He then describes “market fundamentalism” as a collection of “unsubstantiated beliefs associated with laissez faire such as the idea that markets (or the invisible hand of the market) can handle all economic issues without government’s help.” In this, he reveals his thesis: “The purpose of the book is to debunk extreme and unfounded assertions attempting to equate the free market ideal and its beneficial properties with actual markets and the economy.” His gripe is with what he calls “contemporary laissez faire,” which to him is different from a free market.
Market power / Shaanan begins each chapter by presenting a myth that is often professed by laissez-faire enthusiasts. Take “Myth 1: America Has Free Markets.” That is a myth because of market failures and “giant corporations,” he explains. And on this point he is right; market power is one type of market failure. It is undeniable that many firms in the real world have the ability to restrict output and set price above the marginal cost of production. This is undesirable in the sense that the level of output on the market will be below the efficient level where consumers’ marginal value of another unit equals the marginal cost of production. To Shaanan, that is not a free market.
Likewise, the presence of big business renders a market unfree. He decries “powerful bureaucratic centers engaged in economic planning”—meaning corporations that “are hardly the epitome of a free market.”
Shaannan emphasizes the ability of big business to undermine consumer sovereignty. Marketing departments influence consumer behavior through conventional advertising and a new ploy of “muddying or blurring the difference between branding and other aspects of life.” Corporations also weaken a consumer’s judgment from the supply side. “Quite often,” for example, “food choices are skillfully manipulated through careful applications of precisely calculated doses of salt and sugar, at times, intended to addict; somewhat at odds with the spirit of consumer sovereignty.”
He documents myriad ways in which corporate practice proves that “we do not have free markets of the Adam Smith variety.” This reviewer is not an Adam Smith scholar; however, I suspect that the founder of economics railed against merchants in general and the East India Company in particular not so much because they were big businesses but because they benefited from “preference” or “restraint” granted by government.
Darwinian jungle / It is conventional to think of laissez faire and the free market as complementary. If laissez faire is a government policy whereby government officials refrain from interfering with the plans of market participants, then—the standard thinking goes—markets will be free.
However, Shaanan argues, such thinking can harm truly free markets. Consider his “Myth 10: Free Market and Laissez Faire Are the Same.”
He writes, “Laissez faire economists usually oppose government antitrust intervention even when used to stop anticompetitive practices and strengthen markets and competition.” It is reasonable for Shaanan to characterize free-market economists as critical of antitrust policy. He is aware of Joseph Schumpeter’s point that monopolists who innovate should not be discouraged, and Richard Lipsey and Kelvin Lancaster’s theory of the second best, though those contributions are relegated to an endnote.
In the body of the text, he claims that free-market economists “justify their opposition to antitrust laws with the argument that such government actions violate the requirement that no coercion be involved in a free market.” That statement underrates the aforementioned critiques of antitrust policy and makes one wonder what’s wrong with opposing coercion. Shaanan writes, “It is not coercion that bothers them but government, or more likely, democratically elected government.” The real agenda of free-market economists, he alleges, is to achieve corporate hegemony.
Misrepresenting market supporters / Shaanan generally does offer an accurate portrayal of free-market principles, but there are troubling occasions when he caricatures and neglects to cite what free-market economists actually write. Consider “Myth 4: Deregulation Always Improves the Economy.” I claim that’s a caricature because the economic way of thinking recommends deregulation when the benefits exceed the costs, which is not always. In his exposition of this supposed myth, Shaanan cites New York Times columnist Thomas Friedman, who is an accomplished writer but not a free-market economist.
Shaanan’s notions and observations of regulatory affairs are debatable. Ponder these ideas:
Those who enjoy freedom from want often object to extending that freedom through government to many others. They describe such attempts to improve the lives of the many, whether it is a minimum wage law, an antiusury law and bans on financial predation, as restricting their freedom.
The author acknowledges that freedom means different things to different people. “To some,” he explains, “it represents freedom of opportunity and choice; to others it represents freedom from want and having the bare necessities such as food, shelter and health care.” The former meaning appeals to free-market economists; the latter to Shaanan.
He does a service by presenting different viewpoints. But it is unhelpful for him to misrepresent the motivation of critics of regulation by saying that they already have their stuff and don’t want other people to have theirs. One reason economists criticize the minimum wage law is that it denies the least productive workers the freedom to work at a wage below the minimum. Having the freedom to work for a low wage does not make one rich, but opting for a low wage is better than being unemployed. The argument against legal maximum interest rates is that they will reduce lending, which harms borrowers. Likewise, it is possible to evaluate “bans on financial predation” by focusing on, say, the difficulty of defining predation, without concern for anyone’s freedom to prey. (By the way, the block quote above footnotes Karl Polanyi’s The Great Transformation as a source, not the work of a free-market economist.)
Shaanan recognizes problems with regulation, such as “regulatory capture,” whereby industry executives co-opt regulators who erect barriers to enter the industry and rubber-stamp price increases. “It is not clear,” he adds, “that regulators have the necessary information to set reasonable prices.” He also admits that deregulation was successful “in some industries.” Nevertheless, he devotes much more space to what he considers problems with deregulation.
“In the airline industry,” he observes, “prices initially declined and new airlines were established; however, several airlines disappeared, at times, because of anticompetitive practices.” Yet, thanks in part to those lower prices, monthly U.S. air carrier passenger travel is up from about 48 million in January 2000 to 60 million last September. Shaanan attributes airline bankruptcies to “anticompetitive practices,” but competitive behavior (price and nonprice) will also reduce the number of firms in an industry. I make these points to dispute the author’s implication that deregulation of the airline industry did not lead to “the expected competitive outcomes,” which is not to suggest that there is no room for improvement in the airline industry.
Housing bubble / There is much to debate over the role of deregulation in the financial crisis of 2008. Shaanan writes extensively about it in “Myth 12: The Government Caused the Crash of 2007-08.” The gist of his characterization of the free-market perspective is this:
The guilty parties within government, although not exclusively, are Fannie Mae and Freddie Mac—the quasi-government mortgage agencies that practically gave away money to people who knew or should have known would not be able to pay their mortgage. The Community Reinvestment Act, created to promote home ownership in defiance of fundamental market principles, played a key role in bringing about this state of affairs.
The author cites several authors to deflect blame from Fannie and Freddie for the economic turmoil. “Perhaps most importantly,” he argues, “[Fannie and Freddie] were not involved in subprime lending—a major factor in the crash—until late in the game (2005), at which point they were followers rather than leaders.” Yet economist Russell Roberts of the Hoover Institution has argued that Fannie was in the game early. He quotes Fannie’s CEO, who said, “Fannie Mae was at the forefront of the mortgage industry expansion into low–down payment lending and created the first 3‑percent-down mortgage.” (“Gambling with Other People’s Money,” Mercatus Center, April 28, 2010.) Moreover, getting in the game late does not preclude making a difference. “Between 2004 and 2006,” Roberts reports, “[Fannie and Freddie] still purchased almost a million home loans each year made to borrowers with incomes below the median.”
Shaanan deemphasizes any damage done by the Community Reinvestment Act (CRA) because “it was private mortgage companies and other financial firms not subject to CRA rules that sold large quantities of subprime mortgages throughout the nation.” I don’t doubt that, but as Charles Calomiris and Stephen Haber have noted, “Community Reinvestment Act loans by banks, as well as the mandates imposed on Fannie and Freddie that effectively forced them to purchase those loans, set in motion a process by which America arrived at debased lending standards for everyone.” (“Strange Bedfellows at the Bank,” National Review, Feb. 4, 2014.) Economists who criticize government policies aim not to exonerate all private-sector actors and lay all the blame on government officials; they indict the two as co-conspirators.
Rent-seeking / Shaanan’s condemnation of cronyism is commendable. He declares:
A major weakness of the economic system is that it encourages rent seeking behavior. This means that some of America’s most talented people devote their energies to requisitioning existing wealth, rather than creating new wealth.
He expounds on this in “Myth 2: A Great Wall Separates Politics and the Economy.” The favors that businesses seek from government officials include subsidies, tax breaks, and bailouts. Here are a few examples:
For many years, oil, gas, ethanol producers and sugar growers have received large government subsidies. Oil and gas companies and mining companies have also received resources at below market prices. Television stations do not have to pay for use of the spectrum. The 2003 Medicare law banned government from bargaining with pharmaceutical companies over prices paid for medicine purchased.
Of course, free-market economists are sharp critics of rent seeking. This journal, for instance, often seems like a quarterly exposé of such shenanigans. Yet Shaanan implies that free-market economists shill for corporations. He alleges, “While Milton Friedman and his followers link laissez faire with the defense of individual freedom, in actuality, it is large corporations’ right to profit that is being defended.” The charge is uncharitable if not unfair. Friedman supported free enterprise, not business, and pointed out that losses were essential to the process.
Readers of America’s Free Market Myths who prefer increased government intervention in the economy will find the book comforting confirmation that corporations exert undue influence, the middle class is stagnating, and greed caused the Great Recession. They might also learn that government officials are not the faithful servants of progressive conceptions of the public interest. Readers who prefer limited government and a larger role for markets, on the other hand, will be challenged to defend the free market against Shaanan’s accusations. Readers of all sorts will learn that cronyism is a real problem and economists of all sorts would do well to battle it.
