THE MYTH OF FREE MARKETS
BY JULIANNE MALVEAUX
Free markets, it seems, are a mantra of conservatives. They want markets
to flow, unfettered and unregulated, with capital flowing to those investment
opportunities where returns match an investor’s taste for risk. In markets
that are free, there are few barriers to the movements of capital or labor,
but information ought to flow as freely as capital does. There’s a
contradiction here. Regulation is often the incentive that moves
organizations to provide free and accurate information. Absent regulation,
and free information, choices are distorted and people end up making wrong
decision and, perhaps, losing lots of money.
I’m not jumping on the Enron-whipping bandwagon this week, though I’ve
written enough Enron-excoriating columns. I’m just suggesting that the myth
of free markets is one that needs to be explored in the context of the Enron
debacle. Would anyone, after all, have put their pension dollars into Enron
if they knew the stock was going to be plunging to near-zero levels? Thus,
wasn’t the action to distort the information available to the public somehow
an abrogation of free market tenets and responsibility?
Further, wouldn’t any capitalist, given a choice of disclosing damaging
information or hiding it, choose the hiding option? What prevents companies
from systematically “running an Enron” on the public by disclosing false
information whenever, wherever and however possible? Anyone who acknowledges
capitalist motives, which are the maximization of short-term profits, will
also acknowledge the inherent incentives to falsely state a profit position.
The nature of capitalism, in other words, makes the case for regulating
capitalism. Because companies won’t disclose information unless they are
required to or compelled to, especially if disclosing negative information
impacts their profits.
The information game is complicated by the information overload of the early
21st century. Entire networks are devoted to reporting stock fluctuations in
the same way that some folks report scores at a football game. Market
trivia, hackneyed stock market picks, and biased stock advice (too many of
those providing it are in hock to the companies they report on) are such par
for the course that only the most dedicated investor is likely to find
transparent information about their investments. But about half of all
Americans have direct investments in the stock market, empowered by on-line
trading and other vehicles to treat the stock market like a good trip to Las
Vegas. Enabled by a little bit of information, people sink thousands of
dollars onto a hunch.
Who can blame them? The go-go 90s raised people’s expectations beyond the
level of reasonable. There was so much money out there that anyone with a
half-bad idea could find investment capital for it. There was pet dot com
and baby dot com, and perhaps there also needed to be fool dot com because
some fools could wait to be parted from their money. This was, of course,
before the Internet bust, when stars turned into cinders. Still, there are
those who believe that if they click their heels three times the market will
turn around and their long-shot stock picks will be rags-to-riches stories.
If the people investing in long shots could stomach it, this wouldn’t be a
policy problem. But the Enron case reminds us that too many people who need
to opt for safe investments are literally gambling their futures on the
possibility of great returns. They don’t think they are gambling – they
think they have fair, free, and full information. Who would have thought,
after all, that Enron CEO Ken Lay would deliberately manipulate his employees
into investing in a plunging stock, thus providing a short-term stock uptick
of about 5 points? Who would have thought that pension laws would require
people to remain stuck in a poor stock position?
Investing has become as much a national pastime as shopping or watching
the Olympics. Yet people walk into the market with incomplete information,
caught somewhere between a hope and a promise. Those at the bottom end of
the economic spectrum walk in with other misperceptions, as well. Some of
them suffer from the illusion of consumer democracy, believing that they can
have the same goodies that the wealthy have. Our society embraces that
notion, and indeed, broadcasts it by making sure that everyone knows about
goods and services that only a minority of the population can afford. How
many Americans, with average incomes of $45,000 for a family of four, know
what a Rolex watch is? How many can afford one?
We have bought into a fairy tale that suggests that everyone can have
everything now, and that everyone knows enough to turn a dollar into a
million. That’s why Enron employees, flush with the sense of their leaders’
success, sunk they money into a company that was going bust. That’s why so
many Americans oppose taxing the capital gains they haven’t even earned yet –
they have been snookered by the notion that everyone can get rich because our
markets provide everyone with enough information to do so.