Richard Abrams: debunking free marketarianism
by Linda Beale
crossposted with Ataxingmatter
Richard Abrams: debunking free marketarianism
I’ve often written here about the problems of the naive, black-or-white view of economics that has been fostered by the Chicago School and Milton Friedman acolytes who talk of “free markets” as though markets exist in vaccum tubes unaffected by the social, cultural and legal context around them. Debunking that “free market myth” is important, because without understanding the mythology of it most ordinary Americans will continue to be misled and fooled by those who devise and enact policies that affect our everyday lives. From “tea partyers” to Congress, from “the national association of manufacturers” to the US Chamber of Commerce, the “free market” is spoken of with almost reverent tones as though the market works on its own, as though businesses always do everything better than government, as though human liberty were intimately connected with letting mutlinational corporations set their own standards and make their huge profits without protections for the little guys along the way. Wrong, wrong, wrong–this pseudo-concept of free market has little to do with human liberty and lots to do with corporate profits for managers and shareholders. Time that ordinary Americans understood that.
So it is nice to see another academic talking sense on “free markets. See Richard Abrams, historian, on the Berkleley Blog (newly added to the progressive sites of interest blog roll), as he writes “Of ideology, recession and policy paralysis” (March 4, 2010). Here’s a useful excerpt offering “a little history” of our romance with competitive capitalism (and our failures to recognize how uncompetitive corporate capitalism ordinarily is):
For a relatively short span of years in our country’s history, mostly in the middle third of the 19th century, governmental policy withdrew from large areas of economic activity that traditionally had been regulated, leaving it increasingly to the price-and-market system to control the distribution of most resources and rewards. That is, traditionally in the U.S., going back to the start of the nation and continuing well into the 19th century, government – especially at the state and local levels – closely regulated much economic behavior, including of course labor relations, employer liability, and even the price and quality of goods for sale. By the second quarter of the 19th century, government began pulling back, reducing its mediating role between buyers and sellers, and between employers and employees, and yielding to private contract as the main governor of such economic relationships. By mid-century, the American economy did in fact closely resemble the model of “free,” competitive enterprise; i.e., competitive capitalism did work relatively well in regulating most markets and producing something close to a fair and level field among buyers and sellers and other competing interests (but not labor).
But along came the Industrial and Corporation Revolutions. More than a century ago, that is by the last quarter of the 19th century, the transformative growth and mergers of large corporations sharply limited private-sector competition as an effective and fair regulator of markets. As the late dean of American legal historians (James Willard Hurst) put it: “The corporation was the most potent single instrument which the law put at the disposal of private decision makers. In making it available, the law lent its weight to the thrust of ambitions which reshaped not only the business of the country but also its whole structure of power.”
The populist and progressive movements of the late 19th and early 20th century rose in response to the changed structure of power in the country. That is, various commercial and producer interests called on government to intervene, to regulate, to redress the disadvantages that the transformation of the economic scene had brought upon them.
Still, it took almost another half-century before some of the more important economists came to acknowledge that oligopolistic rather than free competition had corrupted their models of the so-called free market system. One such belated acknowledgment came in 1936. That was when economist Arthur Burns, who would later become chairman of the Council of Economic Advisors for President Dwight Eisenhower and then chair of the Federal Reserve Board during the Nixon Administration, made the remarkable discovery that, as he put it: “The widening use of the corporate forms of business organization are bringing, if they have not already brought, the era of competitive capitalism to a close.” That was half a century after the Corporation Revolution had occurred. (It would seem that economists are slow learners.) WE, of course, having experienced the arrival of the megacorporation, and of the conglomerate and multinational corporation revolutions of the past 50 years – WE could have said to Mr. Burns, hey! you ain’t seen nuthin’ yet!
Remarkably, the dominant economic theorists of the past 35 years have continued promoting public policies as if “competitive capitalism” remains vigorously functional. As one dissenting economist (John Munkirs) wrote several years ago, “The enduring belief in the existence of competitive market-structure capitalism is partially explained by the fact that basic economic beliefs are religious in nature, and being so, are difficult to modify.” “Partially explained.” The rest of the explanation has to do with how well the theology serves powerful entrenched interests with privileged access to the media and to politicians. And that privilege has grown all the greater with the recent Supreme Court’s decision overruling more than 100 years of congressional and state legislation designed to limit the power of large corporations to influence elections, and awarding corporations nearly full First and Fourth Amendment rights as “persons.”
(along the same lines, you might also enjoy reading Mark Thoma’s Proponents of a Failed Philosophy” in which he again shows that Fannie and Freddie and the CRA are not the source of the financial crisis, in spite of all the effort by GOP stalwarts to make them so.)
Free markets in a vacuum tube? Electifying!
It’s hard for me to believe that competitive capitalism has come to a close. While free markets are not nearly as fluid in reality as they are in theory, consensus among economists, I think, is that the distribution model in free markets is most efficient.
I would assert that Ms. Beale, like many of the more vocal Tea Partiers, is oversimplifying the Chicago School’s idea of competitive capitalism. She and others seem to combine the school’s “limited government” ideals with an anachro-capitalist ideology not prevalent among most right-leaning economists.
In his writing, Friedman, like Adam Smith, described an important role for government that would let competitive capitalism work efficiently. However, I don’t believe that Friedman, faced with conclusive data implying market failure due to price friction or the like, would have held fast to the black-and-white economics that Ms. Beale, and likely most moderate and pragmatic economists, dislike.
For example, Friedman’s support for the Negative Income Tax, a purely redistributive measure, was a concession that free markets do sometimes come with undesirable externalities or market failures that can be fixed with efficient and perhaps simple economic policy.
It seems that groups on both the left and right have misconstrued the free-market* idea that the Chicago School holds in such high regard, and their dispute is based on that misinterpretation. Abrams is right to suggest that we ought not become religious about our policy opinions when faced with empirical evidence to the contrary. But he has not debunked the basic structure of efficiency (and, to some extent, liberty) in the free market system.
It’s curious though. The Chinese — who are nominally communists — have made enormous economic gains over the past 30 years using free market capitalism as their primary tool. Perhaps the idea of free market capitalism — properly managed — and moderated by occasionally shooting those who capitalist too aggressively in the wrong way — has some merit.
I’m tending toward the belief that free market capitalism works well at allocating relatively scarce capital and resources amongst a broad range of opportunities. The opening of the American West for example. But that it works much less well at providing efficient and effective services in a complex environment. The American Health Care system comes to mind as an area where it has failed dismally.
I think, but haven’t thought it through yet, that incorporation represents a similar form of moral hazard as was seen in the development of “too big to fail” private firms. “Too big to fail” is simply another step in the progress toward seekers of private gain shedding the risk of failure. Corporations allow owners to reap profits, but protect owners assets from the claims of creditors. Recognition that some firms are “too big to fail” performs a similar function. In both cases, firms become bigger as a result of the development, which means the market is less one of price takers with no market power, more one of oligopolies with market power. That is power relative to consumers, new entrants to the market and government.
It seems that a good bit of the interaction between firms and various units of government has to do with firms trying to hold on to benefits while shedding costs, liabilities – responsibility of any kind. This is true of incorporation, anti-regulatory efforts, offshore headquartering, one-off liability limits for oil firms that spill… Add to the list as you see fit. If so, then arguments that regulation, taxation and the like are a deviation from the efficient results that markets would produce are simply wrong in many cases. Intervention is needed to put the cost of business activity inside the business, where theory says it should be.
Nice stated kharris.
Please explain, Robert, what the Chicago school holds in high regard in relation to the business world today, if both left and right misinterpret, and oversimplify (which is of course correct in media and politics).
Vtcodger,
Compared to a ‘command economy’ of the latter half of the 20th century, China is freer on the coast…but are you saying free market allocation is calling the shots. We are getting periously close to not having good words to describe economic activities in context?
“I’m tending toward the belief that free market capitalism works well at allocating relatively scarce capital and resources amongst a broad range of opportunities. The opening of the American West for example. But that it works much less well at providing efficient and effective services in a complex environment. The American Health Care system comes to mind as an area where it has failed dismally”
Whole heartedly agree.
Yes, as Mr Fisher above points out, we must be careful of painting the Chicago school with the wrong brush and we must admit where free market principals (I prefer competitive market principles personally as better descriptor) work better, but the whole exercise requires that a discussion take place. Discussion is an admission that the other guy has something worthwhile to add. Discussion is rare these days when it comes to the legislative bodies working to shape our economic futures
As the article about Sen Sessions points out and as the point kharris makes below points to, modern American conservatives have ZERO interest in nuance. They(and only they) KNOW what the constitution means and corporations aren’t govt created usurpers of competitive markets, they are just the “natural” way a capitalist system rewards those who are too important to hold fully accountable for their actions.
I do not think a real way forward is impossible in this political environment, I’m generally a believer in human creativity and desire for progress, but I do not relish the job of a person trying to find a way to reason with a body that considers Jefferson Beauregard Sessions a worthy spokesman.
He doesnt even think he’s following economic theory. His is the truth while the other guys’ are the theories.
Simply (though probably not comprehensively) what I stated above: that free market practices are in theory most efficient, and that some intervention is needed to correct market failure or to internalize externalities in the price system.
I don’t believe the Chicago school should be thought of as a cut-and-dry set of rules, though I think arguments for and against it often simplify it as such.
***Compared to a ‘command economy’ of the latter half of the 20th century, China is freer on the coast…but are you saying free market allocation is calling the shots.***
Very much so I think. A very large percentage of the population apparently is still living in an agrarian society with a decisive central government — something that Confucious would have understood very well I think.
But the money and most development is in a quasi-western, neo-Japanese, free market economy that the central government seems to just barely have under control. They seem very often to have climbed aboard a rather ill-tempered tiger that they are attempting to steer by pulling on its ears — without annoying it too much.
Caveat: I have never been closer to China than Hong Kong, don’t speak the language, can read it only enough to identify place names and really only know what I read in the English language media.
***I think, but haven’t thought it through yet, that incorporation represents a similar form of moral hazard as was seen in the development of “too big to fail” private firms.***
Sounds right. But at least when a company fails, the investors lose their stake — which can be substantial. Under TBTF, nobody loses anything except the taxpayers.
Its not exactly true that under to big to fail the stockholders did not loose anything. In the Case of city they lost until now about $40+/share. Further the shareholders took a big dilution on the deal to boot, so that future returns will not be as good. Aig sharholders lost about $1150/share (after the reverse split). So the shareholders got to be the patsys in the game having no say on the executive pay, and given the soviet style directors elections no say in the company. (In addition to allowing 5% of shareholders to nominate a director, candidates should be required to state their view on where the company should be going in general terms). So the bailouts just saved the bondholders of the companies, the stockholders took a bath, and the executives mostly came out smelling like a rose.
By the way, I think we have fallen into a bad linguistic habit. Adjectives and adverbs, when used objectively, should narrow the meaning of the modified word. “Free market” as it is used here and elsewhere, often simply means “market”. If we are going to append “free” to “market” every time we say “market”, we are just furthering somebody or other’s propaganda. We do not have and mostly do not want “free” markets. We want markets in which the state enforces contracts when private parties fail to honor them. We want the state to protect constitutional rights – including when those rights are damaged in business activiity. Some of us want externalities to be internalized under law. Whatever the law is, right-thinking people should want it enforced, even if it limits market activity, to make the rules clear to all. All of those necessarily mean that markets are not free. Nor should they be.
Show me a “free” market and I’ll show you a place where a guy without a gun doesn’t stand a chance.
Folks,
Please don’t confuse corporatism or crony capitalism with free markets. It should be apparent all by now that the Ron Paul wing of the Tea Party Movement shares beliefs with Progressives that the current marraige between big business and big government is bad and dangerous.
Finding common ground on key ssues will go a long way to fixing the system.
” We do not have and mostly do not want “free” markets. We want markets in which the state enforces contracts when private parties fail to honor them”………”Show me a “free” market and I’ll show you a place where a guy without a gun doesn’t stand a chance.
Exactly, which is why I try to use the term competitive market instead. A competitive market has rules, referees that enforce the rules and known consequences for failing to follow the rules.
—————
Ben, I’m not sure I agree with you about Rand Paul. He makes some of the right noises at times but then he comes out and calls President Obama mean for criticizing BP for making a “simple mistake”.
This comment sort of addresses another thing that have always bothered me about the history of free markets: The tendency of the largest participants to try to reach a critical mass that allows them to control pricing via artificial scarcity and manipulation. Whether you’re talking about oil, transportation, silver, telecommunications or tulips there have always been attempts to manipulate pricing.
The central question it seems to me is – are these “free” markets actually all that efficient once you subtract out the overt and covert manipulation? Consider today’s supermarket shelf – whether it’s in a Randall’s or Walmart there are significant barriers to entry for any new concept. Retailers more or less end up renting inches of shelf space to existing players; if new products want to reach consumers there are hefty up front fees and subsidies required just to get it on the shelf. This explains why there are 7-12 varieties of Chips Ahoy(tm) and Oreos(tm) etc but very little in the way of actual variety among vendors. Once the major players have their associated niches filled it doesn’t matter how delicious your new cookie might be – you have to give it away for many months just to see if it will sell.
kharris: “By the way, I think we have fallen into a bad linguistic habit. Adjectives and adverbs, when used objectively, should narrow the meaning of the modified word. “Free market” as it is used here and elsewhere, often simply means “market”.
I don’t think so. I think it means, “Sacred Cow market”, something that cannot be criticized, something that dispenses goods and services in accordance with the Hand of Providence. It has nothing to do with whether it is free or not, except that the speaker has an interest in avoiding discussion about it.
Put another way – you don’t have to get Too Big To Fail, just conglomerate your offerings until you’re Too Big To Compete.
First, I want to say that this is one of the most intelligent and balanced comment pages I have ever read… Thanks for your level of talk…
Now, in order for Democracy to work, Bemjamin Franklin said, “Democracy is two wolves and lamb deciding on what to eat for dinner. Liberty is a well armed lamb.”
Capitalism does not arm the workers in a labor market, nor protect the consumers as part of the free market…. It is the role of the govt, in a democracy, to protect the powerless in the free market…
Truth be told, corporations don’t like markets. They seek competitive advantage. If they do it by providing better products, we like it. Then there are all those other ways we don’t like.
Funny part is if you win the game, you become a monopoly. That’s why we have Sherman Antitrust. (banks are excluded of course)
But there was even a problem with that. In Japan they never worried about monopolies because they had an export orientation and believed there was plenty of competition offshore. Their mega corporations caused a lot of grief for even the largest US corporations when they decided to enter the US market in force. Now American corporations got smart ergo the rush to insert themselves as global middle men to China. (well, the Japanese did that first, and Europe followed),
P.S. We have a small independant grocer who sells cookies made by a local bakery. Expensive, but yummy.
I think what is missing in any discussion of the structure of the market we have currently is the conflating of market and all the structures of organization of such for governance.
I don’t know if it is intentional (though I would lean that it is by some) to move the relationship we have with our economic structure toward subplanting our governance structure or at least melding it with our governance structure, but it certainly is happening. It seems to me that inherent in the label “free market” is the instruction that such is how governing is to be structured and function. At minimum it has placed all that is economics equal to governance and thus as one example supports corporate equality of power to the people.
To get to what Kharris suggest requires returning to the thought that We the People as a group have the right by virtue of having the only true power (a power of the collective) to dictate the structure of all that we create. Of course, this requires focusing the people back onto reducing risk and thus improving efficiency (to speak in econ terms) of themself as part of the collective. To do it as individual is to reduce the individual’s power. This is the unstated genius of the “free market” ideology as it relates to increasing corp power. Promoting individual thinking reduces the real power of governance in this nation.
In short, to get to Kharris’ ideal, thinking about an economy has to ask and answer why have an economy? What purpose does it serve Us. What are we trying to achieve with an economy. I think recently (as in 40 years) the answer has been very simpilistic, lacking in maturity of thought and very incompletely: To make money.
The problem with the use of the word efficiency is as the word free when associated with market. What aspect of market as it relates to a purpose of having a market are we trying to make efficient? Efficiency has come to mean least cost to a resultant profit. It seems to serve a market well for a short term. Efficiency has come to mean expediency. An efficient market not only makes profit at the least cost, it does so in the least time. Efficiency has come to mean allocation. An efficient market is one closest to perfection in allocation.
None of these efficiencies will automatically equate to efficiency of life because they are all in reference to market unto its self. I have not read anywhere – and if there is such I would certainly like to know – about the Chicago school presenting a model which presents the efficient market theory as synonymous with an efficient life other than to imply such. Show me the mathematical work that connects the two.
Thus, I had a discussion today with one who was pointing out as a negative how much it will cost to put in the Cape Wind project and how much the electricity will cost. The argument was totally devoid of any issues related to efficiency of life and living.
Cedric…you are the only one with comment hiccups. ???
Apparently so. They are intermittent too. Sometimes it works ok.
divorced one
i would put it a little uglier. what “most ecnoomists” believe is hardly dispositive. “efficiency” is a meaningless noise. at best it means that according to THEORY a “free” market will approach the lowest price for a commodity over a short run, without regard for the “external” or long range harm caused by producing or consuming that commodity. and of course the theory seems to ignore the “waste” created by failed businesss. etc. meanwhile, the theory doesn’t even describe what actually happens right before our eyes on a daily basis.
nor is it obvious that “welfare” is an adequate answer to free market failures.
Codger
of course ‘free markets’ work… up to a point. that is obvious. and the choice is not between free markets and a command economy.
mostly free markets with a fairly heavy hand of government regulation work better than either extreme. and a still better answer would allow for a high degree of family or peasant style cooperation toward a better life style than “free markets” can provide. the marketplace is a good place to sell goods and services. it is not a good place to sell people.
lyle
it’s a little hard for me to see how anyone will “pay for” the devastation along the gulf. except the people who live there and their children’s children perhaps. don’t think that money is going to do it.
kharris
i agree with you about the market. but i don’t agree about the grammar. language is not some grammarians idea of logic. “free market” simply means something different than “market.” and it’s in the minds of the people who use the language that the meaning counts. not the dictionary.
Cedric
but are those cookies efficient?
Ben
wish you were right. but the tea partiers abandoned logic and reality at birth. we ought to have a lot in common with them. but if i remember the religious wars that destroyed europe were fought by people who had a lot in common.
Excellent points divorcedone
Capitalism, of the American variety, has been conflated to be the only economic system congruent with OUR style of democracy (which of course is said NOT to be a democracy but in fact a republic when the “democrats” gain control of our system) and “markets dynamics” has been determined to describe ALL behavior within our system. EVERYTHING reacts to very simple laws of supply and demand, according to certain “thinkers” out there. Applied to our system, if the people DEMAND it the system provides it. So anything not here is simply a result of the fact that not enough people want it !!! Aint it easy figggerin’ things out?
Two articles one by Galbraith, which studies the idea of job markets;
http://www.levyinstitute.org/pubs/ppb36.pdf
and one by Steve Keen looking at the housing market
http://www.debtdeflation.com/blogs/2010/05/11/is-it-all-“supply-demand”/
question the notion that laws of supply and demand can even begin to explain the behavior of job markets and housing markets. If we cannot follow simple Adam Smith thinking to explain a job market or housing market behavior (things which account for the lions share of our sense of economic success in this country) how valuable is the whole supply/demand paradigm in the first place?
Your point about individual thinking versus “collectivist” thinking is poignant. This whole mindset undermines the ability or willingness of people to express what “they” want.
One point of contention
I think the question of “why have an economy” is suggesting that an economy is outside of us. That it is a man made thing. In reality it is only money that is the man made thing. We would have an economy even without money. What we wouldnt have without money is unemployment and people who dont have access to enough money. So in a “moneyed” economy one MUST try to make money or you will perish. What needs to be worked out is not “What is an economy for?” but “What is MONEY for?”
divorced one: “ Efficiency has come to mean allocation. An efficient market is one closest to perfection in allocation.”
About perfection in allocation:
The economy may be viewed as an n-person non-zero sum game. Let’s simplify and look at a two person zero sum game with a pure strategy solution. Would economists view allocation as the result of perfect play in the game as optimal? Correct me if I am wrong, but I think so.
Now suppose that because of the power differential between players, that allocation means that one player starves to death. Would a human being regard that allocation as optimal?
At the margin, yes. I think Marlon Brando once developed a car that will run on them.
Greg
i’d put the question a siightly different way. money is useful. it makes “trade” easier. but what we have now is worship of money. every decision is held to the standard: will it make more money than the other choice.
someone once warned us about serving mammon, but all that is so old fashioned that no one even knows what it means anymore.
Coberly
I’m certainly not suggesting that we SHOULD (or could) do away with money or that its not useful, but I do think its important to see that our real economy underneath the money is what we all should be concerned about. Sometimes money issues hide this. Money is a tool, a very useful tool at times but also one that is able to be used to impoverish people that would not be impoverished in a non monetary economy.
I do think the idea that there would be no unemployment without money is important. Bill Mitchell says this frequently and frankly I’d never thought about that til he said it. Money is what allows someone to actually profit off the work of someone else. In a non monetary economy, no one would be forced to WORK for someone else for their own food/shelter and would develop ways of working WITH others to accomplish these goals. As soon as money is introduced there are people who can substitute money for the actual work that needs to be done to acquire those things.
You’re right about the standard applied to decisions “will it make more money”… which is always framed as a question of efficiency. I wish we were more concerned with EFFICACY instead. Sometimes, in fact possibly usually, the more efficient choice sacrifices efficacy, but it is deemed “worth it.
That warning came from a wise man, but he is often ignored when his ideas arent profitable.
Once again, John K. Galbraith, one of the best known and most read analysts of the real world of US capitalism of my generation, fails to get a mention. Unpersonhood has overtaken him, it seems.