A Thoughtful View From CATO

Gerald O’Driscoll writes in the Wall Street Journal (22 April) “CATO Blasts Mercantilism” and reproduced in part in Right Side News Blog:
HERE

‘Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. ... If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice. Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.

If we had any quibble with this article it would be, first of all, along the lines of the utilization of the term "crony capitalism." It seems to us that another term, historically more precise, would be mercantilism. In America, those who regularly deal in sociopolitical terminology seem determined to substitute their own words for words that already available. We don't understand why this is necessary. Somehow, for instance, America lost sight of what "liberal" meant in Europe; thus to use the term "classical liberal" in America often needs an explanation now…

… Likewise, "crony capitalism" may have more of a meaning in America than Europe, though mercantilism has considerable potency in our opinion. We read this in the Library of Economics and Liberty: "In contrast to the agricultural system of the physiocrats or the laissez-faire of the nineteenth and early twentieth centuries, the mercantile system served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state." …
… Indeed, the process of mercantilism advantages some private interests over others. The United States, like Europe, has been moving toward a full-blown mercantilist-style system for some time now. Perhaps the system could be termed neo-mercantilism. It doesn't have all the formal elements of mercantilism (as regards government accrual of gold bullion, etc.) but it certainly has supported a strong relationship between a favored business class and the government itself. …

… The problem with such approaches, of course, (from a purely anarcho-capitalist point of view) is that one needs an "enforcer" to ensure that such concepts are properly adhered to, and almost inevitably one may end up with a regulatory authority once again. It would seem, therefore, based on this article and similar rhetoric - especially from CATO which seems to espouse "reasonable" libertarianism - that there is still, even within American libertarian circles, an impulse to distrust markets themselves, and their inherent disciplinary abilities. We would like to offer up the idea that the Invisible Hand itself is a formidable disciplinary device. Wouldn't a company that consistently misleads customers or investors run itself out of business - regardless of whether it was under an affirmative obligation to exercise a duty of care?’

Comment
G. P. O’Driscoll, jr, is the author/editor, 1979, of Adam Smith and Modern Political Economy, Ames. IA: Iowa State University Press.

This long article (follow the link) is quite refreshing and suggests that some new thinking is underway at the Cato Institute (a libertarian think tank) about the status of modern US capitalism.

I have long argued that mercantile political economy did not disappear after Adam Smith; it continued, after the loss of the British colonies in North America, in the Caribbean, Canada, India, South Africa (later most of Africa), in the North Pacific, and Australia and New Zealand. As Britain’s first empire fell away (George III would not compromise on anything, so he lost everything), its second empire grew in strength until full-blown colonialism was back in force. Coinciding with the growth of the modern state – still small by today’s standards – mercantile interests were back in business, so to speak, of which ‘crony capitalism’ is a very American alliteration.

I am not taken with the idea of the ‘invisible-hand’ as a ‘formidable disciplinary device’. How and with what means would a metaphor (for what?) exercise self-discipline? Asking if a company whether a ‘company that consistently misleads customers or investors run itself out of business - regardless of whether it was under an affirmative obligation to exercise a duty of care, invites my not entirely cynical response of: ‘I doubt very much if it would!

Similarly I have little faith in regulation, which I agree, tends to self-proliferate once embarked upon both from ever inventive amendments to existing processes and unintended extensions of the regulations to fringe and peripheral areas to ‘plug gaps’ and ‘evasions’ in the interests of multiplying head counts among the regulators.