Government intervention caused global financial crisis
Tom Palmer is vice president for International Programs at the Atlas Economic Research Foundation, and general director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity. He previously served as vice president for International Programs at the Cato Institute and director of the Centre for Promotion of Human Rights. He is a senior fellow at the Cato Institute and director of Cato University, the Institute’s educational arm. He is also the author of Realising Freedom: Libertarian Theory, History, and Practice. He received his BA from St Johns College, MD, his MA in philosophy from The Catholic University of America, and his doctorate from Oxford University. He talks with Kuvera Chalise about free market, role of government and global financial crisis. The excerpts:
Most of the intellectuals blame free market economy for global financial crisis. Has free market economy created global financial crisis?
I think that is a fantasy based on a misunderstanding. It’s a misdiagnosis. It’s like someone got sick and you say oh you got sick because you eat food every day. Rather than looking for the poison inside the food. It was the same case in the global financial crisis. It was a systematic intervention of governments into the market to distort them. The big example in the United States was the Federal Reserve Bank which is a government bank, not free market, it encouraged banking socialism with artificially lowering banking rates to pump up the economy with cheap credit. And then the government policies, government sponsored enterprises called Fanny May Freddy Mac that pushed a great deal of this investment credit into housing and created bubble. That bubble burst and depressed the American economy. The interesting question is why it has knocked down effect in the world economy. That was because the Basel course – that is the institutions of global financial institutions – has caused the world over the toxic assets. So, it was a systematic crisis due to interventionism not the failure of free market neither due to capitalism. The state intervention in the economy has brought this consequence of almost financial collapse.
Aftermath of global financial crisis, the socialists and leftists claim that the capitalism has come to an end, is it so?
I don’t think so. Look around the world and you can see the wealth is produced by private firms. Socialism has been tried and it was a failure. It led to starvation, tens and tens of millions of people died of hunger under the policies of Mao in China, and Lenin and Stalin in Soviet Union. They tried their experiment and the consequence was people hate each other. That what happens when you abolish private ownership and means of production? The global financial crisis was not a collapse of capitalism but only a crisis due to government intervention. It was the crisis of interventionism, the bad behaviour, not of the free market. These are learning we should take from these consequences. The idea of too big to fail – that slogan the American government promoted – it made that if you took unwise decisions also you would not be allowed to be bankrupt. They brought the idea that government will bail you out with tax payers’ money but look what happened. It encouraged more risky behavior, more bad action on part of firms and extent of cronyism. The consequences of state interventionism are promotion of cronyism, and encouragement of systematically bad behavior. But in free market, if you make good decision, you will make profits and you will make losses, if you make bad decisions. Losses are also very important part of the market economy. And also you need to have very stringent limited government because once government becomes much bigger and more powerful it will promote cronyism.
What are the basic pillars of free market economy?
I would prefer to say basic pillars of rational economy. The rational economy says, if you good job you will be rewarded But if you do bad job, if you destroy value, you will bear the consequences. Then the people will change their behavior and learn from it. So, they can actually contribute to the economy and well being of other people. Then if you systematically subscribe bad decisions, and penalise good decisions, you don’t have to be a genius to understand what the results will be.
How do we encourage rational decision making in bureaucracy to promote free market?
The first point is to have good information. And this is an area, in which there is a great misunderstanding due to bad information. Serious economists will study the global financial crisis that was due to boom created deliberately by the government banks. That’s not the future of the free market. If you pump up money supply, if you make credit artificially cheap, if you make interest rates effectively zero like Federal Reserve, people will spent too much money and they won’t save enough. And the economy will have to bear consequence for that. What we got then is the policy to correct that with good information. The governments have been advising the more of the same things that have caused the problems like cheap credits, bail out of failing businesses, and more and more cronyism. We should go back to basics. You don’t need to be a doctor or an economist to understand that. Meaning, if you borrow too much money, eventually you are going to go broke. The government should live within its means like ordinary citizens.
How can the third world countries like Nepal promote free market?
The key thing to remember is all the rich countries in the world were one time poor and in fact poorer than Nepal by far. What did they do to become wealthy? Putting the basics right. Getting the institutions right at the basic level, and ensuring property rights in three DDDs; definable, defendable, and divestible means transferrable. Get those things right and allow people to create businesses in easy way with low transaction costs, lots of paper works and regulations will discourage. One should be able to set up your business in three hours not in three years. If you do that you will unleash the energy of the people. You can take an example of South Korea. In 1960, South Korea was a very poor country but they slowly began making their institutions right, and with democracy, they have been able to increase their per capita by nearly 35 times. South Korea is the example of how a third world country can move up the ladder to first world affluent in one generation. So, it can be done. It could be done in shorter times.
How can Nepal replicate South Korean experience?
Number one question will be how difficult is it to start a business in Nepal. And how difficult is it to do business transactions. Nepal does not have a good track record in this regard. There is a regular bureaucracy. When a bureaucrat has the right to deny your permission, the bureaucrat has the power to ask for money. That’s part of human nature. We need to do is clear all that away. Started a business in Nepal should be easier. If you go to Hong Kong, and want to start a business, it takes three hours and you have a legal existence of a company. It’s very easy.
Number two legal system should be systematically reformed to protect property rights. Property rights with equal justice for everyone from the most powerful person in Kathmandu to a farmer in the most remote part of the country. They all should enjoy the same rights. That is difficult to accomplish but it is possible as many countries have done it. Make sure that the judges are well trained. If judges are found to be corrupt they should be dismissed immediately.
Then open the economy to foreign investment that means people can invest in equal terms with Nepali investors, whether they are from India, Pakistan, or China or Russia, Canada or any place. And make them clear if they make money in the country, they can also repatriate. If they fear their wealth could be confiscated, they will not invest.
Nepal started market reform back in 1990 but still it has not been able to convince people on necessity of reforms, what went wrong?
It needs consistency. If we take example of next door India, they have changed the societal order. As a result some 350 million people have been raised to a middle class. But many people have been left out in the process particularly in rural India due to licence raj. Due to lack of market reform it is still difficult to get tractor in rural India. It is difficult for the farmers to go to market. As a result, higher prices for the consumers and lower prices for the producers because the middlemen gobble that up. The challenge is bring the market reforms to rural populace in India and it needs to be concluded. Likewise, just because the reform process has begun, it does not mean it is completed. It was left at the point where it was only very partially started phase in Nepal. It should be restarted and pushed forward very strongly by the government.
How could it be done?
There are two features. One, people should be well-informed of the nature of markets and how economy really works, not fantacies and number two public education that the public can understand the significance and importance of reforms. For example when the prices are moved upward or downward, there is a reason why prices go up or come down. They are sending information both ways for consumers and producers. When the prices go up that means this resource is scarce and we should be more careful when we use it, if I am a consumer, but if I am a producer, it’s time for me to produce more. If you don’t allow the price to go up then the information is stopped and the people would not know either to conserve it or consume it more. That fundamental role of price system is very important. And it’s important for the government officials also to understand why these things are significant. If you try to fix the price and not move, the consequence is there will be no investment.
What is the role of government and private sector in the free market?
Government has the important but limited role. It needs to provide the basic rule, fairly enforced reform for everybody. It should be easy to understand for people not complicated thousands of pages of book. The government has to enforce the rule of law. The government should stick to its core function. If you get that right, the wealth will be created by private sector. The state itself does not create any wealth. To create wealth, there is work involved and exchange has to be free. When the market is free and information is allowed to give signal, like conserve this and consume that, private sector starts creating wealth.
What about social justice? Can free market ensure poor get their share?
The best way is to realise social justice through the free market. Why some people are continuously left out? They are poor because they are not out into the market due to restrictions by the government. It’s like handcuffing and putting chain in one’s feet and ask why is not has been able to run. Let’s take off the handcuffs, and free them of chains in their feet. Let them the opportunity to create wealth in the market.