Real Free Market Capitalists Demand that Financial Fraud Be Prosecuted


Adam Smith, Leading Austrian Economists and Other Free Market Advocates Are For the Prosecution of Fraud

There is a widespread myth that free market supporters are against regulation or prosecuting fraud.

In fact, Adam Smith – the father of free market capitalism – was for regulation of banks, and believed that trust is vital for a healthy economy. Because strong enforcement of laws against fraud is a basic prerequisite for trust, Smith would be disgusted by the lack of prosecution of Wall Street fraudsters today.

Smith railed against monopolies and their corrupting influence. And Smith was pro-regulation, so long as the regulation benefited the little guy, as opposed to the wealthiest:

When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Richard Posner – one of the leading proponents over the course of many decades for removing the reach of the law from the economy – has now changed his mind.

So has another leading proponent of deregulation and turning a blind eye towards fraud: Alan Greenspan.

While some promoters of a fake version of Austrian economics are anti-regulation and against prosecuting fraud, the main Austrian economists were unambiguously for them.

William K. Black – professor of economics and law, and the senior regulator during the S&L crisis – notes that leading Austrian free market economists said that fraud must be prosecuted:

Real Austrian economists … hate elite frauds and want them prosecuted vigorously. Ludwig von Mises and Friederich Hayek are the two most famous Austrian economists.

Hayek, F.A. The Road to Serfdom

To create conditions in which competition will be as effective as possible, to prevent fraud and deception, to break up monopolies— these tasks provide a wide and unquestioned field for state activity.

The Constitution of Liberty

There remains, however, one other kind of harmful action that is generally thought desirable to prevent and which at first might seem distinct. This is fraud and deception. Yet, though it would be straining the meaning of words to call them ‘coercion,’ on examination it appears that the reasons why we want to prevent them are the same as those applying to coercion. Deception, like coercion, is a form of manipulating the data on which a person counts, in order to make him do what deceiver wants him to do. Where it is successful, the deceived becomes in the same manner the unwilling tool, serving another man’s ends without advancing his own. Though we have no single word to cover both, all we have said of coercion applies equally to fraud and deception.

With this correction, it seems that freedom demands no more than that coercion and violence, fraud and deception, be prevented, except for the use of coercion by government for the sole purpose of enforcing known rules intended to ensure the best conditions under which the individual may give his activities a coherent, rational pattern…..

Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions…. Liberty and responsibility are inseparable.

Mises, L.

Government ought to protect the individuals within the country against the violent and fraudulent attacks of gangsters, and it should defend the country against foreign enemies.

Black also notes that fraud is a leading cause of financial bubbles and malinvestment – two of the greatest sins which Austrian economists rightly fight against.

Unless financial fraud is prosecuted, bubbles will be blown … and when they burst, the economy will tank. Fraud – along with bad Federal Reserve policy – is what causes bubbles in the first place.

The Proof Is In the Pudding: Fewer Prosecutions Equals a Worse Economy

Obama has prosecuted fewer financial crimes than any president in decades – less than Ronald Reagan, less than George H.W. Bush, less than Bill Clinton, and less than George W. Bush.

The economy is worse than it has been since the Great Depression, if not before.

See the connection? See this and this.

Everyone Supports Laws Protecting Contract and Private Property Rights

Even the most radical free market advocates support laws protecting contract and private property rights. In other words, they support the judicial branch of government and the basic laws Congress passes to support such rights.

There are obviously good, pro-competitive laws and bad, anti-competitive laws.

Paul Craig Roberts – a true conservative, who was a Wall Street Journal editor and Assistant Secretary of the Treasury under Ronald Reagan, and is widely credited with being the “father of supply-side economics” – points out:

Regulation can increase economic efficiency and … without regulation external costs can offset the value of production.


Thirty-three years ago in an article in the Journal of Monetary Economics (August 1978), “Idealism in Public Choice Theory,” I developed a model to assess the benefits and costs of regulation. I argued that well-thought-out regulation could be a factor of production that increases GNP. For example, regulation that contributed to the quality and safety of food and medicines contributed to specialization in production and lower costs, and regulations enforcing contracts and private property rights add to economic efficiency.

On the other hand, bureaucracies build their empires and extend their regulations into the realm of negative returns. Moreover, as regulations increase, economic managers spend more time in red tape and less in productive activity. As rules proliferate, they become contradictory and result in paralysis.

I had hopes that my analysis would result in a more thoughtful approach to regulation, but to no avail. Liberals continued to argue that more regulation was better, and libertarians maintained than none was best.

Do Anti-Law Advocates Really Want Anarchy?

All sports need a referee. Some players will be bigger or more talented than others, which is great. They have a better chance of outcompeting the other guy and winning.

But without basic rules and referees, ruthless players might use a knife or kick the other guy in the knee. Perhaps we could suspend all rules, and maybe everyone would whip out a knife break the other guy’s kneecap. That’s fine … but that’s not the game of football.

Radicals who believe that we should not have any laws against fraud are implicitly arguing for anarchy. They might not use that word, but that is what they’re arguing for.

But the same Founding Father who argued for periodic revolutions to keep the government honest also argued against tearing down something unless you have something better in mind to replace it? Thomas Jefferson, the most vocal advocate of the citizens’ right to revolt to ensure honest government also cautioned against tearing something down unless it was for the express purpose of replacing it with something better.

Real, deep-thinking anarchists (as opposed to those using fake anarchy philosophy in order to promote lawlessness by the super-elite) are not for destroying all organization.  Instead, they argue for self-organization and self-regulation. See this, this and this.

JP Morgan and Goldman Sachs aren’t reining in one another’s fraud.  Bank of America and MF Global didn’t police each other’s fraud.   Tepco and BP didn’t make sure the companies made accurate reports about their safety measures.  Solyndra and Koch Industries didn’t guard against abuse by the other company.

So if one wants to argue that the Federal government should not regulate financial players, fine (perhaps our country is too big and complex to manage, and the federal government has become too corrupt) … but who should?

The states? Cities? Communities? Neighbors?

Human beings have the ability to form social contracts. Our D.C. government has largely breached it social contract with the people.

But we shouldn’t tear down the federal government unless we replace it with something better.

No one wants to tear down the state of organization so completely that we go back to monkeys (without the ability to talk), or one-celled critters . . . so the question is how do we want to organize?

Do you want to live as a “savage”? In reality, the natives had survival skills, cultural traditions, and knowledge developed over many hundreds or thousands of years (including knowledge gained before the migration from Asia to America), stored in the database of oral traditions. The settlers had traditions and knowledge as well. If we tear away all of that organization, life is going to be pretty challenging.

It is easy for a teenager to criticize his parents, but a lot harder to actually create a better adult life for himself. A teenager looks silly and immature when he criticizes everything his parents do without understanding the challenges he’ll face as an adult. But a young person who rebels against his parents and then creates a better adult life is doing important and heroic work.

In other words, anarchy as an economic model could work if economic players organized in such a way as to police against fraud and criminal behavior (the equivalent of pulling out a knife or taking out someone’s kneecap in the middle of a football game).

This is a long-winded way of saying that we should not stop the government from enforcing fraud laws unless we come up with a more effective way to stop fraud.

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  • The lack of this Administration’s financial-fraud prosecutions might be attributable to any number of factors.

    1) A lack of focus or understanding of the problem, or how it might be effectively addressed.
    2) A lack of organization-skills that might promote effective law enforcement by the delegation of enforcement duties to strong administrators. AG Eric Holder seems a case in favor of this interpretation.
    3) Bad advice or advice lacking that necessary flavor and judgmental quality coming from those within the inner circle of the Chief Executive.
    4) A combination of all of the above.

    Lest we should irreverently abandon our beliefs about at least some universally beneficial human nature, we should never assume any Chief Executive has a criminal inclination less explainable by some other failing in either his leadership skill, or ideological beliefs. And some times, we must judge, as was the case with Nixon, that the Chief Executive saw the playing field -filled with players- who were either -all against him -or- for him- at some distressed and distorted level of their heightened perception.

    In the end, even Richard M. Nixon did the right thing by all of us. He had the good sense to resign.

    The 24×36 painting linked below is a whimsical self-portrait of the offered at $30k.

    Don Robertson
    Limestone, Maine

    • The lack of this Administration’s financial-fraud prosecutions is due to one and only one thing, campaign contributions. Only public funding of campaigns will correct that… and our entire economical problems in the process.

      Jack Lohman

  • Denny

    There are laws in place now and it doesn’t matter. The laws will be in place tomorrow and it won’t matter. It definitely isn’t ‘free market capitalism’ by any stretch of the imagination. It isn’t capitalism at all when one examines it closely. It is financial anarchy. None of the heavyweight ‘capitalists’ aren’t following any laws as far as I can see. They’ve managed to create a ‘create as you go’ system which is really, under all their government, corporate and legal B.S., anarchy and they’re getting bolder, more desperate for more and…they’re playing this game with our money. I’d like to expose them to a little bit of the peoples’ anarchy. Anybody with me?

  • This is sort of off topic, but I don’t know where to put the comment here. But you’re so good at researching things, can you do some kind of a story on these RADIO NEWS BRIEFS we hear in all our cars every top and bottom of the hour? They are the biggest propaganda going! They make network “news” look like 2nd graders. And you can’t find them anywhere! You can’t find online the “RADIO NEWS BRIEFS”. Who makes them? Is there a record of them anywhere? Today I heard protesters are throwing feces and urine and police on the RADIO NEWS BRIEFS. And I could find no story, no credible story of this. But yet in your car, it’s pounded into your brain. I’ve noticed these RADIO NEWS BRIEFS are always reporting things like that, that you go home and look up, and you can’t find it. Yet it’s pounded into our brains as we’re driving around in our cars.

    RADIO NEWS BRIEFS are famous for “TERRORIST” stories, especially. Remember to pay close attention to the RADIO NEWS BRIEFS, see what you think.

  • Harry Johnson

    The austrian economists are against regulation till the whole system blows up from lack of regulation then they are for it but only when they want to be but not other times. See they are against only bad regulations. What are bad regulations, you ask? Simple, any the Austrian economists do not like.

    For example, free market Austrian economist, friedrich hayek, was brought to the United States only after he was assured he could participate in the benefits of the Social Security system because he was afraid if he left Austria he would no longer be covered under socialized medicine and would have to pay market rates for medical care. See socialized medicine good for hayek because it kept another Austrian economist alive to spew his drivel. Socialized medicine for you or me bad because some of his ultra rich backers might have to pay out one tenth of one one hundredth percent of their income to pay some of their share.

    The mythical free market cures all. Too bad it is mythical.

  • Libertarian News has responded to this nonsense:

    Re: Real Free Market Capitalists Demand that Financial Fraud Be Prosecuted

  • S, Gilgallon

    Anarchy means without rulers, not without rules.

  • Jim

    Posner’s remarks forced me to reassess what he actually believed all these years. Some of us free market proponents have been making some of the same pronouncements for years:

    Markets demand effective communication, but our institutions and laws have allowed the obfuscation of financial statements for decades. The argument against off Balance Sheet accounting like say, derivatives, is not they are inherently risky. It is that they render market communication meaningless. And no one can argue with a straight face that $600 trillion in derivatives should not be measured and reported somewhere in a manner which any reasonably rational adult can understand.

    Markets demand responsibility and honest trade, yet our institutions have been aiding any number of corporate and professional institutions and industries in evading that responsibility in the event of failure, for decades. Our financial crisis uncovered more than naked, over leverage banking cry babies. It uncovered the failure of our auditing and legal professions as by now so watered down that they represent little more than a mandated tax on society.

    Markets structurally demand duplication and variety in the search for innovation, and yet global regulation like Basil not only lowered capital requirements, but by their universal applicability, ensured their inevitable weaknesses produce catastrophic, amplifying failure since everyone crashes according to the same model. The only banks that escaped failure were those that ignored Basil.

    We could go on using the standard definition of free markets as our simple guide. Some of us have been screaming for decades. The whole system is a warren of special interest subsidy and abdication. Consider that a poor unemployed person is now prevented by license and zoning laws from starting a business as simple as growing vegetables, a taxi service, hair cutting or preparing meals for their neighbors, without a warren of government, legal and tax costs. Because no one wants to get in a dirty taxi, or have a bad haircut! What the hell are we building here?

    That omniscient regulators with angelic hearts can draw up a world that is absent all risk is a pipe dream. Worse, we would not want such a world; it is only by trying and failing that we create or innovate or evolve. That entails risk. And risk requires payment from failure.

    So a healthy regulatory environment would encourage trial, punish failure and fraud, and reward successful innovation while keeping barriers to entry low. Hey, I just described the regulation of a free market! But that is surely not the regulation we have now, which forces a one-size-fits-all solution to marketplaces, raises the barrier to entry, forces political agendas, and then bails them out when they fail.

    So what exactly is Posner saying, other than a bunch of academic tripe.

  • I described the mechanism that was used by the financiers to turn the financial system into a classic pyramid (ponzi) scheme in my submission to the British Parliament.

    G Pytel: report for the House of Commons Treasury Committee

    it was republished here with some technical additions and explanations:

    The largest heist in history

  • tk

    where will they find prosecutors or courts to do that? demand from whom?

  • konst

    First I want to say I read your blog and agree with you on many things but …

    I think you have got it wrong here and I have to agree with this response to your article:

  • Please sign my petition on “mortgage fainess” and demand justice for people who are victims of financial crime! in mortgage

  • AshenTech

    you cannot have a regulated free market, you can have a regulated market or a free market, in a free market there is no regulation or law governing the market, because, then it would not be free.

    so, if you want a free market, you have to accept that the only way to deal with fraud is either hiring somebody to recoup your losses or doing it yourself, that is likely to require force.