Regulated Markets Don’t Work Best

“Regulated markets work best.” The words are coming from Gary Gensler, chairman of the Commodity Futures Trading Commission. After all, “we have traffic lights too,” he argued on Fox Business this Monday.

The Commodity Futures Trading Commission (CFTC) was set up as an independent government agency in the 1970s with the stated goal of protecting market users from fraud, manipulation and abusive practices related to the sale of commodity and financial futures and options — all proper functions of government, with the exception that there is no objective standard for what constitute “abusive practices.” Besides, criminal law should suffice to protect people from fraud and manipulation, but let’s not nitpick before listening to what Gensler has to say.

On the Fox Business Network on March 29, the chairman responded to what is regarded as excessive speculation in the energy futures markets. The House introduced legislation in the summer of 2008 to direct to the CFTC to curb the role of such speculation in the energy sector and set new position limits and increase margin requirements in order to eliminate price distortion and “unreasonable” fluctuations. The law died in the Senate but with both chambers of Congress now under Democratic control, there is ample reason to suspect that further government intervention is nigh.

Asked specifically about the role of the CFTC, Gensler said, “We should make sure that everyone has a fair and orderly market.” What is fair? What is orderly? And who decides those things? The chairman saw no reason to elaborate on these questions.

Gensler’s claim that markets “work best” when regulated is nonsense. People do not “work best” under restraint. As economist Murray Rothbard noted in Man, Economy, and State (1962), “government intervention can never raise society’s rate of ‘growth’.” He explained that “when individuals act freely on the market, every one of their actions benefits everyone, and so growth is truly ‘social,’ i.e., participated in by everyone in the society. But when government acts to force growth, it is only some who grow at the expense of the retrogression of others.”

Another Austrian School scholar, Ludwig von Mises, put it all the more plainly in his article “Deception of Government Intervention,” printed in Christian Economics (February 4, 1964). He warned against politicians who wish to curtail the free market in order to adopt “a middle of the road policy that is supposed to avoid the alleged deficiencies of the capitalistic economy.” They never favor socialism outright, wrote Von Mises; “they want to remove what they consider unsatisfactory in the market economy.” The problem, they say, is an unfair distribution of the means of production and wealth.

[T]hey assert that these institutions of the market economy could be easily misused, and are often misused, by the propertied classes for an unfair exploitation of the poorer strata of the population.

In our times, such complaints take the shape of allegations of abuse by the insurance industry; of smears of Wall Street greed; and of people like Gary Gensler, who believes that it is in the public’s interest to control all consumer goods and services lest the people fall victim to corporate manipulation.

This is a government knows best mentality that is increasingly prevalent in the United States today. As Von Mises put it, according to the interventionist doctrine, “the government alone is called upon to decide in every single case whether or not the ‘public interest’ requires government intervention.”

Business is free to act as long as what it does complies exactly with the plans and intentions of the government. Thus nothing is left to the market other than the right to execute meekly what the government wants it to do.

What those in favor of state interventionism fail to comprehend is that free-market enterprise and government controls are incompatible. What Gensler fails to comprehend is what Friedrich Hayek described in The Road to Serfdom (1944) as the difference “between providing signposts and commanding people which road to take.”

Businesses on the whole work in the people’s interest because they are dependent on the people for their profits. Only when regulation subjects them to an uncompetitive market or bestows upon them special status do companies seize to operate rationally. The outcome is always worse and policymakers feel compelled to intervene again. “The same story then repeats itself at another level,” notes Von Mises.

Again the outcome of the government’s intervention appears to the government as even more unsatisfactory than the preceding state that it was designed to remedy.

In this way, the government is forced to add to its first intervention more and more decrees of interference until it has actually eliminated any influence of the market factors […] upon the determination of the ways of production and consumption.

The cycle keeps on repeating itself over and over again until government has successfully eliminated all remaining traces of free-market enterprise and the statist society is a reality. The — often unintended — consequence is indeed, socialism.