Thursday, April 21, 2011

That's not the free market

David Barton recently said:  “It is a principle of free market. That's a Biblical principle, that's a historical principle. We have all these quotes from Ben Franklin and Jefferson and Washington and others on free market and how important that is to maintain. That is part of the reason we have prosperity. This is what the Pilgrims brought in, the Puritans brought in, this is free market mentality.”

Barton was actually talking about net neutrality, arguing that it’s a socialist concept and therefore anti-biblical.  But what caught my attention was his deification of the free market.  He is no more guilty of this than many, many others.  I’m not attacking him in particular, just using him as an example of something that has been bugging the hell out of me for decades.  Ever since I took introductory economics in college and had to read Adam Smith.

For those who haven’t heard of him (which would include almost every freshman I’ve ever taught), he’s the guy who came up with the theory of the free market, in a book called The Wealth of Nations, first published in 1776.  I won’t bother arguing the ridiculousness of claims to biblical or Pilgrim free marketism; the economic lives they lived were so fundamentally different from ours that valid comparisons are not possible.  Nor will I dispute that many of the founding fathers agreed with Smith’s notion of free markets; we know that Adams, Jefferson, Madison and Hamilton all read The Wealth of Nations and there is some evidence that Washington did as well.  From what I’ve read (which isn’t comprehensive), it seems that they agreed with its principles.  My peeve (and it’s much too rank to be a pet) is that most people who talk about the theory of the free market today have NO FRIKKEN CLUE what it actually is.

Smith’s argument was that government shouldn’t go into business.  At the time, the British government was investing madly in expanding the empire for the benefit of a small number of very wealthy corporations.  The theory was that colonies would be sources of raw materials for British industry and provide consumers for British manufactured goods.  As Smith explained:

A great empire has been established for the sole purpose of raising up a nation of customers who should be obliged to buy from the shops of our different producers all the goods with which these could supply them. For the sake of that little enhancement of price which this monopoly might afford our producers, the home-consumers have been burdened with the whole expense of maintaining and defending that empire. For this purpose, and for this purpose only, in the two last wars, more than a hundred and seventy millions [in pounds] has been contracted over and above all that had been expended for the same purpose in former wars. The interest of this debt alone is not only greater than the whole extraordinary profit, which, it ever could be pretended, was made by the monopoly of the colony trade, but than the whole value of that trade, or than the whole value of the goods, which at an average have been annually exported to the colonies.

Taxpayer money was being wasted in vast sums on costly military ventures that would benefit the few and burden the rest of society.  The government of the day argued that this was an investment in the wealth of the empire.  Today, economic historians agree with Smith: the empire cost the British taxpayer far more in cash outlays for troops, weapons, government outposts, etc. than it ever brought back in expanded markets (not just when Smith was writing, but for the entire period of the British Empire).  But the owners and investors of the British East India Company made huge piles of money.  The government spent bucketloads of taxpayer money to make their friends, the already rich, even richer.  Sound familiar?  The notion of the free market was that governments should not promote one business over another.  In Smith’s words:

The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

Smith pointed out, rightly, that governments tend to make lousy business decisions.  Their motives and modes of thinking are all wrong, based not on profit (which encourages economic growth) but on political expediency (which usually doesn’t) or cronyism (which never does).  The only exceptions I can think of in all of world history are Augustus Caesar’s decision to build a fort and a harbor in what is now Yemen and establish a shipping line to bring spices across the Indian Ocean under Roman control, and the Japanese government’s decision in the early post-WWII decades to promote the car industry when the best economists were telling them to stick with lower technology goods.  Those two examples both paid off handsomely.  Otherwise, governments that have tried to guess where the economy should go have generally gotten it wrong.  The more the government gets involved in trying to direct the economy, the worse it gets.  Communist countries of the 20th century are the worst-case examples of how devastating the consequences can be when governments try to make business decisions, with tens of millions of people paying with their lives for poor government choices.

But that’s not what Barton was talking about, nor what the majority of Americans think of when they talk about government and the free market.  They think that a free market means that a government should stay out of the economy altogether.  And that is absolutely NOT what Smith said, and absolutely NOT what the founding fathers meant by a free market.

Smith was pushing his government to stop acting like a business and start acting like a government.  And to Smith, acting like a government meant three things: defense, justice, and public works.  It’s that second one that matters here, because Smith argued that justice includes “protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it,” including particularly the abuses of unregulated business.  He railed against the evil of monopoly, both in general and in specific (the dyers trade secrets and the British East India Company being favorite targets).   He argued that, left to their own devices, corporate interests would always cheat the public, for, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  

Unfortunately, he never managed to write the last book he had planned, the one devoted exclusively to government, so a lot of what we know about his thoughts on regulation comes from interpretation rather than direct statement.  For example, if Smith had not supported government regulation of business, The Wealth of Nations would have been a much, much shorter text: it has over 100 pages just on regulation of the banking industry.  You don’t really have to come out and say “I believe in government regulation of business” when you spend 100 pages describing how that regulation should work.  The real problem Smith had with government regulation was not its existence, but the frequency with which regulations served business interests rather than the people, like when companies get involved in writing the regulations:

The proposal of any new law or regulation of commerce which comes from this order [the business world], ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.  It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Smith never argues against regulation – he assumes there will be regulation – his concern is with the nature of that regulation.  To have a free market, investments must be chosen freely by individuals and businesses, without government instructions or tax incentives, without tariffs or subsidies to artificially manipulate prices, and without the government using tax money to promote particular companies.   That’s a whole big category of government regulation that he opposed.  But, if the economy is left entirely to the companies?  According to Smith, collusion, price-fixing, monopolies, and other forms of anticompetitive behavior will damage the economy and bring everyone down with it.  Government should not direct the economy into one sector or another; that would be an unfree market.  But regulating company behavior?  THAT is the proper role of government in a free market. 

That’s what Adam Smith wrote, that’s what the founding fathers read in The Wealth of Nations, and that is what they meant when they used the term and related language from Smith’s writing.  Governments should regulate business to protect society and the people from the evils of greedy businessmen.  In the American founding fathers’ own language, “We the People of the United States, in Order to… promote the general Welfare … do ordain and establish this Constitution for the United States of America.”  Regulating business is, and was always meant to be, an essential part of the constitutional obligation to promote the general welfare.

If you want to talk about a theory of economics in which the role of the government is to sit back and let business do whatever the hell it wants, go right ahead.  It’s called Libertarianism.  If you want to talk about the theory of the free market, the beliefs of the founding fathers, and the Constitution, you have to acknowledge the essential role of government regulation of economic behavior.

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