Gamestop, Capitalism, and Freedom

[This article was originally published February 12, 2021 at]

Wall Street strategists have called it one of the most extreme of the “sharp short squeezes” in recent decades: at the end of January, shares of video game retailer GameStop skyrocketed, as users of Reddit’s WallStreetBets forum rallied around the stock, which had been a target of short-sellers, including many hedge funds. In general, short-sellers profit by buying and then quickly selling borrowed securities, only to buy them again at a lower price. The investor here expects the price to decrease in the time between her initial sale of the asset and her buy-back. If all goes as planned, then, the short-seller returns the borrowed asset, now lower in value, to the lender, along with any interest or fees due to the lender.

But what happens when all doesn’t go as planned? The amateur traders who mobilized on the WallStreetBets forum threw a wrench in the gears for institutional investors who wanted to short GameStop, effecting what’s called a short squeeze. Through their spontaneously organized effort to shore up GameStop, these individual investors drove the price of the company’s stock to highs that virtually no one expected — least of all the hedge funds shorting the stock. The “squeeze” here is the decision thus faced by those in the short position: do they cut their losses and cover by buying back the stock (which, of course, also drives the stock price higher), or do they double down on their short position, which comes with risk and would require a significant amount of capital on hand. The success of the Reddit army meant staggering losses for many hedge funds, last week witnessing, according to Goldman Sachs, “the largest active hedge fund de-grossing” since the financial crisis triggered by the collapse of the housing market more than a decade ago.

In a controversial response to the flurry of activity around GameStop’s shares, the trading platform Robinhood abruptly imposed new rules specifically addressed to GameStop — a move that has drawn criticism from both the right and the left. Progressive Senator Elizabeth Warren, for example, has raised questions about the extent to which Robinhood’s decision was motivated by its relationships with powerful players like hedge funds. Other progressives, among them Treasury Secretary Janet Yellen, see the case of GameStop as an example of a system failure that suggests the need for further regulations. Yellen has called a meeting of regulatory agency heads, including those of the Fed and the SEC, to discuss the broader implications of the GameStop episode.

The GameStop episode also highlights an important, if all but forgotten, insight about the economic system of capitalism. Perhaps surprisingly, the left and the right make exactly the same mistake about capitalism — that is, both see it as a system of free markets. For the left, this mistake leads them to blame markets and competition for systemic breakdowns and crises. The right, on the other hand, is led to construct contorted apologetics for outcomes under existing capitalism, believing that in so doing, they are defending markets and competition.

If both the left and the right are wrong to treat capitalism and free markets as synonymous, then perhaps the left is wrong to damn the latter. The narrative of today’s left is deeply confused in that it regards the power of capitalists in society as the result of free markets, that is, of too much market freedom and too little government intervention. Nothing could be further from the truth: capitalists are in fact protected from genuine competition by a rigged legal and regulatory system.

Historical American libertarians understood this. The American individualist anarchist Benjamin Tucker wrote that capitalists are “afraid of their own doctrine,” preaching the glories of the free market even as they practice legal and regulatory protectionism. Tucker, the ultimate advocate of the unrestricted freedom of competition, called capitalists “a band of licensed robbers.” He harbored no delusion that capitalists were just the victors in a system of freedom and competition. To free-market libertarians like Tucker, government itself was just the result of the capitalists’ conspiracy (in the formal, legal sense of a group joining together to commit a crime). It was created to protect the interests of capital and allow the predatory, parasitic rules of the few over the many — not to protect citizens or institute law and order.

Anarchists like Tucker argued that the goals of socialism could be accomplished by extending the freedoms currently monopolized by capitalists to all people. If we want a freer and fairer society, Americans of all political stripes must remember the important and radical insight that the politico-economic system we have today isn’t a free market.

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