How free market capitalism would handle BP

Posted: June 15th, 2010 by Militant Libertarian

by Brian Saint-Paul, IC

Free market capitalism gets blamed for everything from the financial collapse to salmonella-contaminated meat to the BP oil spill, and this is primarily due to a misunderstanding of the term. The economic system we have in the United States is not free market capitalism, but corporatism. Free market capitalism allows two parties to exchange goods or services to the mutual benefit of each, without a third party intervening. Corporatism, on the other hand, is that economic system wherein the state offers special benefits — subsidies, tax breaks, etc. — to select privately-owned businesses, with the intention of keeping the economy in a constant state of growth.

In free market capitalism, entrepreneurs balance the potential for financial success against the danger of total failure. Corporatism, on the other hand, offers the energy of free market capitalism, but without the important behavioral check that the risk of failure provides. If a state-sponsored corporation or industry gets into trouble, the state bails it out on the principle that it’s “too big to fail.” As a result, businesses have no financial motivation to act responsibly.

The current situation with BP offers a stark example. Because of the cozy relationship between business and government, BP is only liable for $75 million in damages (beyond clean-up costs). In a true free market system, they would be on the hook for everything. And that’s precisely the kind of danger that would have hemmed in the company’s riskier actions.

Kevin Carson at the Center for a Stateless Society explains:

[A]bsent a liability cap, as the flood of individual and class action lawsuits ate up the company’s equity, the market pressure for holding robust liability insurance (for damages up to tens of billions of dollars) would be a well-nigh non-negotiable prerequisite for economic viability in the industry….

What passed for federal regulations were ineffectual because, among other things, it’s not the federal government’s own money that’s at risk.  Things get downright chummy between regulators and regulated…. When Congress and the White House are packed with people who all got millions of dollars in campaign contributions from all sorts of regulated industries, and most of the political appointees in regulatory bodies are former directors and vice presidents of corporations in the regulated industries, how tough do you think that regulation’s gonna be?

But if relations between regulators and regulated aren’t really all that adversarial, you know what is adversarial?  Relations between insurers and the insured.  Insurance companies are notorious for not liking to pay claims, and for taking an adversarial view of policyholders who make them.  Especially when slipshod safety measures mean a multi-billion dollar payout from the insurance company’s own funds.   And the “adversarial” relationship is likely to entail things like actual inspections to make sure the failsafe devices work, maybe requiring relief wells as a standard precaution, things like that.

Ignore pundits who can’t tell the difference between two opposing economic systems. This is how a free market would have handled BP.


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