The libertarian economist Tyler Cowen doesn’t seem to fathom where his own arguments are taking him. Cowen devotes the last half of an American Interest essay on inequality–now praised by New York Times columnist David Brooks, who characteristically misses Cowen’s point–to laying out the classic case against private ownership of banks.
Cowen’s ostensible subject is inequality. He begins with a well informed, if somewhat inconclusive, discussion of the bottom 99 percent of the population. Inequality hasn’t really increased much, he finds, and to the extent it has people don’t really care a lot. After throwing a bone to his conservative audience by criticizing liberals for being unnecessarily upset, he stares straight at the facts and finds it incontrovertible that the economic distance between the top 1 percent and the rest of the population has indeed grown greatly.
Here is where it gets interesting. The new wealth is mostly in the financial sector, and Cowen wants to know why. The explanation lies in incentives that lead bank managers to gamble with other people’s money. If they win, they go home with big bonuses. If they lose, someone else pays–investors, bondholders, and in the event of a really big blowup like the one that just happened, all of us as taxpayers, workers, and citizens.
What can be done to stop bankers from making these gambles? Cowen looks at a range of regulatory options, but he can’t convince himself that they will be effective: “The financial sector has learned how to game the American system of state capitalism.” And, in a final admission of defeat, “we probably don’t have any solution.”
To readers of Dissent, this might not feel like a defeat. If capitalism can’t work, might something else do better? Government ownership? Cooperatives? Something else? If bankers got salaries instead of bonuses, would they have a different incentive structure? These questions don’t answer themselves–just for a start, one needs to understand why so many government-owned banks in Europe blew up two years ago. But at the point where Cowen has arrived, they do ask themselves. In the failure of such a thoughtful and independent thinker to ask whether some alternative form of organization might be able to clear the very low bar set by the performance of the American financial system, we see once again the damage free-market ideology has done to the American economics profession.