How the so-called 'free market' is a dangerous illusion


Robert Reich

December 08, 2023

Welcome to the third week of our 10-week inquiry into American capitalism and the common good. Today I want to talk about a central myth of capitalism — one that has prevented a realistic conversation about it: the myth of the “free market.”

FEW IDEAS have more profoundly poisoned the minds of more people than the notion of a “free market” existing somewhere in the universe, into which government “intrudes.”

In this view, your pay simply reflects what you’re worth in the market. If you aren’t paid enough to live on, the market has decided you’re not worth enough. If others rake in billions, the market has decided they must be worth it.

If millions of people are unemployed or have no idea what they’ll earn next week, that’s also the outcome of market forces.

If corporations decide to lay off their workers and shift jobs overseas, or use computers and software to do what their workers did, that’s also just the market doing its thing.

According to this view, whatever we might do to reduce inequality or economic insecurity runs the risk of distorting the market and causing it to be less efficient.

Although the government may need to intervene in the market on occasion — to prevent, say, pollution or unsafe workplaces, or provide public goods such as highways or basic research — these are thought to be exceptions to the general rule that the market knows best.

The prevailing view is so dominant that it is now almost taken for granted. It is taught in almost every course on introductory economics. It has found its way into everyday public discourse. One hears it expressed by politicians on both sides of the aisle.

The only question left to debate is how much the government should intervene. Conservatives want a smaller government and less intervention in the free market. Liberals want a more activist government that intervenes more in the free market.

BUT THE PREVAILING VIEW, as well as the debate it has spawned, is utterly false.

There can be no “free market” without government. The “free market” does not exist in the wilds beyond the reach of civilization.

Competition in the real wild is a contest for survival in which the largest and strongest typically win. As the 17th-century political philosopher Thomas Hobbes put it in his book Leviathan (chapter 13),

“[in nature] there is continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.”

Civilization, by contrast, is defined by rules.

Rules create markets, and governments generate the rules.

A market — any market — requires that government make and enforce the rules of the game. In most modern democracies, such rules emanate from legislatures, administrative agencies, and courts.

Government doesn’t “intrude” on the “free market.” It creates the market.

The rules are neither neutral nor universal, and they are not permanent. Different societies at different times have adopted different rules.

The rules partly mirror a society’s evolving norms and values, but also reflect who in society has the most power to make or influence them.

Yet the interminable debate over whether the “free market” is better than “government” makes it impossible for us to examine who exercises this power, how they benefit from doing so, and whether such rules need to be altered so that more people benefit from them.

THE SIZE OF GOVERNMENT is not unimportant, but the rules for how the market functions have far greater impact on an economy and a society. While it’s useful to debate how much the government should tax and spend, regulate and subsidize, these issues are at the margin of the economy. The rules are the economy.

It is impossible to have a market system without such rules and without the choices that lie behind them.

Those who argue for “less government” are really arguing for a different government — often one that favors them or their patrons.


So-called “deregulation” of the financial sector in the United States in the 1980s and 1990s, for example, could more appropriately be described as “re-regulation.” It did not mean less government. It meant a different set of rules.

Those new rules initially allowed Wall Street to speculate on a wide assortment of risky but lucrative bets and permitted big banks to push mortgages onto people who couldn’t afford them.

When the bubble burst in 2008, the government issued rules to protect the assets of the largest banks, subsidize them so they would not go under, and induce them to acquire weaker banks. At the same time, the government enforced other rules that caused millions of people to lose their homes. These were followed by additional rules intended to prevent the banks from engaging in new rounds of risky behavior (although in the view of many experts, these new rules are inadequate).

The critical things to watch out for aren’t the rare big events, such as the 2008 bailout of the Street itself, but the ongoing multitude of small rule changes that continuously alter the economic game.

The bailout of Wall Street created an implicit guarantee that the government would subsidize the biggest banks if they ever got into trouble again. This gave the biggest banks a financial advantage over smaller banks and fueled their subsequent growth and dominance over the entire financial sector — which enhanced their subsequent political power to get rules they wanted and avoid those they did not.

The so-called “free market” is a myth that prevents us from examining these rule changes and asking whom they serve. The myth is therefore highly useful to those who do not want such an examination and who don’t want the public to understand how power is exercised and by whom.

THESE UNDERLYING REALITIES are particularly well hidden in an economy where so much of what is owned and traded is becoming intangible and complex.

Rules governing intellectual property, for example, are harder to see than the rules of an older economy in which property took the tangible forms of land, factories, and machinery.

Likewise, monopolies and market power were clearer in the days of giant railroads and oil trusts than they are now, when a Google, Apple, Facebook, Amazon, or Microsoft can gain dominance over an entire network, platform, or communications system.

At the same time, contracts were simpler to parse when buyers and sellers were on more or less equal footing, and could easily discover what the other party was promising. That was before the advent of complex mortgages, consumer agreements, franchise systems, and employment contracts, all of whose terms are now largely dictated by one party.

Financial obligations were clearer when banking was simpler, and the savings of some were loaned to others who wanted to buy homes or start businesses. In today’s world of elaborate financial instruments, it is sometimes difficult to tell who owes what to whom, or when, or why.

***

Before we can understand the consequences of all of this for why American capitalism has become so rotten, it’s necessary to understand how the market has been reorganized in recent years — what interests have had the most influence on this process and who has gained and who has lost as a result.

In other words, we need to understand how the exercise of power has altered the exercise of economic freedom.

Next Friday, we’ll look at freedom and power.

Robert Reich is a professor at Berkeley and was secretary of labor under Bill Clinton. You can find his writing at https://robertreich.substack.com/.