Sean Gabb on the Financial Crisis (Yawn!)

Free Life Commentary,
A Personal View from
The Director of the
Libertarian Alliance
Issue Number 175
19th September 2008

Free Markets and the Financial Collapse
by Sean Gabb

I was called earlier today by someone at the BBC to comment on the collapse of the financial system. I have no particular qualifications for commenting on this. I do not know how long it will last, or how the recovery will begin. I certainly have no detailed advice on what should be done by anyone during the next few days.

The reason I was thought worth contacting, though, was obvious. The narrative in the establishment media is that markets were too lightly regulated after about 1980, and that the consequences were a ruthless and short term greed that has now reached its natural conclusion. This being so, the answer is how much regulation should now be introduced to prevent all this from happening again. I am a libertarian. I believe in markets. If markets are now being denounced, I am the right sort of person to approach for a defence.

The problem, the researcher discovered, is that I was not the right sort of person to approach. I think, for most people, it is a matter more of ignorance than of intellectual dishonesty. But there is a general tendency to identify free markets with any set of institutional arrangements that allow things to be bought and sold.

When it comes to the Private Finance Initiative, or the privatised utilities, or the internal market in the National Health Service, I do grow impatient. These are not examples of free markets, but of corporatism: they have been called into being by the State, and are at every step regulated and privileged by the State. Where the financial markets are concerned, the identification is more reasonable. After all, these are dynamic and highly efficient markets. Perhaps more so than any others, they conform to the neoclassical concept of perfect competition. Many people who work in finance are sympathetic to libertarianism. The markets are often discussed and defended in libertarian terminology.

What I tried to explain to the researcher was that, for me and for many other libertarians, markets are to be defended not according to how efficient they may be, but according to whether they are or would be part of a voluntary order.

What libertarians want is a society in which people come together only in uncoerced relationships. Some of these � marriage and partnership agreements, for example � might be hard or even impossible to dissolve. Some others � the main example being parents and their children � might involve some coercion for a limited period. But we do require, so far as reality permits, that no one should be compelled into any relationship.

When we defend markets, we mean those relationships, outside the circle of our friends and loved ones, than involve exchanges of legally binding promises, usually with a price attached. We do not defend priced relationships that are based on any degree of coercion. Therefore, we denounce slavery and trading in slaves. We denounce the collection of taxes to pay for services provided by the government. We denounce regulations that limit the range and nature of relationships that people can choose.

And we denounce patterns of indirect coercion that herd people into relationships they might not otherwise have chosen.

The financial system, as it currently exists, is based on this last type of coercion. Consider:

First, we have taxes and a monetary framework that make prudence, as traditionally known, unwise. It used to be that people would save for emergencies by putting money into savings accounts or contributing to mutual insurance schemes. For their old age, they would save money for purchase of annuities on retirement. But we have long had levels of inflation that eroded capital values, and taxes that depressed real returns. We can respond to this by playing the markets. But this requires more time and understanding than most people are willing to give; and there is the problem � at least in Britain � of capital gains tax when securities are sold at a profit.

The answer has been to put our savings with groups of professional speculators. These claim to understand the markets better than ordinary people. Undoubtedly, they have more time to follow the markets. And there are tax laws that privilege such companies.

The result has been to concentrate most savings into the hands of people whose job is look out for short term profit, and who are inclined to welcome exotic new products that no ordinary investor would ever dare touch.

Second, there are the company laws that allow easy incorporation and limited liability for debt. These have allowed giant business organisations to rise up and flourish. The result here has been to increase the number of securities that can be bought and sold, and to call into being whole armies of professional speculators, employed by multi-national banks and other organisations.

Third, there is fractional reserve banking and fiat money. Ever since the development of modern finance, bankers have been tempted circulate more notes than they could honour. What kept this in bounds was knowledge that the monetary base was a certain amount of gold that would not quickly be changed in size. Nowadays, if bankers cannot finance all the lending they would like to make at prevailing interest rates from the stock of savings, they can simply create more money. They still have an obligation to redeem their promises. But they operate in circumstances where the monetary base can be increased at will.

I do not say that there would be no financial markets in a voluntary order. There would be intermediation between lenders and borrowers. There would be trade in bonds. There would be securitisation of debt. There would be speculation on future values of commodities and securities.

I do not even say that the financial system we have is wholly useless or malign, given the highly corporatized nature of business. Fears of shortselling or takeovers provide a check on corporate sloth or greed. The endless speculation enables those of us who have some money not to have it all stolen by our government through taxes or inflation.

But the financial system, as it does now exist, would not exist as part of a voluntary order. It would not be the huge global casino that it is. It may be efficient. It may be plausibly claimed as an instance of the free market in action. But it is not part of a voluntary order, and therefore has at best only partial legitimacy to libertarians.

Moreover, if the financial system is a creature, directly or indirectly, of government, its current problems have been wholly caused by government. I do not know when the inflation started. It may have been to float us out of the last recession, back in the early 1990s. It may have been to avoid the expected panic of the Millennium Bug. It may have been to pay for the War on Terror. It may have been the product of all of these and others. But for many years, money has been lent that was not first saved. The gap between savings and loans was bridged by money creation. It is testimony to the skill of regulators and the sophistication of the markets that the speculative bubble was able to grow so large. But, however long delayed, its bursting was inevitable. The media can blame crooked mortgage sellers in the American ghettoes, or coke-fuelled graduates in the London dealing rooms. But financial collapse was always a matter of when and not if.

When I gave a potted version of this to the BBC researcher, I could almost hear her eyes glazing over. For the second time this year, I was not called into the studio to defend the City. I understand why I was not called in. What I am saying does not fit into the establishment narrative of what has happened.

And though I never got to tell the researcher, I also have no idea of what should now be done. Perhaps the bank of England should raise interest rates sharply and stand back while much of the financial system goes insolvent. This would get things over and done with, and move us reasonably fast into the recovery stage of the next bubble. Or perhaps it should flood the City with fresh money, in an effort to bring about a soft landing. I really do not know.

Something I do know reasonably well, however, is how to stop these bubbles from starting. If I ever came to power as the front man for a military coup � somewhat unlikely for several reasons, but still worth hoping for � I would do the following:

First, I would cut taxes and government spending by at least two thirds. The remainder should pay the interest on the national debt and honour the pension commitments made to those over about the age of fifty. I would then end the tax privileges of the investment funds. This would, among much else, allow people to plan for their future without having to sit behind the institutional equivalent of a compulsive gambler.

Second, I would repeal the Companies Acts and make the declare the directors of existing corporations the true owners with joint and several liability for their debts. This would put an end to the impersonal, bureaucratic nature of modern business. It would also reduce the number of securities to be bought and sold and reduce the number of people employed to buy and sell them.

Third, I would move to a fully-convertible gold standard, with the heads of every bank made jointly and severally liable for redemption in gold of all obligations, unless contracted otherwise

As said, even a stateless voluntary order would still have financial markets. And the semi-statist system I am recommending would have not only financial markets, but also some room for speculative bubbles. But neither would be anything like the world in which we actually live.

The shame is that what we have is largely what we shall have. Sooner or later, the present collapse will be over. Then, whatever �tough regulation� the politicians may have brought in will be circumvented by a new generation of clever speculators, and the next bubble will begin to inflate.

It could be worse, however. We are not talking about Soviet Communism here, but a corporatism that, if neither stable nor just, does enable the creation of vast amounts of real wealth. And, I might say, I have done rather well personally out of the late bubble. I am assured I shall not lose disastrously now it has burst. This means I am well placed to benefit from the next bubble.

As the Good Book says: �Unto every one which hath shall be given �.�

NB—Sean Gabb’s book, Cultural Revolution, Culture War: How Conservatives Lost England, and How to Get It Back, can be downloaded for free from


  1. Well said, sir.

    Corporate personhood and limited liability are right at the top of my personal hate list, along with our current monetary regime. It never ceases to amaze me how few people seem to understand the market distortions that such state-granted privileges are responsible for.

  2. The things Patrick comments on would be OK with merely minor legal changes, surely. I can’t see why a libertarian could object to the creation (by people) of an entity with Corporate Personality, (such as a firm) so long as that Personality had the same rights and obligations as a real individual.

    I guess that rules out Limited Liability, then?

  3. David — if corporate personhood _were_ equivalent to ordinary personhood you’d have a point.

    But it’s not. People die, corporations (can) live forever. There’s a whole bunch of other reasons why they are in fact not the same; I must post about this soon on our blog 😉

    Here’s just one difference. Punishment for crimes. If the same, that would mean ‘jail’ for various corporate offences — i.e. stopping a company doing any sort of business whilst ‘serving time’. Not pitiful fines for malfeasance.

    I’ll pull my thoughts together into a coherent post (but I bet that Sean has one long written!).

  4. Certainly limited liabilty in tort could not arise in a voluntary order but surely it could between contracting parties? To quote Rothbard (because I’m lazy):

    “It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such men would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it.”

  5. I have a stack of silver and a stack of gold. It sits in a tin, secreted away in the house. I add to it as and when funds allow.

    I have not entrusted them to a neo-Thatherite former cockernee barrowboy reptile in red braces , cocaine covered nose and a Ferrari to keep.

    Thus they have not beome toxic, and now only fit for toilet duty. I started with nothing, and now, as I sit here and hold it in my hands, have a number of thousands of pounds.

    No-one so far has told me they are worthless, lost, defunct or been spent on a ten million pound bonus for Y.U.Pee for his sterling work with derivitaves.

    Lesson there if you want it. Gold and Silver good. Paper in the hands of the City, baaaaaaad.

    Divers weights, and divers measures, both of them are alike abomination to the LORD.
    Proverbs 20: 10 King James Version, Holy Bible

  6. Sean:

    You say:

    “What libertarians want is a society in which people come together only in uncoerced relationships. Some of these � marriage and partnership agreements, for example � might be hard or even impossible to dissolve. Some others � the main example being parents and their children � might involve some coercion for a limited period. But we do require, so far as reality permits, that no one should be compelled into any relationship.”

    That may seem unexceptional (except for the “coerced childen” bit — what sort of coercion are you talking about? See ‘Taking Children Seriously” for more on these issues).

    If it were the case that indivduals were migrating to differing instantiations of Terra Nullius, your position might be tenable: “You got what you agreed to (except if there has been fraud along the way”).

    Bit even on a voluntarist society, novel problems will arise. The dynamic, evolving socity will present the participants with unexpected problems, with unintended consequences, which may require systemic changes. How are these to be reached? Is unanimous agreement required? Are there pre-existing Embedded Rules for deciding Changes”, rather like a Constitution?

    We would have to look at such provisions with great care, if we are to avoid coercion. Required adaptation may require everyone to agree on a single course of modification; flirting with understatement, this is unlikely in the extreme. The ‘Old” LA could not manage do it; and the Law of Unincorporated Assiations (without Rules) is clear insofar as Unanimous ASgreement by all the
    Members of the Association, with conditionalities undecideable at Common Law, because we found that no Unincorporated Association has ever taken this issue through to the House of Lords.

    The costs and uncertainties are so great, and all the while any Member can get an Injunction forbidding modification as Ultra Vires pending resolution. While grinding through the Courts, the Association will disintegrate, because it cannot unanimously decide upon any specific procedure or end-state.

    The LA could not resolve this internal conflict, and split, each claiming to be the “closest continuer.”

    After taking Counsel’s Opinion, it seemed to me that the only thing we (the Tame faction, if you will) could do was to write to each Member, inviting them to read and sign an agreement, and offering them a year’s free service. They could then decide whether to renew; and newcomers could decide on whether or no to assent to our written Terms of Service and procedure. “Our” LA is the result, although the arbitrary changes and decisions of Chris Tame acting on his own meant that changes did occur without consultation or agreement or arbitration. Blocking his changes would have resulted in a new round of paralysis, infighting and unpleasantness. Some people have a taste for that — I don’t!

    As far as I have any reason to know, there has NEVER been a satisfactory accounting, nor has there been consultation, arbitration or lawful Civil procedure.

    “The Ither” LA continued on its way, promising elections (Steele wanted a ‘hands-up’ ballot at a Public Meeting, for reasons which should be obvious, but apparently aren’t: there has never been a full Ballot, as far as I’m aware, and the self-appointed Founding Oligarchy goes its own way, taking such decisions by Majority Vote of the Oligarchs.

    I find all this intrinsically fascinating.

    Here we have one (then two) Libertarian Alliances, both claming ‘legitimacy’ on different foundations and according to widely divergent procedures.

    A competent politico-legal analyst would have a hard time figuring out who had any “rights” to what were the origins and natures of “Libertarian Alliances”: Steele asserted that he wanted an elected leadership, with all the Members as participants (but they never got a chance to vote on it). It will occur to you, Sean, that any “tightly-knit group of politically-motivated people could join the group, and when they constituted an absolute majority of the Membership (not difficult when the LA(s) are so small and easy to take over) and become a new Absolute Oligarchy (even though ‘their’ LA would be a nominal “democracy”). Steele went on to assert that I had always thought that the LA should be a Service Business, providing literature and facilities and contacts to the “customer base.” He assertted that I had turned CRT though 180 degrees on this foundational issue. My view was simply that I did not want the LA to be destroyed by internal political conflicts, which would be insoluble insofar as they rested on grounds of deeply-held beliefs.

    Chris’s firm allegiance to NATO in the then-current world situation was certainly inconsistent with anarchist principles; but he and I and Judy and Dave supported it.

    I was the only declared non-Anarchist: none of my two contributions are in print in ‘this’ LA’s Archives; the first, with Steels Reply, IS in the Archives of ‘the other’ LA.

    This may well strike you as extremely odd! CRT — in fine Stalinist style — ‘air-brushed’ me from the history and records of ‘his’ LA, the LA which I fought alongside him to create!

    My “Impossibility of Anarcho-Capitalism”; Steele’s “Reply to Hollick” and my “Lenin in Chicago” rejoinder in ‘our’ Free Life are missing, just like Phillip Pullman’s excellent piece in ‘Times-Inline” and for EXACTLY the same underlying reasons:

    The analyses and arguments presented therein by Steele and myself PRECISELY foteshadow the fate of the LA.

    Bith Chris AND David held that Anarcho-Capitalism is absolutely libertarian; whereas I agree with Noam Chomsky that “Anarcho-Capitalism — when applied in the real worlf — must result in the most hideous tyrannies the world has ever seen, which would then engsage in open-ended warfare with each other, wars which could only end in victory or subjugation, or Mutial Assured Destruction (Anarchies can place no limit on the kind and arbitrary possession and conteol over weapons of mass destruction and there are no Laws of War, because they cannot be unanimously agreed-upon. and no-one has to abide by them anyway. There is no enforcement mechanism.

    It truly does seem to me that while Anarchists of various stripes can be highly intelligent; profess high moral principles; nd be excellent company (!), their doctrines are insuperably opposed to everything that individual liberty is supposed to represent.

    There are profound implications for the future of our world. We have at present no Elected Constitutional World Government, one World Order (and this may be a very good thing, even though — like Immanuel Kant — I hope for a future world which will be disarmed down to ‘policing’ and self-defence levels, with room for Humanitarian Interventionism).

    “For no light matter is in issue; but the manner in which human life itself is to be lived” (Plato).

    This is the first of the three main reasons why that I’m a _Philosophical Anarchist_; but NOT an ‘Anarcho-Capitalist.”

    More of a Democratic Agorist, really…

    [ FX: (smiles) ]

    I hope you find these discussions interesting. Obviously, I (and CFR and Heritage do (inter alia!!!),



    “The Secret of Happiness is Freedom; and the Secret of Freedom is Courage.” — Thucydides, Ancient Greek philosopher and General…

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