Real Free Market Capitalists Demand that Financial Fraud Be Prosecuted

George Washington's picture


There is a widespread myth that free market supporters are against regulation or prosecuting fraud.

In fact, Adam Smith – the father of free market capitalism – was for regulation of banks, and believed that trust is vital for a healthy economy. Because strong enforcement of laws against fraud is a basic prerequisite for trust, Smith would be disgusted by the lack of prosecution of Wall Street fraudsters today.

Smith railed against monopolies and their corrupting influence. And Smith was pro-regulation, so long as the regulation benefited the little guy, as opposed to the wealthiest:

When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

Richard Posner – one of the leading proponents over the course of many decades for removing the reach of the law from the economy – has now changed his mind.

So has another leading proponent of deregulation and turning a blind eye towards fraud: Alan Greenspan.

While some promoters of a fake version of Austrian economics are anti-regulation and against prosecuting fraud, the main Austrian economists were unambiguously for them.

William K. Black – professor of economics and law, and the senior regulator during the S&L crisis – notes that leading Austrian free market economists said that fraud must be prosecuted:

Real Austrian economists … hate elite frauds and want them prosecuted vigorously. Ludwig von Mises and Friederich Hayek are the two most famous Austrian economists.


Hayek, F.A. The Road to Serfdom


To create conditions in which competition will be as effective as possible, to prevent fraud and deception, to break up monopolies— these tasks provide a wide and unquestioned field for state activity.


The Constitution of Liberty


There remains, however, one other kind of harmful action that is generally thought desirable to prevent and which at first might seem distinct. This is fraud and deception. Yet, though it would be straining the meaning of words to call them ‘coercion,’ on examination it appears that the reasons why we want to prevent them are the same as those applying to coercion. Deception, like coercion, is a form of manipulating the data on which a person counts, in order to make him do what deceiver wants him to do. Where it is successful, the deceived becomes in the same manner the unwilling tool, serving another man’s ends without advancing his own. Though we have no single word to cover both, all we have said of coercion applies equally to fraud and deception.


With this correction, it seems that freedom demands no more than that coercion and violence, fraud and deception, be prevented, except for the use of coercion by government for the sole purpose of enforcing known rules intended to ensure the best conditions under which the individual may give his activities a coherent, rational pattern…..


Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions…. Liberty and responsibility are inseparable.

Mises, L.


Government ought to protect the individuals within the country against the violent and fraudulent attacks of gangsters, and it should defend the country against foreign enemies.

Black also notes that fraud is a leading cause of financial bubbles and malinvestment – two of the greatest sins which Austrian economists rightly fight against.

Unless financial fraud is prosecuted, bubbles will be blown … and when they burst, the economy will tank. Fraud – along with bad Federal Reserve policy – is what causes bubbles in the first place.



Obama has prosecuted fewer financial crimes than any president in decades – less than Ronald Reagan, less than George H.W. Bush, less than Bill Clinton, and less than George W. Bush.

The economy is worse than it has been since the Great Depression, if not before.

See the connection? See this and this.



Even the most radical free market advocates support laws protecting contract and private property rights. In other words, they support the judicial branch of government and the basic laws Congress passes to support such rights.

There are obviously good, pro-competitive laws and bad, anti-competitive laws.

Paul Craig Roberts – a true conservative, who was a Wall Street Journal editor and Assistant Secretary of the Treasury under Ronald Reagan, and is widely credited with being the “father of supply-side economics” – points out:


Regulation can increase economic efficiency and … without regulation external costs can offset the value of production.




Thirty-three years ago in an article in the Journal of Monetary Economics (August 1978), “Idealism in Public Choice Theory,” I developed a model to assess the benefits and costs of regulation. I argued that well-thought-out regulation could be a factor of production that increases GNP. For example, regulation that contributed to the quality and safety of food and medicines contributed to specialization in production and lower costs, and regulations enforcing contracts and private property rights add to economic efficiency.



On the other hand, bureaucracies build their empires and extend their regulations into the realm of negative returns. Moreover, as regulations increase, economic managers spend more time in red tape and less in productive activity. As rules proliferate, they become contradictory and result in paralysis.


I had hopes that my analysis would result in a more thoughtful approach to regulation, but to no avail. Liberals continued to argue that more regulation was better, and libertarians maintained than none was best.



All sports need a referee. Some players will be bigger or more talented than others, which is great. They have a better chance of outcompeting the other guy and winning.

But without basic rules and referees, ruthless players might use a knife or kick the other guy in the knee. Perhaps we could suspend all rules, and maybe everyone would whip out a knife break the other guy’s kneecap. That’s fine … but that’s not the game of football.

Radicals who believe that we should not have any laws against fraud are implicitly arguing for anarchy. They might not use that word, but that is what they’re arguing for.

But the same Founding Father who argued for periodic revolutions to keep the government honest also argued against tearing down something unless you have something better in mind to replace it? Thomas Jefferson, the most vocal advocate of the citizens’ right to revolt to ensure honest government also cautioned against tearing something down unless it was for the express purpose of replacing it with something better.

Real, deep-thinking anarchists (as opposed to those using fake anarchy philosophy in order to promote lawlessness by the super-elite) are not for destroying all organization.  Instead, they argue for self-organization and self-regulation. See this, this and this.

JP Morgan and Goldman Sachs aren’t reining in one another’s fraud.  Bank of America and MF Global didn’t police each other’s fraud.   Tepco and BP didn’t make sure the companies made accurate reports about their safety measures.  Solyndra and Koch Industries didn’t guard against abuse by the other company.

So if one wants to argue that the Federal government should not regulate financial players, fine (perhaps our country is too big and complex to manage, and the federal government has become too corrupt) … but who should?

The states? Cities? Communities? Neighbors?

Human beings have the ability to form social contracts. Our D.C. government has largely breached it social contract with the people.

But we shouldn’t tear down the federal government unless we replace it with something better.

No one wants to tear down the state of organization so completely that we go back to monkeys (without the ability to talk), or one-celled critters . . . so the question is how do we want to organize?

Do you want to live as a “savage”? In reality, the natives had survival skills, cultural traditions, and knowledge developed over many hundreds or thousands of years (including knowledge gained before the migration from Asia to America), stored in the database of oral traditions. The settlers had traditions and knowledge as well. If we tear away all of that organization, life is going to be pretty challenging.

It is easy for a teenager to criticize his parents, but a lot harder to actually create a better adult life for himself. A teenager looks silly and immature when he criticizes everything his parents do without understanding the challenges he’ll face as an adult. But a young person who rebels against his parents and then creates a better adult life is doing important and heroic work.

In other words, anarchy as an economic model could work if economic players organized in such a way as to police against fraud and criminal behavior (the equivalent of pulling out a knife or taking out someone’s kneecap in the middle of a football game).

This is a long-winded way of saying that we should not stop the government from enforcing fraud laws unless we come up with a more effective way to stop fraud.

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Zero Govt's picture


You are brow beating free market supporters suggesting "real" FM'ers would follow Adam Smith, "the Father of the free market" (nobody fathered it, it came from nature) calling for the Law

The Law is a monopoly institution... no person that understood the free market and the massive benefits of the competition mechanism would endorse a monopoly for either social or economic justice. Adam Smith, like Ron Paul, DOES NOT UNDERSTAND THE FREE MARKET.

Nor does Austrian F.A. Hayek, with his nonsense, "To create conditions in which competition will be as effective as possible, to prevent fraud and deception.."

Again Hayek DOES NOT UNDERSTAND you cannot prevent anything, including fraud. You can only nip it in the bud as soon as possible once discovered. No monopoly institution is going to do that (as the monopoly of the Judiciary, the monopoly of Govt and its monopoly Regulators have crushingly proved)

So if prevention is bollocks what are we left with?

We are left with prosecution after a crime. Should we leave that to a monopoly like the Law?

Fuk No. . . . . we should leave nothing to any monopoly authority/body

We should leave it to natural social order to deal with it... call it 'Mob Rule' if you like but its a tried and tested human (and animal) system for Millenium. It works massively better than this shambolic, expensive, inept, drowned in red tape corrupt legal system we have (not working) at the moment

Example: MF Global has exploded in massive theft and fraud. What has happened under the 'Justice' system to date? Zero. Adam Smith is patently wrong and Hayeks 'prevention of fraud' is smashed on the rocks 

We have a very small group of thieves at the top of MF who have ripped off hundreds of investors and traders. The criminals are out-numbered but feel free because the Law is in the way of the hundreds venting their anger and chasing down these crooks and beating the crap out of them

The Law is acting like a block, a wet blanket, on the natural social justice that would have already happened. "Don't take the Law into your own hands" is the shit the 'Justice' System hed-fuks society with to maintain its 'authority' (not at all in eveidence in the MF Global scandal)

The Law is absolute garbage (like all monopolies)... any free marketeer that endorses the Law does nto understand the free market, they are only idealists (rather than practioners) of the free market 

Any genuine free marketeer would see $Trillions of goods traded nationally and globally every year with no Law needed. When the contract is not fulfilled the injured party takes their business elsewhere. If theft occurs the injured party either kicks the crook in the bollocks or simply takes the costs of the theft on the chin and changes supplier (action taken after the event)

Nature is the most effective system o earth. Massively more effective than any man-made system liek the Law at dealing with daily theft and damage. It has no central, monopoly, authority. The free market is based on nature, an individualistic system with no central authorities.

Individuals can make their own decisions, including impart their own justice. Why would anyone want to pass their decision-making to some old fart Judge, 2 sets of money grabbing lawyers and books of dribble on how to impart 'justice'? You cannot improve on the free market and you cannot improve on a free society... all attempts at institutionalisation and monopolies of authority have all failed miserably and constantly.

Nature is self regulating

Free markets are self regulating

A free society is self regulating 

..don't touch

ManicMechanic's picture

Well so much for the veiled attempt at sarcasm … true the end results are the same. It may be that sunlight is the best disinfectant however much of today’s contaminated environment stays in the shade and seemly will remain there unless something changes. Nevada’s robo-signing indictments are the only thing I see with traction right now but hopefully it’s the start of a larger trend. Possibly those that had viewed our diminished expectations of justice and fairness as being apathetic in our positions will take notice of dissatisfaction turned to rage. For years the expectations of a level of excellence in this country have been taken for granted … until finally that excellence is no longer granted and must be forcefully reclaimed!

michael.suede's picture

Libertarian News reponds to this nonsense article:


Re: Real Free Market Capitalists Demand that Financial Fraud Be Prosecuted

e-recep's picture

Ah, the usual libertarian naivity. No wonder Wall Street loves them so much.

Zero Govt's picture

Wall Street would have gone bankrupt in 2008 if liberty reigned... in fact Wall Street would never have got so big, fat, corrupt, dangerous and criminal if the free market (competition) had operated because these diseased dinosaurs would have been sliced and diced by small and medium sized competitiors decades ago

It is the Govt (monopoly) that props up these cancerous corporate monopolists with their Primary Dealer State subsidies and free money and the protection racket and competition killing Law and regulatory killers're the naive one swallowing whole all the BS ideas (propaganda) spread by The Parasite Clubs muck rakers

Mediocritas's picture

Here's a solution for America, let's call it the Great Rebalancing.

For every new regulation that we add to the financial sector, eliminate an existing regulation from daily life.
For every existing regulation that we actually enforce on the financial sector, stop enforcing an old regulation in daily life.

Through decades of lobbying, bribing and threatening, the FIRE sector got much of the regulation applied to it eliminated (ie, anarchy). With idiots like Greenspan and Summers at the helm, they not only got the Wild Wild West that they craved, they got handed unlimited guns and ammo to rape and pillage at will. Meanwhile, general society went in the opposite direction until there's CCTV cameras on every street corner and rules governing how many times you're allowed to blink every day.

I reject anarchy and fascism. They're polar opposites but they result in the same thing: a fucked up world. America today is both an anarchy (financial) and fascism (daily life). Bring on the rebalancing.

Zero Govt's picture

when you sit down and think about it you realise anarchy, fascism/communism and indeed Govt itself is all the same thing ...a small group of cheats/thugs running riot over society 

freedom (no rules at all) as nature demonstrates is the natural and finest state for individuals and society as a herd to grow

If free marketeers understand freedom (and the competition mechanism) then they'd understand the importance of no rules and the freedom for each individual to strike their own understandings (and change them as time goes on)

Change is the only constant. Change isn't helped any by a barrel of red tape and Laws pissed into society by retards behind Govt desks who have zero skill at anything.

The Law is a total failure on every subject as our current global stink is proving once again (unequivicably) is a monopoly of authority, all monopolies are fuking junk. Period

Ron Paul and Adam Smith are idealists, they only understand the free market as an ideal/idea. They do not understand freedom and the competition mechanism as a working practical mechanism that allows speculation, progress/change and failure. They onyl needed to look at nature, Darwnism etc to see how individual freedom and competition brings the greatest change for everyone benefit 

They are clearly ignorant as they support a monopoly authority (Govt and the Law) to rule over society... some people will simply not give up on the idea of God and we need to be rules, governed and needing some tosser laying to rules for others

Freedom = No Rules at all

it works (see nature) brilliantly

11b40's picture

Say what?  You think dyslexic and under-handed are mutually exclusive?

I sure won't defend Obummer, but Bush doesn't get a pass either.  Corruption is corruption, dyslexic or not.

ManicMechanic's picture

This is the direct result of replacing a dyslexic administration with an under-handed administration.

willien1derland's picture

Great post GW! I would LOVE to hear Larry Kudlow support your position; although my expectation is low as everyone at CNBC are spineless teleprompter reading automatons...

Rev Sale's picture

Watching the streams of Occupy Wall Street marchers today and realizing that one of their unstated goals is justice.  This means enforcement and perp walks that never took place and are festering, feeding the outrage.

Rev Sale's picture

Why do you think that Occupy Wall Street is marching today?  Where is justice?  Waiting for the perp walks.

spanish inquisition's picture

It's 4:40pm. Do you know where your non margin cash is?

divide_by_zero's picture

Over the last 10 years Soros has pumped at least $45M into the US judicial system(quite possibly more as the Tides co-written Porkulus bill provides matching funds to certain Obama friendly groups). He really hates this "rule of law" Constitution shit, progressives prefer the living, changeable, document. 

Pitchman's picture

To save the republic we love; The Rule Of Law Must Apply To All Americans!  John F. Kennedy understood the potential cost when one group dominates the whole, when he said;

"Those who make peaceful revolution impossible, make violent revolution inevitable."


falak pema's picture

Reposted :  about the Banking crisis now reaching boiling point. The greatest crime of this or last century in this domain. 'A day in infamy' is not too inappropriate.

the recent posts over the last months on ZH have ALL been about Euro sovereign debt shenanigans; and everybody took their eye off the ball.


Through ongoing derivative mountain plays, to pilfer social riches making it into private profit via the banking debt 'broke back market-mountain' ponzi. It goes on and on right before our eyes every day.




If PETRARCH  were alive today he would spit on them. 

How can the elected members of the biggest capitalist country pretend controlling the financial banking ponzi if they are busy getting rich thanks to it? The Borgias run the world OPENLY. And they are all servants of the banking cabal, the new global ponzi church. USD being its divine God to which they bow.

Just look at the numbers in Euroland : Total sovereign debt 10T; Total Banking asset 50 T (of which socialised debt base : 50%, Oligarch private profit in off shore locations : 50%, aka 25 T  held by 185000 people around the globe).

Which do you think the political Borgias will preserve? The 50T  of which HALF is their ill gotten accumulated private profits. Not the Sovereigns. 

Game OVER, WS will rule the western world....Let the people burn. do you stop contagion...If MErkel defies GS take over of EUrozone...Fourth Reich or continuing pax Americana? 

O'bammy's speech today in Australia is a clear signal that US Hegemony in PAcific is not over. China is not going to get a walk over. All three pillars of world economy now fragile, banks or tanks, its not getting better it's getting worse.

Catullus's picture

Even the most radical free market advocates support laws protecting contract and private property rights. In other words, they support the judicial branch of government and the basic laws Congress passes to support such rights.

That's quite a leap. Supporting laws does not mean supporting the government. The rule of law requires no government itself. This is both an anarchical position and supporting the free market position. There can be free market courts that can deal with fraud and they still exist to this day. Maritime law developed this way. As did mosaic, canon, and sharia law. Congress did not make fraud illegal in the US. It already was

ebworthen's picture

Timely article GW, thank you.

Let's see if Corzine is held accountable, or allowed to slink away.

I am really sick of so called conservatives chirping about "Free Market Capitalism" and casting aspersions on the OWS protestors as "Lazy Hippies".

If we don't have prosecution of theft, embezzelment, and malfeasance in Wall Street and Financial markets there is no free market and there is no Capitalism.

As I have said before, we have the worst of both worlds; crony capitalism and selective socialism - a two headed hydra that devours free markets, true charity (at the level of the individual), and the moral impetus for individuals to be self reliant or to save and invest.

falak pema's picture

....crony capitalism and selective socialism...

Charybdis and on. 

As Jefferson said and somebody quoted in this thread; manipulative tyranny has many faces and they all mean the same : death of individual liberties and rule of law.

Cistercian's picture

 Slink away...

  Why, in the name of GOD don't the authorities do what they must and arrest the super-villains?

 The end result of the ludicrous corruption is would think the idiots would get that.

 Oh well, lots and lots of guns in America's closets yet to appear on the streets.

 The fools should repent....but it looks like they won't.


Pitchman's picture


As throughout time, the money power elite fails to understand their insatiable quest for power and control is leading to their eventual down fall. That Bloomberg has now strong armed the movement will, of course, only heighten the resolve of the people and focus their grievances.

The issue today is the same as it has been throughout all history, whether man shall be allowed to govern himself or be ruled by a small elite. – Thomas Jefferson

Reconstructing The Occupy Movement: MSM Obfuscation and The Truth

ResFam's picture

ebworthen... "crony capitalism and selective socialism".  brilliant.  care to expand on that a bit (e.g. would love to read what else you've said about it)? I think you're absolutely right, and this is why our phony two party system offers us only the illusion of choice.  Crony capitalism bails out the top, selective socialism co-opts the bottom.  The middle class gets worked over. 

I've heard the phrase progressive corporatism a lot as well recently.  The idea that monopolies have been big supporters of increased regulation as a means to tie their competitors up in knots.

I suspect there are lots of shades of gray in all of this, but it's pretty clear that big government, big labor, big business -- any big hierarchical structure -- gets into self-preservation mode rather quickly, and figures out ways to manipulate the system -- always at the expense of the powerless.

Pitchman's picture

For the most part a shallow thinking American public has been reduced to mouthing nothing more than slogans...USA, USA, USA, put in mind by the statist money power.  And our once great Republic, over the decades, has devolved to a leadership of sock puppets herding an inattentive and unwitting public to their demise....

While I have great admiration for the OWS protestors, their energies are being miss directed. The fact that the protestors are looking to captured government officials, that have trampled the RULE OF LAW and abdicated their Oath to Protect and Defend the Constitution, to suddenly change face for the good, is a misguided leap of faith in the wrong direction. You may as well offer yourself up to the auction block. - Elite Money Power And The Central Bank: Life Is But A MEME


Zer0henge's picture

Where is John Corzine?  How come NO ONE is mentioning him ANYWHERE?

SwingForce's picture

He's under lockdown in his new office as Treasury Sec'y, next to Jeff Immelt's Tax evasion office.

Aeonios's picture

Sorry, in Amerika, "financial crimes" only applies to tax evasion, not any of that stuff you're talking about.