Tag Archives: free market

The End Of Free Markets?

Last month, Time Magazine published an article asserting that the “free market” was effectively dead. The author then went on to speculate over what might replace.it. (For the record, I’m pretty skeptical of definitive pronouncements of this sort–as I used to tell my students, the real world is considerably more complicated than that.)

Time’s conclusion was evidently prompted by a recent meeting in the White House between President Biden and the CEOs of some of America’s largest companies, attended by the head of the U.S. Chamber of Commerce (whose “presence was enough to rock the political landscape” according to the article.)

“Washington’s most powerful trade group is having a political identity crisis,” wrote Politico. Two weeks later, a group of 150 CEOs, unaffiliated with the Chamber, followed suit, throwing their weight behind Biden’s COVID relief bill, which sailed through Congress. They have been similarly supportive of the additional $2 trillion the administration has now proposed for infrastructure spending – but they unsurprisingly don’t want corporate tax rates to be the means for paying for it.

The article went on to say that corporate America’s support for public investment is not a new or temporary phenomenon–rather, it’s evidence of the “most profound realignment in American political economy in nearly forty years,” and it cites the rise of ethno-nationalism on the right and democratic socialism on the left as evidence of a widespread disillusionment with conventional economic wisdom.

For the record, the “conventional economic wisdom” being undermined has only been conventional for some 40 years.

The article traces the evolution of free market absolutism, and acknowledges that prior to the 1970s, most economists had advocated fairly robust government action—countercyclical fiscal spending, management of the currency, tactical protectionism—to create long-term prosperity. The emergence and influence of what the article calls “free market apostles” changed that, and led to what we now call Reaganomics–the notion that virtually any government regulation of the market is unhelpful, if not illegitimate. (This required some cherrypicking of Adam Smith, but hey…)

Interestingly, in what may be the most insightful portion of the article, it connected this shift to an anti-government “free market” philosophy to racial politics. The need for government to take a “hands off” approach coincided with federal efforts to ameliorate some of the most egregious economic effects of state-sanctioned racism.

In any event, while the article argues that public and expert opinion have swung against what it labels “free-market orthodoxy,” what is actually happening–at least among people who are concerned with such things– is a return to a much more nuanced understanding of market economics.

Virtually all rich countries today have mixed economies, in which certain services are “socialized”–i.e., provided communally by government–and others are left to a market subject to reasonable regulation. Americans love “either/or” politics–it’s either capitalism or socialism, freedom or tyranny. That makes for great sloganeering, but bad politics.

The issue isn’t free markets versus socialism. The actual issues confronting policymakers are much more nuanced, and fall into two broad categories: 1) which services ought to be provided by government, and which should be left to the market? and 2) what regulations are needed to ensure the proper operation of that market and which are counterproductive? Just how “free” should markets be?

People of good will will have different answers to those questions, and it would be nice if the ensuing arguments were evidence based–although I’m not holding my breath.

I do know that those evidence-based conversations are not encouraged by headlines suggesting that a new emphasis on anti-trust enforcement or other regulatory activity is tantamount to the end of the free market.

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The Frame Game

It’s a new year, and with it has come a whole new crop of state and local elected officials. It’s early, but the signs are not auspicious.

One of the first official pronouncements from Indiana’s newly inaugurated Governor was a solemnly-delivered promise to stop regulating—to cease issuing administrative rules except when “absolutely necessary.” Cynics noted that the language of the executive order pretty much anticipated business as usual, but they missed the point of the exercise, which was to confirm the new Governor’s conservative, small-government “bona fides.”  And what better way to accomplish that than by demonstrating his profound misunderstanding of his own job responsibilities and the role of the state in the operation of the market?

What is the proper role of government in a capitalist system? It is to act as “umpire” or referee, ensuring that everyone plays by the rules. Wasn’t it Teddy Roosevelt who reminded us that monopolies distort markets? If one company can dominate a market, that company can dictate prices and other terms with the result that free-market transactions—defined as exchanges between a willing buyer and a willing seller both of whom possess the necessary relevant information—will no longer be a genuinely voluntary transaction.

If Manufacturer A can avoid the cost of disposing of the waste produced by his factory by dumping it into the nearest river, he will be able to compete unfairly with Manufacturer B, who is following the rules governing proper waste disposal.

If Chicken Farmer A is able to control his costs and gain market share by failing to keep his coops clean and his chickens free of disease, unwary consumers will become ill.

Most economists agree that in order for markets to operate properly, government must act as an “umpire” in such situations, assuring a level playing field.  They use the term “market failure” to describe  three situations in which Adam Smith’s “invisible hand” doesn’t work: when monopolies or corrupt practices replace competition; when so-called “externalities” like pollution harm people who aren’t party to the transaction (who are neither buyer nor seller); and when there are “information asymmetries,” that is, when buyers don’t have access to information they need to bargain in their own interest.

Policymakers and economists may disagree about the need for particular regulations, or the optimum number of regulations, or the relative costs and benefits of suggested regulations, but most do agree that capitalism requires appropriate regulation. Unregulated markets can lead to a very different system, a system about which I have previously blogged, called corporatism. In corporatist systems, government regulations favoring powerful corporate interests are the result of lobbying by corporate and monied special interests that stand to benefit from them. You might think of it as a football game where one side has paid the umpire to make calls favorable to that team.

The rhetorical framework employed by Governor Pence, where the forces of Leviathan–defined as the government in which he serves–are in opposition to the creative energy of the market, has been a staple of American politics for at least three decades. Unfortunately, it’s an incomplete and misleading framework, and its continued use undermines both the government’s ability to do its job and, ironically, citizens’ ability to impose appropriate limits on government authority.

American politics has devolved into an exchange of bumper-sticker slogans and labels barely masquerading as discussion. Terms like capitalist, fascist, socialist and communist are used as epithets by people who rather clearly have no real acquaintance with the elements of those economic philosophies. The result is a discourse that has more in common with a mud fight than a debate, a faux “conversation” where everyone is talking nonsense, but it really doesn’t matter because no one is listening anyway.

Those of us who teach public administration talk a lot about transparency. An essential element of that transparency is a “back to basics” honest discussion about the role of government. Americans may be talking a lot, but we are not having that discussion.

It’s seductively easy to blame “Washington” or “government” or “the Statehouse” for doing too much or not doing enough or doing the wrong things. It’s a lot more difficult to have an adult discussion with one’s constituents about the complexities and ambiguities of decision-making in the administrative state. I get that: no one was ever elected using a campaign slogan proclaiming “On the one hand…but on the other hand..” (I know. I once tried.)

Until we elect people who are willing to have that honest discussion, however, we will continue to see officeholders—many of whom have spent their entire lives in government—rhetorically biting the hand that feeds them, and continuing to undermine the enterprise they claim to serve by mischaracterizing the questions we face.

Government officials do not face a choice between regulation and the free market. They face a much more difficult question: which regulations will protect the operation of the market and ensure a level playing field? How much is enough, and how much is too much? What are the costs and what are the benefits? Who will bear those costs?

Elected officials who don’t understand that this is the question aren’t likely to endorse sensible answers.

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