The recent spate of accounting fraud scandals signals the
end of an era. Disillusionment and disenchantment with
American capitalism may yet lead to a tectonic
ideological shift from laissez faire and self regulation to
state intervention and regulation. This would be the
reversal of a trend dating back to Thatcher in Britain and
Reagan in the USA. It would also cast some fundamental -
and way more ancient - tenets of free-marketry in grave
doubt.
Markets are perceived as self-organizing, self-assembling,
exchanges of information, goods, and services. Adam
Smith's "invisible hand" is the sum of all the mechanisms
whose interaction gives rise to the optimal allocation of
economic resources. The market's great advantages over
central planning are precisely its randomness and its lack
of self-awareness.
Market participants go about their egoistic business,
trying to maximize their utility, oblivious of the interests
and action of all, bar those they interact with directly.
Somehow, out of the chaos and clamor, a structure
emerges of order and efficiency unmatched. Man is
incapable of intentionally producing better outcomes.
Thus, any intervention and interference are deemed to be
detrimental to the proper functioning of the economy.
It is a minor step from this idealized worldview back to
the Physiocrats, who preceded Adam Smith, and who
propounded the doctrine of "laissez faire, laissez passer" -
the hands-off battle cry. Theirs was a natural religion. The
market, as an agglomeration of individuals, they
thundered, was surely entitled to enjoy the rights and
freedoms accorded to each and every person. John Stuart
Mill weighed against the state's involvement in the
economy in his influential and exquisitely-timed
"Principles of Political Economy", published in 1848.
Undaunted by mounting evidence of market failures - for
instance to provide affordable and plentiful public goods -
this flawed theory returned with a vengeance in the last
two decades of the past century. Privatization,
deregulation, and self-regulation became faddish
buzzwords and part of a global consensus propagated by
both commercial banks and multilateral lenders.
As applied to the professions - to accountants, stock
brokers, lawyers, bankers, insurers, and so on - self-
regulation was premised on the belief in long-term self-
preservation. Rational economic players and moral agents
are supposed to maximize their utility in the long-run by
observing the rules and regulations of a level playing
field.
This noble propensity seemed, alas, to have been
tampered by avarice and narcissism and by the immature
inability to postpone gratification. Self-regulation failed
so spectacularly to conquer human nature that its demise
gave rise to the most intrusive statal stratagems ever
devised. In both the UK and the USA, the government is
much more heavily and pervasively involved in the
minutia of accountancy, stock dealing, and banking than it
was only two years ago.
But the ethos and myth of "order out of chaos" - with its
proponents in the exact sciences as well - ran deeper than
that. The very culture of commerce was thoroughly
permeated and transformed. It is not surprising that the
Internet - a chaotic network with an anarchic modus
operandi - flourished at these times.
The dotcom revolution was less about technology than
about new ways of doing business - mixing umpteen
irreconcilable ingredients, stirring well, and hoping for the
best. No one, for instance, offered a linear revenue model
of how to translate "eyeballs" - i.e., the number of visitors
to a Web site - to money ("monetizing"). It was
dogmatically held to be true that, miraculously, traffic - a
chaotic phenomenon - will translate to profit - hitherto the
outcome of painstaking labour.
Privatization itself was such a leap of faith. State owned
assets - including utilities and suppliers of public goods
such as health and education - were transferred wholesale
to the hands of profit maximizers. The implicit belief was
that the price mechanism will provide the missing
planning and regulation. In other words, higher prices
were supposed to guarantee an uninterrupted service.
Predictably, failure ensued - from electricity utilities in
California to railway operators in Britain.
The simultaneous crumbling of these urban legends - the
liberating power of the Net, the self-regulating markets,
the unbridled merits of privatization - inevitably gave rise
to a backlash.
The state has acquired monstrous proportions in the
decades since the Second world War. It is about to grow
further and to digest the few sectors hitherto left
untouched. To say the least, these are not good news. But
we libertarians - proponents of both individual freedom
and individual responsibility - have brought it on
ourselves by thwarting the work of that invisible regulator
- the market.