Clearing Up Some Misinformation, Part 1

President Obama gave a speech at Osawatomie High School on December 6, 2011, where he declared freedom and free markets to be dead, unworkable ideas which have been tried and proven to fail.  The President claims that free people making decisions about how to allocate their labor and resources (the free market) is a simple theory that appeals to our rugged individualism, but that it does not work and has never worked:

… there is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes — especially for the wealthy — our economy will grow stronger. Sure, they say, there will be winners and losers. But if the winners do really well, then jobs and prosperity will eventually trickle down to everybody else. And, they argue, even if prosperity doesn’t trickle down, well, that’s the price of liberty.

Now, it’s a simple theory. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government. That’s in America’s DNA. And that theory fits well on a bumper sticker.  But here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible postwar booms of the ‘50s and ‘60s. And it didn’t work when we tried it during the last decade.  I mean, understand, it’s not as if we haven’t tried this theory.

With all the misinformation contained in these two paragraphs, I am not sure where to begin. 

First, let us define some terms so that the following analysis can rest on a firm basis.  According to, the term “market” is “a meeting of people for selling and buying.”  I think this definition comes closest to what the President is referring to in his speech. 

Also, what exactly is the President talking about when he mentions “the economy?”  The economy is not some amorphous clay to be shaped, molded, guided, and engineered to produce some desired outcome.  The economy is the organization of people through completely voluntary means whereby which each individual makes purposeful decisions and actions in order to economize between means and ends.  So those who wish to plan and control the economy really want to alter the natural outcome of individuals’ decisions and actions.  Ignoring the fact that we have not had truly free markets for 100 years, what President Obama is really saying when he states that “It doesn’t work.  It has never worked.” is that freedom does not work and freedom of choice and association does not work.    

And who are “winners and losers”?  In a free market economy, winners are made by the decisions they make and losers are made by the decisions they make.  In the end, there is no government employee to blame or some elected official to shoulder the responsibility for their failure or for their success.  It is the individual who owns themselves and should take the full responsibility for their failures and successes based upon their own decisions.  The fact that people rely on the government to shape the winners and losers in this country also leads to people taking risks they might not have normally taken. 

For example, Fannie Mae and Freddie Mac made some poor business decisions, but they realized it did not matter because the government was there to save them from bankruptcy should their loose lending practices lead to failure.  And that is exactly what happened.  Do we, the economy – the market! – really want a small group of people to pick the winners and losers in our “meeting of people” or would we prefer to let that responsibility fall on the individuals making those decisions?  In a free market, there is no such thing as “too big to fail.”         

According to the President, this “theory” of free market economics was tried in the decades before the Great Depression, but it failed.  According to Murray N. Rothbard in his article “Reliving the Crash of ’29”:

One common guiding assumption characterized the Keynesians, socialists, and fascists of the 1930s: that laissez-faire, free-market capitalism had been the touchstone of the US economy during the 1920s, and that this old-fashioned form of capitalism had manifestly failed us by generating, or at least allowing, the most catastrophic depression in history to strike at the United States and the entire Western world.

It appears as though Dr. Rothbard agrees that this period in American history has been characterized as the “heyday” of liassez-faire economics.  However, he does not agree with this characterization:

Unfortunately for the course of history, the common interpretation was dead wrong: there was very little laissez-faire capitalism in the 1920s. Indeed the opposite was true: significant parts of the economy were infused with proto–New Deal statism, a statism that plunged us into the Great Depression and prolonged this miasma for more than a decade.

How can the “mainstream” narrative about the period leading up to the Great Depression be so “dead wrong?”  According to Rothbard, people have forgotten the fact that Republicans have never been the laissez-fair party but it was the Democrats who had always fought for free markets and limited government all the while…

Republicans had crusaded for a protective tariff that would shield domestic industry from efficient competition, for huge land grants and other subsidies to railroads, and for inflation and cheap credit to stimulate purchasing power and apparent prosperity.

It appears as though the script has been flipped and many people out there, especially a high school audience at Osawatomie High School, have been led to believe the misinterpretation of this period in history.  But can we rely solely on the great Austrian economist Murray Rothbard?  According to Randall G. Holcombe in his paper “The Growth of the Federal Government in the 1920s”:

However, before FDR’s administration, the Republicans were the party of government activism and the Democrats the party of conservatism. Furthermore, except for President Wilson’s election that was the result of a temporary fracture of the Republican party into Republicans and Progressives, the Republicans, along with Republican ideas, dominated the White House. After Abraham Lincoln’s presidency, Grover Cleveland was the only Democrat to hold the office until FDR. The ideas of Progressivism, found mostly in the Republican party, provided the intellectual foundation for the substantial growth of 20th century government.

It is clear that Dr. Rothbard is not the only one to have characterized the 1920s as a decade of statism.  So the very premise that the “theory” of free market economics was in full swing during the 1920s is false.  The President uses this period as an example of what “those people” want to do to our economy, when in fact this period saw the championing of “paternalistic big government and the partnership of business and government…” and “..brought the federal government to its greatest intensity of peacetime spending and hiked the tariff to new, stratospheric levels”, according to Rothbard’s analysis. 

So how exactly does all this tie in with the Great Depression, since the implication in the President’s speech is that the policies of the 1920s led directly to the Great Depression.  Rothbard explains:  

But most important in terms of the depression was the new statism that the Republicans, following on the Wilson administration, brought to the vital but arcane field of money and banking. How many Americans know or care anything about banking? Yet it was in this neglected but crucial area that the seeds of 1929 were sown and cultivated by the American government.

How was banking instrumental and how exactly did it take shape?  The Federal Reserve Act of 1913 created a central bank, enabling central control and manipulation of the commercial banking industry.  This gave government the flexibility to inflate the currency and control credit.  In 1923 the Agricultural Credits Act created 12 federally owned banks to make agriculture loans, according to Holcombe.  The Federal Reserve’s inflationary boom fueled, in part, by American loans to foreigners, created the “roar” in the Roaring ‘20s and the eventual bust that took place in 1929. 

Today we are still implementing the same policies of the 1920s.  So in some respect, the President is correct in that the policies of the 1920s led to the Great Depression, however his characterization of these policies are incorrect.  He implies that the policies of the 1920s led to a free market, laissez-faire economy and that it was “the market” that failed and created the Depression.  Nothing is farther from the truth.  In Part 2 of this analysis of the President’s speech, I will continue to clear up as much misinformation as possible.

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