AS THE SAYING GOES,
there's no such thing as being a little bit pregnant. When it comes tofreedom
, the same applies: People either are free, or they aren't. Either they're sovereign individuals who own their lives and the results of their productive efforts, or they're servants to the state. If basic rights are always subject to a majority vote, it's not liberty, but mob rule.
Free trade is one of those rights. As philosopher Ayn Rand wrote, "political freedom cannot exist without economic freedom; a free mind and a free market are corollaries." People who aren't free to trade their property, time or productive effort in accordance with their own values aren't free at all.
Yet slowly, under the leadership of both major political parties, free trade has become systematically exorcized from civic life. Most citizens, the business community included, now completely accept that the government has a right to regulate, orchestrate and otherwise micromanage their affairs in any fashion it sees fit.
You now need government permission to open a restaurant, deliver a letter, drive a taxicab or become a dentist, just to name a few examples. Every piece of property you buy, every dollar you make and every worker you employ must duly be reported and registered with the State. In most cases, the process involves paying a tax or filling out a stack of forms that nobody will ever read.
While we pay lip service to freedom as being unalienable, we routinely permit free trade to be curtailed on the basis of public-opinion polls. It's a reality that damages not only our economy, but the very philosophical framework on which our republic is based.
Take, for example, the minimum-wage law, an issue on which Senator John Kerry, the presumptive Democratic candidate for president, has been quite vocal lately. Kerry supports raising the minimum wage to $7 from $5.15 by 2007. President Bush, according to a spokesman, is also willing to consider an increase. It's an issue that scores points with liberals, labor groups and anybody who doesn't recognize that free trade is, in fact, free trade not just a clever catchphrase or bumper-sticker slogan.
Minimum-wage laws don't work. Like any government intrusion in the free market, they end up exacerbating exactly the problem they were designed to remedy. Because it is set by slow-moving bureaucrats and not the responsive free market, the minimum wage quickly becomes the maximum wage for entry-level, low-skilled workers. Of course> the minimum wage isn't a "living wage." The only reason businesses can pay it is because the government do-gooders give them a perfect reason to.
The way to raise the standard of living in this country isn't to boost the minimum wage, but to abolish it altogether. If businesses were allowed to compete in a truly free market, more low-skilled employees would be working, and more high-skilled employees would be working for higher wages. The work force would be more productive, and everybody would benefit.
Minimum-wage laws are economically detrimental, because they impede otherwise perfectly functioning market mechanisms. Yet the real reason to oppose them isn't because they are unpractical, but because they're immoral>. A free market exists on the basis of voluntary exchange. Employees have the right to negotiate, accept or leave any job they choose. So if I indeed have a right to my life, then it follows that I have the right to willingly and consciously accept a job for any wage I see fit, even if it's lower than the wage the government sees fit.
Any number of workers, from low-skilled laborers to soccer moms to other workers moonlighting off hours, might indeed want to take a job that pays less than the governmentally mandated minimum. And they have every right to do so. Yet it seems like the regulators would rather see a person not working for $4.85 than working for $5.15.
At the same time, employers in a free market are entitled to offer whatever type of wages or compensation they want. So if I own a business and want to hire an employee, then I have the right to offer to pay whatever sort of salary I choose. When the government allows the free market to work, both sides inevitably come to mutually agreeable terms. For both political parties, simply letting the free market govern wages seems, well, impossible. How did we fall this far?
Given that our wages and income are so tightly regulated, it stands to reason that we allow our investments to be controlled as well. Indeed, securities regulation is a growth industry these days, with no less than three separate government agencies vying for power, prestige and the chance to benefit from productive work they don't have to do. Now that insurance companies, brokerages, mutual funds and accounting firms have been given a thorough shakedown, next on the list are hedge funds, which it seems are targets for regulation simply because there's almost nobody else left.
The vast amount of misinformation regarding hedge funds is a direct result of you guessed it government interference in private, lawful, free trade. To start, most people seem surprised to learn that the term "hedge fund" does not describe an investment technique or a risk level. Hedge funds are simply private investment partnerships. Just like a mutual fund, or any business start-up for that matter, a group of investors voluntarily pool their money under the guidance of an investment manager. Hedge funds aren't inherently volatile, risky or highly leveraged. They can be invested in anything from real estate to stocks, exotic options to plain old cash.
To suggest even for a moment that hedge funds are "unregulated" isn't just inaccurate it's farcical. Hedge funds are one of the most regulated industries in the nation. They aren't permitted to advertise, solicit business or be the least bit publicly visible. Whereas a strip-club operator can buy a huge billboard on the interstate, hedge funds are barely permitted to print business cards. Direct mail, Web sites, anything that would actually inform the consumer is strictly forbidden. To a law-abiding hedge fund, the First Amendment doesn't even exist.
Because it is illegal for hedge fund to educate the public as to exactly what they do, we end up hearing only about the ones that fail, or on those infrequent occasions when fraud occurs. Whether it's a cover story in a magazine or grandstanding politicians vowing greater controls, hedge funds are expected to take the punches but not throw them back. And that's the way regulators like it the more fear, mistrust and ignorance that exists about hedge funds, the more they are able to justify regulating them in the name of "the public good."
Another central way in which hedge funds are regulated is that they are prohibited from accepting investments from "nonaccredited" investors, a patronizing term the government uses to describe anybody with less than $1 million in assets or an income of less than $200,000 over the past two years. It doesn't matter if a fund invests in CDs or a checking account it's illegal for hedge funds to accept an investment from anybody not meeting the "accredited" investor criteria. It's a hurdle that eliminates about 99% of the entire population. Considering that hedge funds have beaten most other investments in recent years, it's more than a little ironic that the majority of the regulations that prevent most citizens from investing in them are enacted in the name of the "public good."
Just as with the minimum-wage laws, government regulation of hedge funds is both practically and morally wrong. As was noted, the "dangerous" hedge funds from which the public needs to be protected have been resoundingly profitable for investors over the past few years. The vast majority of money lost in the financial markets, it turns out, has been lost in fully regulated entities. WorldCom was regulated, as was Enron, Adelphia and countless others. Regulation, it turns out, doesn't eliminate fraud it just makes it more difficult to detect. A company that meets government regulation is granted an implicit guarantee of safety. An unregulated enterprise has to be more transparent to attract and build public trust. Regulation allows a company to meet oftentimes very low minimums and be immediately considered reputable. And there's no incentive to go beyond the oftentimes very arbitrary minimums.
Regulation also doesn't stop incompetence it cultivates it. Consider how many small and unsophisticated investors lost huge chunks of their life savings by investing with SEC-regulated stock brokers or in SEC-regulated mutual funds during the late 1990s boom. Because government regulation undercuts the free market's competition for reputation, a fly-by-night operator is given the same credentials as the well-established professional.
The biggest by-product of regulation isn't better qualified investment advisers, but more expensive ones, since the cost of compliance is simply passed on to the consumer. The only interests being protected are those of the regulators themselves, who without endless paperwork to demand and pages of rules to rewrite, would find themselves with little purpose for remaining on the public payroll.
Of course, the real reason to oppose further regulating hedge funds isn't on practical grounds, but moral ones. More than any other country in the history of mankind, the U.S. stands as the international example of freedom, liberty and individual rights. The ability to invest, however and with whomever one chooses, is as inherently American as religious autonomy or freedom of speech. If a person's life is his own, so is the product of his productive effort. Any restriction on how he may save, spend, invest or keep his money violates the basic principals on which this country was founded.
Forget Sarbanes-Oxley, the downright draconian set of controls that re-regulated financial service businesses back to the Stone Age. The real damage from Enron, WorldCom and the Nasdaq collapse will be felt over the next few decades, as the full effect of bigger government intrusion onto private enterprise finally begins to take its toll.
And the real tragedy is that what has changed isn't our laws, but our attitudes. There's now a consensus opinion that free markets, and indeed capitalism itself, are inherently destructive, immoral and criminal. The belief is that without "public servants" like New York Attorney General Eliot Spitzer or the SEC's William Donaldson "protecting" the masses, business would run wild with fraud, looting America down to its last penny. Our population now accepts, by and large, that capitalism needs to be corralled, controlled and otherwise centrally planned.
It's that philosophical shift that marks the end of freedom as we know it. And although a civilization doesn't disintegrate overnight, you mark my words: The assault on free trade is what will eventually herald the collapse of liberty itself.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.>