Recent accounting fraud scandals are a sign that an era is coming to an end. Disillusionment and disenchantment with American capitalism could still lead to a huge ideological shift from laissez-faire and self-regulation to state intervention and regulation. This would be the opposite of what has been happening since Thatcher and Reagan. It would also call into question some very important and very old ideas about free markets.
People think of markets as places where people can exchange information, goods, and services. Adam Smith's "invisible hand" is the sum of all the mechanisms that work together to make sure that economic resources are used in the best way possible. The randomness and lack of self-awareness of the market are exactly why it is better than central planning.
Market participants act selfishly and try to get the most out of the market for themselves, not caring about anyone else's goals or actions except for those they interact with directly. Somehow, the chaos and noise give way to a structure with unmatched order and efficiency. Man cannot do things on purpose to make things better. So, any kind of intervention or interference is seen as bad for the way the economy works.
It's not hard to get from this idealized view of the world to the Physiocrats, who came before Adam Smith and believed in "laissez-faire, laissez-passer," the battle cry for leaving things alone. Their faith was based on nature. They yelled that since the market was made up of many different people, it should have the same rights and freedoms as any other person. In his important and well-timed 1848 book "Principles of Political Economy," John Stuart Mill argued against the government's role in the economy.
This flawed theory came back with a vengeance in the last two decades of the 20th century, even though more and more evidence showed that the market didn't work, for example, to provide cheap and plentiful public goods. Privatization, deregulation, and self-regulation became trendy buzzwords and were pushed by both commercial banks and multilateral lenders as part of a global consensus.
When it came to accountants, stock brokers, lawyers, bankers, insurance agents, and so on, self-regulation was based on the idea that people would be better off in the long run if they took care of themselves. Moral and economic agents who are acting rationally are supposed to maximize their long-term utility by following the rules and regulations of a level playing field.
This was a good trait, but it seemed to have been ruined by greed, narcissism, and an inability to wait for satisfaction. Self-regulation was supposed to change the way people act, but it failed so badly that it led to the most intrusive state strategies ever made. Both in the United Kingdom and the United States, the government is much more involved in accounting, stock trading, and banking than it was just two years ago.
But the "order out of chaos" philosophy and myth, which had supporters in the exact sciences, went deeper than that. The culture of the business was completely changed and permeated. It's not surprising that the Internet, which is a chaotic network that works in an unorganized way, took off at this time.
The dot-com revolution wasn't so much about technology as it was about new ways to do business, like mixing a lot of different things that don't go together, mixing them well, and hoping for the best. No one, for example, gave a linear revenue model for how to turn "eyeballs," or the number of people who visit a website, into money ("monetizing"). It was a dogma that somehow, traffic, which is a chaotic thing, will magically turn into profit, which used to be the result of hard work.
Even the idea of privatization was a big leap of faith. All of the state's assets, like utilities and companies that provide public goods like health and education, were given to people who wanted to make the most money. The underlying idea was that the price mechanism would provide the planning and rules that were missing. In other words, higher prices were meant to make sure that the service wouldn't stop. Failure was inevitable, and it happened everywhere, from electric companies in California to railroad companies in Britain.
When all of these urban legends fell apart at the same time—that the Internet would free people, that markets would regulate themselves, and that privatization was the best thing ever—it was inevitable that there would be a backlash.
Since the end of World War II, the government has grown into a huge monster. It is about to grow even more and take over the few areas that have been left out so far. These are not good news, to put it mildly. But we libertarians, who believe in both personal freedom and personal responsibility, have brought this on ourselves by stopping the market from doing its job as an invisible regulator.
