The Myth Of The Free Market – OpEd

 July 4, 2023 

By Dean Baker

The media are really going overboard in telling us the days of the free market are over with Biden’s new economic policies. President Biden has quite explicitly implemented policies intended to reshape the direction of the economy, pushing clean energy and more domestic production of advanced semiconductors and other products. He also has reinvigorated anti-trust policy, which was largely shelved by his predecessors.

But the idea that the policies of the last four decades were somehow a matter of just leaving things to the market is a grotesque lie that no person remotely familiar with economic policy should be repeating.

The Finance Industry Cesspool

I will reverse the usual course of my diatribe here and start with the financial sector. Suppose back in 2008-09 we let the market work its magic when Citigroup, Bank of America, and other financial giants were effectively bankrupted by their own greed and stupidity. We would have a radically downsized financial sector, with many fewer people earning seven and eight-figure salaries at banks. (No, we would not have had a Second Great Depression. Keynes taught us how to prevent a depression: spend money.)

We would also have a much smaller financial sector if we taxed sales of stocks, bonds, and derivatives like we taxed sales of clothes, cars, and furniture. It is the power of the financial industry, not the free market, that tells us that these financial transactions should be exempted from the sales taxes that apply to just about everything else we buy.

There is also nothing “free market” about the special tax treatment that some of the richest people in the country get when they have “carried interest” income as partners in hedge funds or private equity funds. Nor is it the free market when these funds prey on public pension funds, promising high returns that they rarely deliver.

“Free Trade” is a Story for Children and Elite Pundits

The “free trade” deals of the last forty years had little to do with free trade. We did want to remove trade barriers on manufactured goods, in order to subject our manufacturing workers to direct competition with low-paid workers in the developing world. This had the predicted effect of costing us millions of manufacturing jobs, and substantially reducing the pay of the jobs that remained.

But we could have made the focus of free trade removing barriers that protected doctors, dentists, and other highly paid professionals from competition with their lower paid counterparts in the developing world. This would have had the effect of reducing jobs and pay for U.S. born professionals.

For some reason, this was never a part of our “free trade” agreements. We could speculate this was because the people deciding on trade policy were far more likely to have friends and family members who are highly paid professionals than friends and family members who were autoworkers or textile workers, but that would be rude. In any case, this part of “free trade” deals was about a having a freer trade in a particular sector of the economy, where the predicted and actual effect was to drive down the pay of non-college educated workers.

Patent and Copyright Monopolies

The other really big part of our free trade deals was to make patent and copyright monopolies, and related protections, longer and stronger. It is incredibly Orwellian that these government-granted monopolies are somehow discussed as being the free market.

And, their impact is not some small sideshow. We will spend over $550 billion this year on prescription drugs. If drugs sold in a free market, without patents or related protections, the cost would almost certainly be less than $100 billion. The difference of $450 billion is more than four times the annual food stamp budget. It’s more than half of what we spend on the military each year. It comes to more than $3,000 a family.

If we projected out over ten years, and accounted for growth in spending, it would be close to $6 trillion. That is six times President Biden’s widely touted infrastructure program.

And, it has a huge impact on inequality. The people who benefit from these monopolies are many of the country’s richest people. Bill Gates is the poster child. He would likely still be working for a living if the government didn’t threaten to arrest people who copy Microsoft software without his permission.

Just since the pandemic, we created five Moderna billionaires by paying the company to develop vaccines and then letting them keep control over the vaccines. Don’t try to tell us that is the free market.

By my calculation we transfer over $1 trillion a year to the beneficiaries of patent and copyright monopolies, compared to a situation where items like drugs, medical equipment, computer software and other items sold at their free market price. This is around 40 percent of all after-tax corporate profits.

Why the Free Market Lie?

I could on at great length laying out other areas where the government has structured the market in ways that redistribute income upward. (See Rigged, it’s free.) It should be obvious to anyone at all familiar with economic policy over the last four decades that it was not about the free market, it was about structuring the economy in ways that made the rich richer.

It is understandable that the proponents of these policies would like to claim it was just the free market. After all it sounds much better to tell the public, the vast majority who are losers from these policies, that “the market creates both winners and losers,” as opposed to saying, “we’re implementing polices to transfer money from you to us.”

But why do people who oppose these policies go along with the hoax? There apparently is a big market for this sort of pretending in major media outlets, but it would be nice if we could get more reality-based policy discussions.

This first appeared on CEPR.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.