The passage last week by the U.S. House of Representatives of a $180 billion farm subsidy program, the March 5 decision by the Bush administration to impose tariffs on steel, and the continuing discoveries by Congress of new needs for government programs raises an interesting question: Is there any political organization that a committed free marketer can vote for, not just as the less bad alternative, but out of conviction? Not just in the United States, but anywhere?

This analysis forms two parts. In this Part 1, I discuss what a free marketer believes, and what policies they would favor. In Part 2, to be published Tuesday, I discuss the free marketer view of the Bush administration and other governments worldwide.

First, let’s define what a believer in free markets actually wants:

— He (or she) believes in free trade, but not in the kind of trade “unilateral disarmament” undertaken by William Gladstone and Richard Cobden in 19th century Britain.

— He believes in allowing the market to determine which industries survive and flourish, and which go to the wall.

— He believes not that “the market is always right” — it frequently produces the most absurd bubbles and collapses — but that the best long-term economic results are produced by a financial system where shareholders invest on the basis of long-term value, managers operate on the basis of maximization of that long-term value, and monetary policy is designed to facilitate the measurement of that value and the “gravitational pull” of securities prices towards it.

— He believes in smaller government, that the maximum 10 percent of national resources which governments absorbed before 1914 was and should still be a reasonable limit, that excesses over this level should be for emergencies only, and that social needs such as health, pensions, unemployment benefits and subsidies for the neediest should as far as possible be privatized.

— On social policy, he believes in measures that will reduce the deadweight cost of those citizens whom others must care for, and of crime both blue- and white-collar.

Naturally, since the world is not perfect, the believer in free markets accepts its imperfections, and looks only for politicians or parties that seem likely to move significantly in the desired direction. On trade, for example, the free-market position is somewhat subtle. The free marketer accepts that full free trade is the optimum outcome, because of the workings of comparative advantage. Further, if exchange rates are unconstrained, a country engaging in unilateral free trade maximizes its total welfare, whatever other countries may do. Nevertheless, there is a paradox here, and in practice a low tariff may in some cases be better than no tariff at all. Even though full free trade may maximize welfare, if other countries are heavily protectionist, it can provide huge distortions to the domestic economy, because, compared with a low tariff, full free trade may produce a large benefit to consumers, at the cost of a detriment almost as large but more visible and concentrated to producers facing competition sheltered by heavy protectionist barriers. In addition, if government is large, forgoing the fiscal revenues from modest tariffs may require excessively high direct taxation, thus killing incentives.

How this works can be demonstrated from the history of the 1920s. During that decade, the United States had become a large net creditor, and should have taken the lead in reducing tariffs on a reciprocal basis, through some such mechanism as the 1947 General Agreement on Tariffs and Trade. Instead, Congress raised the already high U.S. tariffs twice, first through the 1922 Fordney-McCumber Act and then, notoriously and fatally, through the 1930 Smoot-Hawley Act. From a free-market perspective, this failure was the only flaw in the otherwise admirable presidencies of Warren Harding and Calvin Coolidge. The U.S. high tariff policy proved fatal — it brought on the Great Depression, caused Europe to repudiate its war debts, and encouraged the rise of Hitler.

Conversely, in free-trade Britain, which had suffered financially from World War I, a modest Imperial Preference tariff, such as proposed by Stanley Baldwin in 1923, but only installed, too late, by Neville Chamberlain in 1932, would have stabilized the exchanges, allowed Britain to return to the Gold Standard with much less strain, and enabled a reduction in the already over-high British levels of income tax — of which the top rate was as high as 60 percent in the early 1920s and declined only marginally thereafter.

Thus if free-market tariff policies had been followed in the 1920s by both the United States and Britain, the relatively dynamic British 1930s would have happened ten years earlier, the U.S. bubble of the late 1920s would have been less inflated, and the Great Depression with all it led to might well have been entirely avoided.

The free marketer neither subsidizes venture capital to encourage the creation of new industries that may, as the dot-coms demonstrated, lead to bubbles and wastage, nor does he prop up old industries that should be led to the knacker’s yard.

Textiles, lumber and steel are all industries where low labor costs are important; consequently they should be left primarily to countries with labor costs lower than the U.S. agriculture, even more, is the staple of many Third World economies; to the free marketer there is no excuse for the United States, the European Union and Japan propping up inefficient farmers and denying their consumers the cheap food that free markets would produce. When subsidies are known to go, not to the mythical “family farmers” of whom there are today very few, but to huge politician-buying conglomerates such as Archer-Daniels-Midland, it is not farm policy but sheer corruption. Of all government’s actions under the Bush administration, the most depressing is the abandonment of the relatively free market 1996 Freedom to Farm Act and its replacement by yet larger subsidies, that reward rich agricultural conglomerates at the expense of the middle-income consumer and the impoverished Third World.

To rectify the U.S. financial system, the free marketer would institute two accounting reforms: insuring that public company auditors are selected genuinely by shareholders, not by management, and insisting that all forms of executive compensation, notably including stock options, be recorded directly in the income statement. Wall Street conflicts of interest would be severely punished, and full disclosure required in future of both analysts’ conflicts and sales practices in initial public offerings. Taxes would be realigned to favor dividends, tangible today in the hands of shareholders, over capital gains, subject to pie-in-the-sky promises and flim-flam. Finally, monetary policy would be taken out of the feeble and politicized hands of the Federal Reserve Board and placed back where it belongs, in the automatic mechanism of the Gold Standard, that would penalize speculative excess quickly by a period of tight money, rather than attempting to prolong it by artificial reductions in short-term interest rates.

On government spending, the free marketer understands that World Wars I and II were bonanza opportunities for believers in Big Government, and that we are unlikely in any but the longest term to get back to traditional government spending levels below 10 percent of gross domestic product. More disquieting, however than the rise in government spending during the World Wars, and its subsequent failure to decline, has been the further rise in spending worldwide since 1965 or so, a period of general peace and unparalleled prosperity. In the 30 years 1970-2000, government spending in the 15 Organization of Economic Cooperation and Development countries reporting such figures over the whole period, all of which already had well established welfare states in 1970, rose from an average of 32.2 percent of GDP in 1970 to 42.6 percent of GDP in 2000. Needless to say, such a rise in a generally calm and prosperous period is not only obnoxious to free marketers but unsustainable in the long run.

Free marketers wish to privatize as many government costs as possible, but recognize that in practice the cost of caring for the poorest in society, and of fighting crime and terrorism, must inevitably fall to a large extent on government. They therefore wish to minimize those costs, and support policies that do so. Since cause and effect is sometimes unclear in this area, the precise social and diplomatic policies favored may vary. However, free marketers share a general tendency towards restricting immigration, because immigrants have a higher than average poverty rate, and diverse societies have generally higher crime rates than homogenous ones. They favor both abortion and abstinence, because of the cost of unwanted pregnancies, and are mildly in favor of eugenics and genetic engineering, on cost-benefit grounds. They favor stern hard drug and alcohol policies, because of the high cost of associated crime, but are libertarian on soft drugs, prostitution and tobacco. They favor removal of mandatory retirement ages, and tax and other policies designed to postpone retirement and thus reduce the risk of old people outliving their money. They favor limited military activity, but stern deterrent retaliation to outrages such as the Sept. 11 bombings.

(To be continued)

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.