor is eroding faith in the American dream.” According to the same poll, “46 percent say it would be better to allow the market to operate freely even if the gap gets wider.“ The businesses that wrecked the economy and the rich people who control them ruined our lives, but if we just let them keep going, everything will get better. This is the result of the touching faith of Americans in the Free Market.

Look at the cable companies. In the wake of the announced merger of the two largest cable companies, Time Warner and Comcast, pundits ask again about the miserable state of the businesses that supply overpriced and lousy internet and cable. Cable companies are pretty much unregulated monopolies: they charge what the market will bear, they provide crappy service, and they make you buy crap you don’t want and never use. Then they argue that their prices aren’t actually going up because the cost per crap is lower, an argument that could only appeal to a tiny mind.

This simple-minded idea of free markets is widely held in the US, especially by the Tea Party crowd. Just check out the twitter descriptions of any of the noxious conservatives who rant at our friend @tbogg and you’ll see that faith in all its flag-decorated glory. But in fact, there aren’t any economists who think there is any such thing as a free market like the markets these true believers believe in. All markets are regulated. As Bruce Harcourt explains in his book, The Illusion of Free Markets, the only interesting issue is who gets the benefits of regulation.

So why is there so much faith in the free market? Harcourt offers a convincing explanation. Underlying the words is the idea that markets are part of the natural order of things. They spring from the same source as the moral codes set up in the Bible: they are part of the fabric of the human story, they define us as humans. They are not subject to interference by the state, because that only makes things worse. Only the untrammeled exercise of this natural order will create a decent life. This emphasis on the natural order hides the most important part of the story: all markets are regulated, and those regulations have distributional consequences. Whatever rules are set up, someone benefits and someone loses. If we let the cable companies make the rules, they will insure that they make lots of money at our expense.

And, that’s exactly what happened. The rules of the cable market currently say that cable companies can charge as much as they can get away with. They currently say that cable companies can provide faster internet services to favored clients, and that they can favor clients who pay them more money. They say that cable companies don’t have to provide decent customer service, that they can charge exorbitant rents for set-top boxes and routers, and that they can provide no service for extended periods without making amends. In other words, they can make as much money as possible and you can’t do anything about it and the precious free market, by which I mean the Free Stock Market, thinks that’s just fine.

The free market apostles don’t talk about that. In his Wall Street Journal review of Harcourt’s book, James Grant, publisher of an investment tout sheet, Grant’s Interest Rate Reporter, says this

Thus on Dec. 16 shares in Visa and Mastercard plunged in response to the possible imposition of a new, consumer-friendly structure of debit-card fees. And who was going to do the imposing? Not the credit-card companies themselves but the Federal Reserve, which regulates them.

Really? An oligopoly is going to create “a consumer-friendly structure of debit card fees?” Please do not take any advice from this deluded soul.

Think about markets in exotic financial instruments. The derivatives market is wholly unregulated. How did that work out for you? When AIG crashed, every single one of its credit default swap counterparties ran screaming to the government to save them from the consequences of the free market by giving them billions of dollars. Goldman Sachs took $13 billion of those dollars, and it whines and cries about the minor regulations that the fools in Congress managed to pass, claiming that Dodd-Frank will make it harder for them to make money. Which, of course, proves Harcourt’s point. The consequence of regulation in that market is that investors have a better chance of making money than the sellers of crap financial instruments. Rules have distributional consequences.

Or take professional football. The rules describe in detail how teams pay their rookies. Cam Newton got a four deal worth about $21.1 million, about the same as Robert Griffin III and Andrew Luck. That compares with the six year deal Sam Bradford got which paid him $78 million the year before the current rookie salary cap went into effect. Newton is a wonderful player, but he can’t negotiate a new deal for three years, and his team can force him to sign for a fifth year at the average of the top ten quarterback salaries, which is ridiculous compared to Drew Brees’ $100 million five year deal. Meanwhile, the commissioner, Roger Goodell, is paid $44.2 million a year for sitting with the stinking rich and utterly useless owners of the non-profit NFL. The money that should have gone to Cam Newton is going to the Rich White Boy Club of owners and their lackeys. Rules have distributional consequences.

This free market silliness is for the rubes. Don’t be a rube.

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I read a lot of books.