How Not to Draw a Conclusion

The dictionary definition of laissez-faire is:

a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights

Here in the United States do we advocate such a system? The U. S. federal government has several hundred major agencies and thousands of minor ones and subdepartments. Most of these agencies issue regulations that bear on economic activity in one way or another. The Code of Federal Regulations is divided into fifty titles, each title amounting to hundreds of pages of regulations. The Uniform Commercial Code, the closest thing we have in this country to a consolidated body of civil law, amounts to thousands of pages. Virtually by definition civil law regulates economic activity.

We also have fifty states, each one with hundreds of departments of its own which issue regulations of their own. In addition we have counties and municipalities, each with its own code regulating economic activity within its jurisdiction.

If the United States has a system of laissez-faire capitalism, we’re doing a terrible job of it.

In reality we neither have nor advocate a system of laissez-faire capitalism and claiming we do is either woefully ill-informed, relies on a peculiar definition of laissez-faire, or is a bald-faced lie.

Like every country in Europe and most in the world we have a hybrid or mixed system, less regulated than most, more regulated than some. If a tendency towards laissez-faire were itself a “smoking gun” in the economic problems that face the world, the countries that were more laissez-faire would have more serious problems, the countries with less, less. That is emphatically not the case and, consequently, while one may reasonably argue about what regulations we should have in place, arguing that the problems occurred due to a lack of regulations is specious.

The other day Nouriel Roubini, the economist who’s getting quite a reputation as an oracle and the title of “Doctor Doom” for predicting the financial crisis and its attending economic downturn, had a column in Forbes titled “Laissez-Faire Capitalism Has Failed”, condemning the “Anglo-Saxon model” of government regulation of economic affairs. It is the very definition of the straw-man fallacy.

Dr. Roubini does a good job of describing the problems we face but nowhere in the column does he identify a specific regulation that would have prevented the problems we face nor does he propose any for the future. This completely supports the claim I’ve been making around here for some time that economics, like paleontology, is a descriptive science rather than a predictive (or prescriptive) one.

To date nobody has identified a “smoking gun”, a regulation or body of regulations that, had it or they been in place, would have prevented the problems we face. Not during the George W. Bush Administration, not during the Clinton Administration, not during the George H. W. Bush Administration, nor the Reagan, Carter, etc. It is simply not that simple.

8 comments… add one
  • How about regulations limiting the size of banks? Small banks can be allowed to fail, large banks no.

    How about regulations on transparency — knowing who holds what and forbidding types of bundling that obscure the details of specific assets? We’re months into this crisis now and we still don’t know which banks are holding what amount of bad paper.

    How about a sort of beta bond rating agency, a quasi governmental Moody’s to act as a corrective?

    Or how about we stretch the event horizon of performance bonuses paid to traders and CEO’s, basing them on 5 year performance rather than rewarding short-term risk-taking?

    How about a regulation requiring a minimum down-payment on a mortgage, or requiring that all applicants undergo a full credit check and supply documentation of income?

    For that matter, why not do away with ARMs altogether? A 15 year fixed or a 30 year fixed with a minimum 10% cash down for a credit score over 700, and 15% down for lesser credit? If that had been the law would we be in the current mess? It’s a lot harder to submerge if you are buying a 500k house but your mortgage is only 425k.

  • I agree with that, Michael. I’ve always opposed branch banking.

    But that has implications. For example, it means we’d need to prohibit the large foreign banks from operating within the United States which in turn would very likely mean that U. S. banks would end up being prohibited from operating overseas. It would put U. S. banks at a competitive disadvantage.

    I think that’s a price worth paying but, obviously, since I lost the argument, not everybody agrees with me.

  • Andy

    Dave,

    It’s posts like this that keep me coming here. You have a real talent for distilling ideas and writing with clarity and brevity. Keep up the good work!

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