Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.

Free Exchange Depends on Just Markets

James Skillen


September 28, 2007

Reporting and advising on global economic conditions September 24, the International Monetary Fund (IMF) warned that “the turmoil in global credit markets was likely to be ‘protracted’.” But it urged governments not to rush into writing new rules to try to overcome the turmoil (Financial Times, 9/25/07).

The IMF’s report, with all its uncertainty and caution, accurately reflects the confusion and unpredictability of our times economically speaking.

Part of the credit-market problem is due to the type of mortgages American banks and mortgage companies granted to people who were not necessarily good credit risks. Those mortgages, many of which were pre-programmed for automatic interest rate hikes within one to three years, were then packaged and sold to investors who did not accurately calculate the risk involved in their investment.

Yet this sub-prime mortgage crisis did not arise in a vacuum. Housing prices across the board had been rising too fast for quite some time. The value of the U.S. dollar relative to other currencies has been declining for months. And energy prices have been climbing again. Yet, economic growth in China, India, and Brazil has hardly been fazed by credit turmoil in the U.S. and Europe. Economic anomalies and surprises like these are reported almost daily. No one, not even the chairman of the U.S. Federal Reserve Bank, Ben Bernanke, knows how to weigh and measure all the factors that are playing into global economic turmoil these days.

So the IMF is correct both to warn of protracted instability and to tell governments not to move too quickly to try to fix problems with band-aids that might do more harm than good.

Nevertheless, all the meetings and actions of major central banks and treasury departments in recent months highlight the fact that healthy economic life depends on justly governed markets. After all, the Federal Reserve, which recently lowered interest rates, is a government body not a corporation or an association of consumer activists. When the U.S. or any other government decides to revalue its currency, it takes public-legal action, not private action. In fact, almost every piece of advice the IMF report offers is to governments about how to govern banks, credit-rating agencies, and other organizations so the market can achieve stability and economies can grow in a steady, healthy fashion.

Too often, talk of free-market economics pits the freedom of businesses and consumers over against government regulation. Conservatives want freedom from overbearing government regulation; liberals want governments to act more vigorously to protect consumers and the poor from the ravages of the free market. But this way of posing a divide leads to a misunderstanding of what makes healthy markets possible.

We must start with the fact that the market itself is a public realm, not a private construct. The responsibility of governments is to define and govern that public realm justly. It is government, not private industry, that establishes anti-monopoly laws, guarantees accurate weights and measures, controls the money supply, makes tax decisions, and even defines what a corporation is. Genuinely free exchange among producers and consumers depends on a justly governed market that strengthens public trust in market rules, including the trust of workers who should not have to fear that their employer or government is cheating or misusing them.

Government cannot compel the economy to do what the public wants it to do. Nor can corporations and consumers be assured of a just market simply through their exchange of goods and services. Governments should focus on their job of upholding justice for everyone in the complex public marketplace, which includes real people with many vocations and a delicate natural environment. Only in a just market will entrepreneurial initiative and market exchanges be free to fulfill their purpose.

—James W. Skillen, President
    Center for Public Justice

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Capital Commentary is a weekly current-affairs publication of the Center for Public Justice. Published since 1996, it is written to encourage the pursuit of justice. Commentaries do not necessarily represent an official position of the Center for Public Justice but are intended to help advance discussion. Articles, with attribution, may be republished according to our publishing guidelines.”