Free Market Capitalism Needs Clear and Enforced "Rules of the Game"

Appreciate all the Seeking Alpha comments I've received on my article on "It's time to champion real free market capitalism."

Several have said that "real" free market capitalism should have no government involvement.

First, I don't believe that either Friedman or Rand would agree with that statement.

See this clip of Ayn Rand and Mike Wallace from 1959 (watch all 3 clips but the business/free market aspects are in the 2nd clip of the interview).

Wallace specifically asks her if all she cares about is protecting the "robber baron" (i.e., monopolist or oligopolist) capitalists. She clearly says she doesn't want to see monopolies and is favor of breaking them up. She also, of course, played an influential role in the 1st term of the Reagan administration when they (among other things) broke up Ma Bell.

I am not sure she wouldn't have supported keeping Glass-Steagall or breaking up Too Big To Fail Banks.

Friedman and Rand clearly saw a role for government for police, defense, and our legal system. Clearly, an extension of those agencies would touch business. After all, why else would she support the break-up of AT&T?

But let's all -- as proponents of free markets -- think for ourselves instead of only speculating about what Rand would have thought. After the last 2 years, to me, it's clear that government's primary role in relation to a healthy free market system is to set and enforce the "rules of the game" such that the entire game isn't at risk of stopping... as it almost did last year.

Rules of the game means preventing monopolies that inhibit choice. It means -- to me, and I don't care what Friedman or Greenspan used to think on this -- you prosecute no-talent fund managers who cheat their investors by illegally trading on insider information. It means giving shareholders -- the true owners of the corporation -- the right and freedom to toss out under-performance directors.

On the other hand, I don't think the government should be setting pay, deciding that Bear should get bought and Lehman should go under. They also shouldn't be saying that more sub-prime borrowers have the right to own a home as part of "the American Dream."

Strong "rules of the game" set and enforced by the government allows 'real' free market capitalism -- and they would have the secondary benefit of also removing crony capitalists who have stopped competing on ability and instead compete on lobbyist dollars spent.

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It’s Time to Champion Real Free Market Capitalism

By Eric Jackson

November 10, 2009

Market commentators and the White House have been quick to blame last year’s economic meltdown on a free market run amok. And they’ve used that false assumption to justify their unprecedented response of government intervention and increased regulation.

But we’ve never really had free market capitalism in this country. The last 30 years of America’s market system is better described as “mixed crony capitalism” – one part capitalism, one part government intervention through various programs, and one part corporate cronyism where officers and directors of big businesses pay themselves more, lobby politicians on both sides of the aisle and gain more power through favorable governmental regulations including mergers.

In such a three-way shared system, it shouldn’t surprise anyone that true free market capitalism always appears to be outnumbered by the interests of the government and corporate cronies.

For example, despite the billions in taxpayer dollars that have helped prop up a slew of “too big to fail” banks, and unprecedented government ownership of them, the powerful bank lobby has somehow convinced the current administration that little needs to be changed about how those banks operate. It’s as if the bankers and politicians are saying “let’s just call last year a mulligan and move on.” Not surprisingly, most of the CEOs and directors the banks that drove their institutions over a cliff are still in place.

If Standard Oil or Ma Bell existed today, it’s hard to imagine there would be the political will to break them up. Instead, politicians and their corporate donors would argue that what’s good for Ma Bell, GM, Bank of America, Citibank, or any other company is good for America. Politicians would never support programs that curtail spending, because it would give them nothing to go back home and talk about to get them re-elected.

There are many critical thinkers arguing why even more government intervention is needed today than ever before. Unfortunately, there are no critical thinkers arguing why our system needs more emphasis on free markets with clear “rules of the game” and less state involvement in our economy and less protections for corporate cronies. This paucity of ideas is something that greatly troubles me and other investors I know.

Milton Friedman and Ayn Rand are no longer around to argue for their vision of free market capitalism. Instead, we only hear alarmist libertarian rantings of Ron Paul or populist sloganeering to “keep the government out of our business” providing no clear direction for what changes should take place.

We need a renewed focus on the ideas of individual choice championed by Friedman and Rand. Both argued for a free market system built by entrepreneurship and small business and against abuse of power by “robber baron” CEOs. Government’s role in their eyes should be limited to police, defense, and the legal system. The importance of a market system following enforced rules is critical. The ideal market system the US should be striving to attain here is not Russia but Hong Kong.

The economic problems are country face are great, but they won’t improve by further deteriorating our federal balance sheet by short-term spending and tax breaks. Instead, we need to:

· reduce excessive government spending and restore fiscal balance to the federal and state governments

· break up companies that are “too big to fail” including the big banks

· force over-leveraged banks to undergo debt-to-equity conversions that allow them to get credit out to real entrepreneurs sooner

· bring back Glass-Steagall that separates commercial and investment banks,

· prosecute insider trading and other white collar crimes when they occur,

· get the government out of the business of setting executive pay in favor of giving shareholders more direct powers to remove directors not doing this appropriately and

· eliminate special tax breaks for homeowners and cars which only prolong the pain of an inevitable correction until later.

The heroes of free market capitalism are the entrepreneurs who create real value and real businesses. Those people are the antithesis of “fat cat” capitalists who ensconce themselves in money, power, with government protection. We need more people championing well articulated pro-market, pro-entrepreneurship policies in Washington.

Eric Jackson is Founder and Managing Member of Ironfire Capital and the General Partner and Investment Manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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