Jeremy Cutcher is a political science senior and Mustang Daily liberal columnist. A couple of months ago, I wrote an article about the fundamental issue at odds in most political disagreements: namely, the political pursuit of liberty versus equality. It is an issue that is rarely discussed in political discourse, but does most to shed light on political disagreements.
There is a similar fundamental issue in the economic realm, and understanding the underlying conflict in economic disputes fosters a better ability to grasp the real consequences of economic issues. However, this conflict centers on the values of efficiency versus equity.
Neoliberal economic theory, namely the belief in private, free markets, has risen to supremacy in many industrialized nations because of its theoretical power. With complete information and low transaction costs — assumptions that questionably reflect reality — free markets achieve allocative efficiency, meaning resources go to the individual who values the resource the most, and in so doing, the invisible hand guides the market to the efficient price and quantity.
The importance of efficiency in markets is that it maximizes total net benefits for society, utilizing all resources within the market. However, this theory stresses the full allocation of resources, but makes no normative judgments on how those resources are distributed within society.
In essence, resources could be primarily allocated to a wealthy few, but as long as that’s what the free market dictates, capitalist ideology makes no value judgment either way. But economic inequalities invariably lead to social and political inequalities. And that’s where equity becomes an important value to pursue in economic affairs, but one that more often than not must be pursued through policies outside the marketplace.
Although conservatives often condemn the New Deal reforms following the Great Depression as socialism, the true story is that Franklin Delano Roosevelt introduced programs such as Social Security, the FDIC and the SEC to save capitalism and prevent the destitute from turning hard left.
No doubt the depth of the Depression was one of the factors that was conducive to the rise of fascism in Europe. In fact, socialists holding office in other countries at the time of the Depression refused to take actions to manage the crisis because they saw the Depression as the final downfall of the capitalist system. In the United States, however, the benefits of industrialization and capitalistic enterprise were everywhere, but progressive leaders knew it had to provide some protections from the irrational exuberance that often characterized markets.
According to Harvard sociologist Daniel Bell, “Between 1910 and 1930, the United States became an effective national economy, but it had few institutional mechanisms to deal with an economy of that scope. In historical retrospect, the salient meaning of the New Deal was the creation of institutions to under gird and manage a national economy. What Franklin D. Roosevelt did was to match the scale of economic activities with a new political scale.”
This is what financial reform aspires to do. Our financial system had become so large in scope and so complex in detail that we lacked the regulatory structure necessary to control it. Yet, even seeing the need for regulation — given that the market failed and thus did not reach allocative efficiency as evidenced by the financial crisis — Republicans still refuse to even consider government “intervening in the economy.” Not only do they prefer “private” efficiency over “public” equity in the economic dichotomy, but they will stridently oppose any legislation that even aims to correct inequities in the marketplace.
Given that the government must step in to correct inequities in the marketplace, it is questionable whether markets even achieve efficiency at a given price and quantity. In finance, a whole market exists that profits off of wrong prices, either selling when securities are overvalued or buying when they think they are undervalued. Apparently, reality does not reflect theory.
As I mentioned above, one of the assumptions of neoliberal economic theory is that supplier and demander have all the information necessary in the marketplace, but this does not seem to be the case. In fact, it seems to be to the advantage of the supplier to provide consumers with only information they deem necessary, perhaps to inflate prices. Looking at the financial crisis, academics are still trying to sort through all the factors to understand exactly how it occurred.
It follows then that at the time transactions were actually taking place in the markets, the participants must not have been fully informed. Borrowers were not fully informed about their mortgages, investors were not fully informed about the toxic assets they were buying and banks were not aware of the risk they were taking on, but prosperity was everywhere so no one really cared to ask.
Favoring government regulation when markets demonstrate that they are not operating properly does not mean you are a socialist. Nor does favoring equity in some instances mean you desire some socialist utopia. Some government official making decisions about prices and levels of production within the marketplace makes no sense given the frequency in which economists are wrong. But knowing that the government cannot operate the full economy does not mean that it should not intervene when a particular market is clearly failing. And the conservative ideal of completely free markets is just as utopian as its liberal counterpart.
Ideological purity rarely solves any issue, but pragmatic discussions that incorporate reasonable solutions to difficult problems is the best way to move the country forward.