One of the most hazardous myths in current policy debates is the idea that there can ever be anything such as a free market.
I think we need a healthy, active debate about the role of regulations, and regulatory regimes, and I believe that policies always need to be re-visited. But I object to the flawed myth that there can ever be such a thing as an economy that exists independent of government intervention. Governments issue money, set borrowing rates, negotiate trade treaties (including the elimination of import/export taxes), and protect property. So the most basic flaw in the myth is the idea that markets could exist at all without significant and continuous government intervention.
However, many free-marketeers do accept that governments should play a “night-watchman” role by maintaining the police and the courts to protect private property rights, but refrain from any further interference. Free-marketeers invoke Adam Smith as a sort of patron saint of economic liberties. But did Smith advocate “free” markets? Did he advocate deregulation? Not according to the economic historian Robert Heilbroner, nor Amartya Sen, nor Robert Reich.
Smith did advocate liberation of the markets from direct control ans substantial meddling by aristocrats and royalty. He argues for commoners to be allowed to engage in peer-to-peer private contracts as a matter of right, and for tax-funded public courts to arbitrate over those contracts when disputes arose. Americans implemented this specific right as the Seventh Amendment to the U.S. Constitution. Smith also argued that if the nobility ‘took their hands off’ of local markets, an ‘invisible hand’ would continue to govern markets without direct intervention. This metaphor is often treated as mysterious, but Smith was unambiguous and explicit in what he meant by the ‘invisible hand’ as a market mechanism. It is a balancing tension: on the one hand, liberated producers try to get the highest possible price for the good they are selling. On the other hand, liberated consumers are willing to comparison-shop to get the best value, the lowest price they can for what they are trying to buy. Smith argued that this healthy tension promotes productivity, efficiency, and innovation through competition between producers. So: Smith did advocate a kind of deregulation: liberation from a Soviet-level direct control of licenses and contracts by aristocrats in the 1700s. But what sort of market was Smith advocating? A competitive market.
I repeat: Adam Smith advocated competitive markets.
The other possibility–the condition of market failure for Smith–would be monopolistic markets, because the balancing tension of price-maximizing buyers cannot be tempered by the comparison-shopping effort of bargain-hunting consumers if they lose the choice of competing providers. So I repeat: Adam Smith believed that monopoly-control over markets constituted market-failure. In fact Smith argued for a certain quid-pro-quo: commoners should get the right to freedom of contract, in which public courts would enforce those contracts if necessary. In exchange for this public service, courts and the police-power of government should be used to keep markets competitive by preventing monopoly-level consolidation.
Adam Smith believed in market-regulation. In fact he wrote about it in Wealth of Nations.
Speaking of which, the full title of that book is Enquiry into the nature and causes of the wealth of nations. Rather than individual, aristocratic wealth–which was well-understood at the time–Smith was trying to figure out how whole nations could grow their economies. Smith framed the question of economic growth which remains central to public debate across the world, 230 years later. Heilbroner (1953) argues that Smith was invoking the seventeenth-century notion of commonwealth in his thinking about the whole nation, rather than the wealth of the elites alone.
There is plenty of evidence that deregulation leads to market-consolidation towards oligopoly, if not monopoly. Consider mobile-phone companies, oil companies, banks, and media-delivery companies in the U.S. as of 2014. In some respects, ExxonMobil is like a Soviet state-owned enterprise in size, scope, and lack of innovation. The differences? ExxonMobil prioritizes profit-maximization, and it is only answerable to the people rich enough to be major shareholders.
So from a preponderance of cases, we know that deregulation enables market-consolidation to occur. Therefore, free-market policies lead directly to what Adam Smith would have regarded as market-failure. Free-marketeers can keep declaring that ‘we should get government out of the way of business,’ but advocates of regulation should invoke Adam Smith in favor of regulation, in favor of competition, and against monopolism.
We should also start calling America’s 1% “oligarchs.” The Koch brothers are oligarchs, just like the Russian plutocrats. Mitt Romney is an oligarch.
But there is another issue to address. Was Adam Smith wrong? Does deregulation and market-consolidation actually promote economic growth, as free-marketeers contend? If we cripple the ‘invisible hand’ by removing the consumer’s ability to choose, does GDP go up? Here the results are mixed. The strongest case I can find in favor of FreeMarketism is post-Thatcher Britain, where major acts of deregulation seemed to contribute to London emerging as the financial capital of Europe. It is entirely possible that Britain from 1946-1979 was indeed too regulated. Certainly I would argue that Brezhnev’s regime in the USSR was far too interventionist; the regime itself acted as the growth-crushing monopoly. I make no apologies for extremist ideologies; what I am pointing out is that free-marketism is also an extremist ideology. It is totalitarian: free-marketeers believe in a one-size-fits-all, totalizing solution to the problem of promoting economic growth. Among Liberal-capitalist countries, high levels of wealth correlate pretty well with increasing levels of government regulation and interventionism: Japan, South Korea, Taiwan, Singapore, the Scandinavian countries and northern Europe. Coming from the other direction, the People’s Republic of China is deregulating, but only to a limited degree from a previously extreme condition. The regime, at all levels in China, remains far more interventionist than in the United States. At least for thirty years, that high level of interventionism has enabled sustained high levels of economic growth.
That does not mean that China’s level of market-interventionism is “the best solution” to the problem of economic growth. The flaw is the free-marketeer’s assumption that there must be One Best Solution for everywhere. In fact there is some evidence that every country should repeatedly revise the role of the government in its markets, as economic conditions change over time. Even China’s leaders seem inclined to revise their economic policies and practices, because their society is changing due to the growth itself. But the case of China does mean that the orthodox, free-market credo of “deregulate everywhere, all the time” is invalid in the face of overwhelming evidence.
The most pure example of deregulation today? Somalia. It is close to the free-marketeers’ ideal of a country where government intervention in the market is nonexistent. So…does anyone want to argue that Somalia exemplifies the policy model the U.S. should follow?