
The Phony Free Market - jrs235
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jrs235
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Robert Reich Here's an excerpt from my new book "SAVING CAPITALISM: For the
Many, Not the Few," out 9/29.

"The Phony Free Market"

It usually occurs in a small theater or a lecture hall. Someone introduces me
and then introduces a person who is there to debate me. My debate opponent and
I then spend five or ten minutes sparring over the chosen topic—education,
poverty, income inequality, taxes, executive pay, middle-class wages, climate
change, drug trafficking, whatever. It doesn’t matter. Because, with
astounding regularity, the debate soon turns to whether the “free market” is
better at doing something than government.

I do not invite this. In fact, as I’ve already said and will soon explain, I
view it as a meaningless debate. Worse, it’s a distraction from what we should
be debating. Intentional or not, it deflects the public’s attention from
what’s really at issue.

Few ideas have more profoundly poisoned the minds of more people than the
notion of a “free market” existing somewhere in the universe, into which
government “intrudes.” In this view, whatever inequality or insecurity the
market generates is assumed to be the natural and inevitable consequence of
impersonal “market forces.” What you’re paid is simply a measure of what
you’re worth in the market. If you aren’t paid enough to live on, so be it. If
others rake in billions, they must be worth it. If millions of people are
unemployed or their paychecks are shrinking or they have to work two or three
jobs and have no idea what they’ll be earning next month or even next week,
that’s unfortunate but it’s the outcome of “market forces.”

According to this view, whatever we might do to reduce inequality or economic
insecurity—to make the economy work for most of us—runs the risk of distorting
the market and causing it to be less efficient, or of producing unintended
consequences that may end up harming us. Although market imperfections such as
pollution or unsafe workplaces, or the need for public goods such as basic
research or even aid to the poor, may require the government to intervene on
occasion, these instances are exceptions to the general rule that the market
knows best.

The prevailing view is so dominant that it is now almost taken for granted. It
is taught in almost every course on introductory economics. It has found its
way into everyday public discourse. One hears it expressed by politicians on
both sides of the aisle.

The question typically left to debate is how much intervention is warranted.
Conservatives want a smaller government and less intervention; liberals want a
larger and more activist government. This has become the interminable debate,
the bone of contention that splits left from right in America and in much of
the rest of the capitalist world. One’s response to it typically depends on
which you trust most (or the least): the government or the “free market.”

But the prevailing view, as well as the debate it has spawned, is utterly
false. There can be no “free market” without government. The “free market”
does not exist in the wilds beyond the reach of civilization. Competition in
the wild is a contest for survival in which the largest and strongest
typically win. Civilization, by contrast, is defined by rules; rules create
markets, and governments generate the rules. As the seventeenth-century
political philosopher Thomas Hobbes put it in his book "Leviathan:"

[in nature] there is no place for industry, because the fruit thereof is
uncertain: and consequently no culture of the earth; no navigation, nor use of
the commodities that may be imported by sea; no commodious building; no
instruments of moving and removing such things as require much force; no
knowledge of the face of the earth; no account of time; no arts; no letters;
no society; and which is worst of all, continual fear, and danger of violent
death; and the life of man, solitary, poor, nasty, brutish, and short.

A market—any market—requires that government make and enforce the rules of the
game. In most modern democracies, such rules emanate from legislatures,
administrative agencies, and courts. Government doesn’t “intrude” on the “free
market.” It creates the market.

The rules are neither neutral nor universal, and they are not permanent.
Different societies at different times have adopted different versions. The
rules partly mirror a society’s evolving norms and values but also reflect who
in society has the most power to make or influence them. Yet the interminable
debate over whether the “free market” is better than “government” makes it
impossible for us to examine who exercises this power, how they benefit from
doing so, and whether such rules need to be altered so that more people
benefit from them.

The size of government is not unimportant, but the rules for how the free
market functions have far greater impact on an economy and a society. Surely
it is useful to debate how much government should tax and spend, regulate and
subsidize. Yet these issues are at the margin of the economy, while the rules
are the economy. It is impossible to have a market system without such rules
and without the choices that lie behind them. As the economic historian Karl
Polanyi recognized, those who argue for “less government” are really arguing
for a different government—often one that favors them or their patrons.

“Deregulation” of the financial sector in the United States in the 1980s and
1990s, for example, could more appropriately be described as “reregulation.”
It did not mean less government. It meant a different set of rules, initially
allowing Wall Street to speculate on a wide assortment of risky but lucrative
bets and permitting banks to push mortgages onto people who couldn’t afford
them. When the bubble burst in 2008, the government issued rules to protect
the assets of the largest banks, subsidize them so they would not go under,
and induce them to acquire weaker banks. At the same time, the government
enforced other rules that caused millions of people to lose their homes. These
were followed by additional rules intended to prevent the banks from engaging
in new rounds of risky behavior (although in the view of many experts, these
new rules are inadequate).

The critical things to watch out for aren’t the rare big events, such as the
2008 bailout of the Street itself, but the ongoing multitude of small rule
changes that continuously alter the economic game. Even a big event’s most
important effects are on how the game is played differently thereafter. The
bailout of Wall Street created an implicit guarantee that the government would
subsidize the biggest banks if they ever got into trouble. This gave the
biggest banks a financial advantage over smaller banks and fueled their
subsequent growth and dominance over the entire financial sector, which
enhanced their subsequent political power to get rules they wanted and avoid
those they did not.

The “free market” is a myth that prevents us from examining these rule changes
and asking whom they serve. The myth is therefore highly useful to those who
do not wish such an examination to be undertaken. It is no accident that those
with disproportionate influence over these rules, who are the largest
beneficiaries of how the rules have been designed and adapted, are also among
the most vehement supporters of the “free market” and the most ardent
advocates of the relative superiority of the market over government. But the
debate itself also serves their goal of distracting the public from the
underlying realities of how the rules are generated and changed, their own
power over this process, and the extent to which they gain from the results.
In other words, not only do these “free market” advocates want the public to
agree with them about the superiority of the market but also about the central
importance of this interminable debate.

They are helped by the fact that the underlying rules are well hidden in an
economy where so much of what is owned and traded is becoming intangible and
complex. Rules governing intellectual property, for example, are harder to see
than the rules of an older economy in which property took the tangible forms
of land, factories, and machinery. Likewise, monopolies and market power were
clearer in the days of giant railroads and oil trusts than they are now, when
a Google, Apple, Facebook, or Comcast can gain dominance over a network,
platform, or communications system. At the same time, contracts were simpler
to parse when buyers and sellers were on more or less equal footing and could
easily know or discover what the other party was promising. That was before
the advent of complex mortgages, consumer agreements, franchise systems, and
employment contracts, all of whose terms are now largely dictated by one
party. Similarly, financial obligations were clearer when banking was simpler
and the savings of some were loaned to others who wanted to buy homes or start
businesses. In today’s world of elaborate financial instruments, by contrast,
it is sometimes difficult to tell who owes what to whom, or when, or why.

Before we can understand the consequences of all of this for modern
capitalism, it is first necessary to address basic questions about how
government has organized and reorganized the market, what interests have had
the most influence on this process, and who has gained and who has lost as a
result.

 __*

Should you wish to pre-order: Amazon:
[http://bit.ly/1F2A9PX;](http://bit.ly/1F2A9PX;) Barnes & Noble:
[http://bit.ly/1ihgd0M;](http://bit.ly/1ihgd0M;) IndieBound:
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(Excerpted by permission of Knopf, a division of Random House LLC.)

