The Era of Laissez-Faire?

28 January 2010 at 2:08 pm 14 comments

| Peter Klein |

One of the established memes about the financial crisis is that it demonstrates the failure of unfettered capitalism, the dog-eat-dog, laissez-faire environment that prevailed in the West over the last few decades, all driven by the ideology of “free-market fundamentalism.” This seems to be a truism among most of the Commentariat. Of course, as pointed out repeatedly on this blog, the truth is virtually the opposite: there was never any “deregulation,” the Bush Administration spent public money like a drunken sailor, and government continued to expand as it always does. But a picture is worth a thousand words, so try these on for size. (US data; click charts for sources.)

One response I sometimes hear is “Sure, there are more regulations and more government spending, but the set of things that should be regulated and the amount of government spending the economy needs are growing even faster!” This is essentially the Krugman-DeLong view about the stimulus: it just wasn’t big enough. Or they say that financial markets were “deregulated,” de facto, because the number of regulations and regulators increased more slowly than the number of new financial instruments and new markets. I wonder, though: are these falsifiable propositions? No matter how big the government is, if there are any problems, it’s always because the government isn’t big enough!

Entry filed under: - Klein -, Myths and Realities, Public Policy / Political Economy. Tags: .

Hayekian Comments on Student Papers Now That’s a Complete Contract!

14 Comments Add your own

  • [...] Did Financial Deregulation Lead to the Financial Crisis? By Daniel J. Smith http://organizationsandmarkets.com/2010/01/28/the-era-of-laissez-faire/ [...]

  • [...] under: Curmudgeonliness, Economics — Kevin Feasel @ 5:50 pm Peter Klein points out that the last 10 years were not exactly the era of the free market. But hey, when people hurt, government has to be there…or something like that… Leave [...]

  • 3. Ferran  |  29 January 2010 at 6:18 am

    Very interesting, only one question before I share it with some of my colleagues: do you think that the spending increase is also so dramatic if it is put in context with the total budget or GDP numbers. Meaning, if seen as ratios of total expenditure or as ratio of the country GDP, does it still show such dramatic increase?

  • 4. Recomendaciones « intelib  |  29 January 2010 at 9:03 am

    [...] The Era of Laissez-Faire?, by Peter Klein [...]

  • 5. Peter Klein  |  29 January 2010 at 9:53 am

    Ferran, um, sure:

    http://lmgtfy.com/?q=us+government+spending+to+gdp

  • 6. Ferran  |  29 January 2010 at 10:07 am

    Ups, thanks! this will truly help me argue the point that free-market policies often get terribly mixed with pro-business actions.

    Would it be acceptable to say that the NBA is an example of “real” free-market policy regulation, compared to the pro-business policies in european soccer associations (where most of the clubs are close to bankrupcy, and the players+coach are the managers of the system)?

  • 7. Vilken laissez-faire? « Niklas Elert  |  29 January 2010 at 6:43 pm

    [...] Publicerade januari 29, 2010 Uncategorized Leave a Comment Några bilder säger mer än tusen ord. Jag tror att jag ska skriva ut de här figurerna, vika ihop dem i plånboken och [...]

  • 8. Matt Stiles  |  30 January 2010 at 10:41 am

    Very good post, Peter. This really needs to be hammered home. Relentlessly.

    Interesting that the gov’t spending/GDP you linked to actually fell during the Clinton years and rose during Reagan and Bush II. So much for Republican “small gov’t ideology” eh?

    For thoroughness, it would also be interesting to see total financial regulation expressed as a percentage of the size of the financial industry.

  • 9. David Hoopes  |  31 January 2010 at 5:52 pm

    Great post Peter!

  • 10. Aaron Agassi  |  1 February 2010 at 1:48 pm

    We all know that Bush waged a ruinously expensive war. But that hardly contradicts the equally true assertion that Bush also deregulated Wall Street giving them free reign for embezzlement on a heretofore unprecedented scale. Who are you kidding?

  • 11. Peter Klein  |  1 February 2010 at 1:51 pm

    Nobody who can read, I hope. We’ve discussed this many times before, e.g. here, here, here, and here. The “deregulation of Wall Street” is a myth. It never happened.

  • 12. Robert  |  1 February 2010 at 6:38 pm

    I think I’ve come up with a campaign slogan those running in 2010 and 2012 could use if they really mean it. Run on a platform of abolishing all subsidies, and for those in an industry that receives a subsidy, tell them, “Sure, you’ll lose a subsidy, but you’ll also lose 2000 other ways that you’re being robbed. And if you’re not receiving a subsidy, then all you have to lose is 2001 ways you’re being robbed.”

  • 13. Get the picture? at Catallaxy Files  |  1 February 2010 at 10:14 pm

    [...] at Organisations and Markets has listed some nice pictures to demonstrate the absurdity of the claim that we have lived through some decades of deregualtion, [...]

  • [...] Más bien, ellos hablan de un “Estado mutante y creciente”. No es de extrañar si observamos algunas cifras como la evolución de la presión fiscal o el gasto público, el número de regulaciones, los [...]

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