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 wild is a contest for survival in which the largest and strongest typically win. Civilization, by contrast, is defined by rules; rules create markets, and governments generate the rules. As the seventeenth-century political philosopher Thomas Hobbes put it in his book Leviathan:
[in nature] there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.
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 versions. 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 free market functions have far greater impact on an economy and a society. Surely it is useful to debate how much government should tax and spend, regulate and subsidize. Yet these issues are at the margin of the economy, while the rules are the economy. It is impossible to have a market system without such rules and without the choices that lie behind them. As the economic historian Karl Polanyi recognized, those who argue for “less government” are really arguing for a different government—often one that favors them or their patrons.1 “Deregulation” of the financial sector in the United States in the 1980s and 1990s, for example, could more appropriately be described as “reregulation.” It did not mean less government. It meant a different set of rules, initially allowing Wall Street to speculate on a wide assortment of risky but lucrative bets and permitting 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. Even a big event’s most important effects are on how the game is played differently thereafter. The bailout of Wall Street created an implicit guarantee that the government would subsidize the biggest banks if they ever got into trouble. This, as I will show, 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 “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 wish such an examination to be undertaken. It is no accident that those with disproportionate influence over these rules, who are the largest beneficiaries of how the rules have been designed and adapted, are also among the most vehement supporters of the “free market” and the most ardent advocates of the relative superiority of the market over government. But the debate itself also serves their goal of distracting the public from the underlying realities of how the rules are generated and changed, their own power over this process, and the extent to which they gain from the results. In other words, not only do these “free market” advocates want the public to agree with them about the superiority of the market but also about the central importance of this interminable debate.
They are helped by the fact that the underlying rules are 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, or Comcast can gain dominance over a 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 know or 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. Similarly, 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, by contrast, 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 modern capitalism, it is first necessary to address basic questions about how government has organized and reorganized the market, what interests have had the most influence on this process, and who has gained and who has lost as a result. To do so, we must examine the market mechanism in some detail.
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1 In his book The Great Transformation (1944) Polanyi argued that the market economy and the nation-state should be viewed as a single man-made system he called the “Market Society.” In his view, the coming of the modern nation-state and the modern capitalist economies it fostered altered human consciousness, from one based on reciprocity and redistribution to one based on utility and self-interest.
2
The Five Building Blocks of Capitalism
In order to have a “free market,” decisions must be made about
• PROPERTY: what can be owned
• MONOPOLY: what degree of market power is permissible
• CONTRACT: what can be bought and sold, and on what terms
• BANKRUPTCY: what happens when purchasers can’t pay up
• ENFORCEMENT: how to make sure no one cheats on any of these rules
You might think such decisions obvious. Ownership, for example, is simply a matter of what you’ve created or bought or invented, what’s yours.
Think again. What about slaves? The human genome? A nuclear bomb? A recipe? Most contemporary societies have decided you can’t own these things. You can own land, a car, mobile devices, a home, and all the things that go into a home. But the most important form of property is now intellectual property—new designs, ideas, and inventions. What exactly counts as intellectual property, and how long can you own it?
Decisions also underlie what degree of market power is permissible—how large and economically potent a company or small group of firms can become, or to what extent dominance over a standard platform or search engine unduly constrains competition.
Similarly, you may think buying and selling is simply a matter of agreeing on a price—just supply and demand. But most societies have decided against buying and selling sex, babies, and votes. Most don’t allow the sale of dangerous drugs, unsafe foods, or deceptive Ponzi schemes. Similarly, mo
st civilized societies do not allow or enforce contracts that are coerced or that are based on fraud. But what exactly does “coercion” mean? Or even “fraud”?
Other decisions govern unpaid debts: Big corporations can use bankruptcy to rid themselves of burdensome pension obligations to their employees, for example, while homeowners cannot use bankruptcy to reduce burdensome mortgages, and former students cannot use it to reduce burdensome debts for higher education.
And we rely on decisions about how all these rules are enforced—the priorities of police, inspectors, and prosecutors; who can participate in government rule making; who has standing to sue; and the outcomes of judicial proceedings.
Many of these decisions are far from obvious and some of them change over time, either because social values change (think of slavery), technologies change (patents on novel arrangements of molecules), or the people with power to influence these decisions change (not just public officials, but the people who got them into their positions).
These decisions don’t “intrude” on the free market. They constitute the free market. Without them there is no market.
What guides these decisions? What do the people who make the rules seek to achieve? The rules can be designed to maximize efficiency (given the current distribution of income and wealth in society), or growth (depending on who benefits from that growth and what a society is willing to sacrifice to achieve it, such as fouling the environment), or fairness (depending on prevailing norms about what constitutes a fair and decent society); or they can be designed to maximize the profits of large corporations and big banks, and the wealth of those already very wealthy.
If a democracy is working as it should, elected officials, agency heads, and judges will be making the rules roughly in accordance with the values of most citizens. As philosopher John Rawls has suggested, a fair choice of rule would reflect the views of the typical citizen who did not know how he or she would be affected by its application. Accordingly, the “free market” would generate outcomes that improved the well-being of the vast majority.
But if a democracy is failing (or never functioned to begin with), the rules might instead enhance the wealth of a comparative few at the top while keeping almost everyone else relatively poor and economically insecure. Those with sufficient power and resources would have enough influence over politicians, regulatory heads, and judges to ensure that the “free market” worked mostly on their behalf.
This is not corruption as commonly understood. In the United States, those with power and resources rarely directly bribe public officials in order to receive specific and visible favors, such as advantageous government contracts. Instead, they make campaign contributions and occasionally hold out the promise of lucrative jobs at the end of government careers. And the most valuable things they get in exchange are market rules that seem to apply to everyone and appear to be neutral, but that systematically and disproportionately benefit them. To state the matter another way, it is not the unique and perceptible government “intrusions” into the market that have the greatest effect on who wins and who loses; it is the way government organizes the market.
Power and influence are hidden inside the processes through which market rules are made, and the resulting economic gains and losses are disguised as the “natural” outcomes of “impersonal market forces.” Yet as long as we remain obsessed by the debate over the relative merits of the “free market” and “government,” we have little hope of seeing through the camouflage.
Before examining each of the five building blocks of capitalism separately, it is useful to see how political power shapes all of them and why market freedom cannot be understood apart from how such power is exercised, and by whom.
3
Freedom and Power
As income and wealth have concentrated at the top, political power has moved there as well. Money and power are inextricably linked. And with power has come influence over the market mechanism. The invisible hand of the marketplace is connected to a wealthy and muscular arm.
It is perhaps no accident that those who argue most vehemently on behalf of an immutable and rational “free market” and against government “intrusion” are often the same people who exert disproportionate influence over the market mechanism. They champion “free enterprise” and equate the “free market” with liberty while quietly altering the rules of the game to their own advantage. They extol freedom without acknowledging the growing imbalance of power in our society that’s eroding the freedoms of most people.
In 2010, a majority of the Supreme Court of the United States decided in Citizens United v. Federal Election Commission that corporations are people under the First Amendment, entitled to freedom of speech. Therefore, said the court, the Bipartisan Campaign Reform Act of 2002 (commonly referred to as the McCain-Feingold Act), which had limited spending by corporations on political advertisements, violated the Constitution and was no longer the law of the land.
Yet as a practical matter, freedom of speech is the freedom to be heard, and most citizens’ freedom to be heard is reduced when those who have the deepest pockets get the loudest voice. Nowhere did the five members in the majority acknowledge the imbalance of power between big corporations increasingly willing to finance vast political advertising campaigns and ordinary citizens. In practice, therefore, the freedom of speech granted by the court to corporations would drown out the speech of regular people without those resources.
In the first decades of the twentieth century, the court was similarly blind to the realities of power. Conservatives on the court struck down laws enacted to protect the freedom of workers to organize and bargain collectively. In Carter v. Carter Coal Company (1936), the court’s majority ruled that collective bargaining was “an intolerable and unconstitutional interference with personal liberty and private property a denial of rights safeguarded by the due process clause of the Fifth Amendment.” Yet without collective bargaining, workers weren’t free to negotiate their terms of employment; if they wanted a job, they had to accept whatever terms were dictated by the big businesses that dominated the economy. By elevating “personal liberty and private property” over the freedom of workers to band together to achieve better terms, the court tipped the Constitution in the direction of the powerful. Carter was subsequently overruled, but the ideology behind it lives on.
Now, as economic and political power have once again moved into the hands of a relative few large corporations and wealthy individuals, “freedom” is again being used to justify the multitude of ways they entrench and enlarge that power by influencing the rules of the game. These include escalating campaign contributions, as well as burgeoning “independent” campaign expenditures, often in the form of negative advertising targeting candidates whom they oppose; growing lobbying prowess, both in Washington and in state capitals; platoons of lawyers and paid experts to defend against or mount lawsuits, so that courts interpret the laws in ways that favor them; additional lawyers and experts to push their agendas in agency rule-making proceedings; the prospect of (or outright offers of) lucrative private-sector jobs for public officials who define or enforce the rules in ways that benefit them; public relations campaigns designed to convince the public of the truth and wisdom of policies they support and the falsity and deficiency of policies they don’t; think tanks and sponsored research that confirm their positions; and ownership of, or economic influence over, media outlets that further promote their goals.
Under these circumstances, arguments based on the alleged superiority of the “free market,” “free enterprise,” “freedom of contract,” “free trade,” or even “free speech” warrant a degree of skepticism. The pertinent question is: Whose freedom?
The expanding freedom of corporations to do what they want may theoretically enlarge the economic pie for everyone. But in recent years the major consequence of such freedom has been to give bigger slices to the top executives of large corporations and Wall Street banks, and their shareholders, and small
er slices to almost everyone else. Another consequence has been to reduce the freedoms of ordinary working people in the workplace. The supposed freedom of contract is a cruel joke to workers who have no alternatives but to agree to terms mandating arbitration of all grievances before an arbiter chosen by the company, thereby forcing employees to give up their constitutional right to a trial. A corporation that monitors its employees’ every motion from the minute they check in to the minute they check out, even limiting bathroom breaks to six minutes a day, may be a model of free enterprise, but it does not contribute to the liberty of the people working for it.
“Free enterprises” designed to maximize shareholder returns have been known to harm the environment, endanger the health and safety of consumers and others, and defraud investors. Even when such actions are illegal, some corporations have chosen to defy the law when the risks and costs of getting caught are less than the profits to be made. The list of enterprises that in recent years have made such a calculation, wittingly or unwittingly—including BP, Halliburton, Citigroup, and General Motors—makes clear that corporate power will infringe on individual liberties if the potential financial returns are sufficiently high.
The freedom of enterprises to monopolize a market likewise reduces the freedom of consumers to choose. Allowing Internet service providers to reduce or eliminate competition, for example, has made Internet service in the United States more expensive than in any other rich country. Permitting drug companies to prolong their patents by paying generic producers to delay lower-cost versions has kept drug prices higher in the United States than in Canada or Europe. Most of us remain “free” in the limited sense of not being coerced into purchasing Internet services or drugs. We can choose to do without them. But this is a narrow view of freedom.
Saving Capitalism Page 2