There’s no such thing as “free” markets

Posted on March 1, 2015

Last week, when the Federal Communications Commission voted for net neutrality and changed the way the Internet is policed, conservatives fell back on their favorite myth. The right wing media raged that it’s “a blow to the free market system.…

But there’s no such thing as “free” markets.

Somehow this neoclassical, theoretical concept plays a central role in contemporary politics. When we progressives try to explain our economic policies, we face the fundamental challenge that typical American voters believe in “free” markets. And why shouldn’t they? They hear no real arguments to the contrary.

But the truth is, the free market is a fairy tale, a fraud, a rhetorical device. American markets are not, and never were, free of government influence. Just open up the business page of any major newspaper and see for yourself. One company seeks a government subsidy. Another is forced to disclose finances by the SEC. The Fed changes the prime rate, affecting everyone’s ability to borrow. The Administration proposes a treaty that would reward some industries over others. The government is always involved, always biasing market results, always nudging and twisting and bumping around the supposedly invisible hand.

We’re all familiar with some of the government structures that regulate markets to protect employees, consumers, stockholders, and competing businesses. The government inspects food and drugs, keeps unsafe consumer products off the market, limits air and water pollution, requires minimum safety and health standards for employees, prevents monopolies, protects consumer privacy, insures bank deposits, and on and on.

Voters are less familiar with—or think less about—the many government programs that the rich and powerful use to warp markets in their favor. Let us count the ways.

  1. Direct subsidies: Federal, state and local governments hand out trillions of dollars in payments and tax breaks to some industries but not others, and to some companies but not others within the same industry. There are subsidies for corn and wheat, oil and gas, drug marketing, chicken farming, auto manufacturing, and even tobacco growing. None of those are “free” markets.
  2. Indirect subsidies: There are many kinds of indirect subsidies. For example, the federal government funds research and development and then hands over the products to pharmaceutical, electronic, telecommunications, and defense corporations. State and local governments provide loan guarantees that lower the cost of borrowing for select businesses. Local governments pick up private construction costs, building a road and a sewer line right to the door of a company’s new building. They all warp markets.
  3. Sweetheart contracts: Every year, about 40 percent of all federal government procurement payments—more than $100 billion—are paid to just twenty companies. Many of these contracts are one-sided deals, and the defense industry is, of course, the worst offender. Does anyone believe the military sector is a “free” market?
  4. Health care markets: Nothing in health care is a free market, in large part because the person who selects the particular medical procedure, device or drug—the doctor—is different from the person who pays for it. Except when corrected by facets of the Affordable Care Act, companies often have a greater incentive to invest in marketing, lobbying, litigating, and creating copy-cat drugs than to deliver the best medical care.
  5. Noncompetitive markets: Sometimes government creates monopolies. The casino industry, for example, has a market that could hardly be more contrived; it’s invented by state governments, and it directs fortunes into the pockets of a select few politically connected companies and individuals.
  6. Rigged markets: Through government action or inaction, some markets are simply rigged to favor one party over another. There may be no way to bargain on key contract terms (like the fine print in rental or sales contracts), one party may have no leverage (like employees earning the minimum wage), or legislation may have shifted financial risk from one party to another (like tort “reform” and bankruptcy law).
  7. Protection from imports: The United States leads the world in protectionism, with conservatives enthusiastically jettisoning free market principles to protect their favorite domestic businesses. In a 1987 speech, then treasury secretary James Baker bragged that Ronald Reagan “has granted more import relief to U.S. industry than any of his predecessors in more than half a century.”Incidentally, tariffs on sugar imports do more than just increase the price of sugar and protect the Archer Daniels Midland corn syrup business. You can taste the market distortion every time you drink a Coke, Pepsi, or other soft drink made with corn syrup instead of better-tasting cane sugar.
  8. Tax avoidance: The corporate income tax structure is riddled with loopholes. One study found that 26 of the nation’s largest corporations paid zero federal income tax from 2008 to 2012. Part of this is because governments rarely adjust tax law to combat avoidance schemes, as they should. Part is due to the lack of tax enforcement. It’s no accident that the right-wing has significantly cut the IRS budget; they’re knowingly helping wealthy tax cheats.
  9. Barriers to labor organizing: The obvious approach to creating healthy labor markets is to encourage the formation of unions. But federal (and now often state) law tilts strongly anti-union. In a labor-organizing election, employers are given the upper hand, and they take full advantage of it. We have neither a free labor market nor a fair one.
  10. Corrupt markets: Obviously, the “me generation” always “looking out for number one” has taken its toll. Outright illegality runs rampant throughout our economy, in many cases willfully overlooked by regulators. Even the most extreme proponent of laissez-faire economics would have to admit that white-collar crime corrupts markets.

If conservative economists actually believed in free markets, wouldn’t they be railing against all the market distortions caused by government subsidies and preferences? But they don’t. That’s because they don’t really want government to keep its nose out of economic decisions—they want the government to step in and prejudice the market in their favor. They use the term free market not as a philosophy to follow but as a rhetorical device—albeit a hugely effective one—to skew public opinion toward conservative economic policy.

So Americans are stuck in the wrong debate. The question is not whether government should be involved in the marketplace. It is. The question is, what principles should guide government’s involvement? (I’ll suggest an answer next week.)