Blogs > Steve Hochstadt > The Great Myth of the Free Market

Oct 28, 2015

The Great Myth of the Free Market

tags: free market,religion,capitalism,regulation,Adam Smith

In 1776, in “An Inquiry into the Nature and Causes of the Wealth of Nations”, Adam Smith developed a new theory of economics, which we now call the theory of the free market. He wrote that a man should be “free to pursue his own interest his own way.... By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this ... led by an invisible hand to promote an end which was no part of his intention.” That useful end was economic progress for the whole nation.


Smith was an economic genius who realized that the restrictions placed on their economies by 18th-century European monarchies stifled productivity and the creation of wealth. If people were allowed to seize opportunities that they perceived, to assess risk and seek reward, the larger economy would grow more rapidly than if rulers dictated how commerce should proceed.


The moral superiority of free choice over monarchical fiat was indispensable to Smith’s argument. As a partner to the demand for more political freedom, the promotion of the free market was inherently democratic.


Since then, no economic system has equaled capitalism in creating wealth, for nations and individuals. The “free market” is such a sweet phrase that it has become a magic incantation, a panacea for every economic problem. The free market as an idea appears to have attained religious status. Proponents of an unfettered market invoke their version of God’s will in favor of their political position against any government regulation, for example, laws protecting the environment. The lineup of conservative presidential candidates has nothing good to say about any economic regulation.


The people who raise the unregulated market to a religious commandment support political advocacy with mythical stories, beginning with Adam Smith. Smith did not have absolute faith in the “invisible hand”. He openly preached that governments must play a significant role in the economy.


Governments should provide roads and bridges and other public works which individuals or private enterprises are not likely to build. He praised regulation of the labor market, but only when it supported workers. “When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.... Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.” Smith distrusted the motives of employers, who sought, he believed, to keep wages as low as possible, “always and everywhere”.


He not only supported taxation, but favored a progressive tax system. “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.... It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion.”


By obscuring these uncomfortable elements of Adam Smith’s theory, free market absolutists offer another myth: regulation has only costs, not benefits. Every regulation increases rather than decreases the costs of doing business, otherwise businesses would undertake these measures themselves. But modern life is dependent on the greater benefits of regulation: food products free of disease, rivers with live fish, air healthy to breathe. Regulations took the lead out of gasoline and paint. Regulations keep harmful drugs, like thalidomide, off the market.


Regulations put seat belts and air bags into cars, saving countless lives, a good example of their value. Every state but one legislates that adult drivers must wear seat belts. That state, New Hampshire, has the lowest usage of seat belts in the country. Live free and die.


Car manufacturers were successful in delaying the deployment of the air bag, costing thousands of lives. In 1983, the Supreme Court ruled 9 to 0 in favor of government-mandated air bags, writing: “For nearly a decade, the automobile industry waged the regulatory equivalent of war against the airbag and lost — the inflatable restraint was proved sufficiently effective.”


The writers of our Constitution, 13 years after Smith published “The Wealth of Nations”, enshrined the mutual necessity of freedom and regulation into Section 8, “The Congress shall have Power ... To regulate Commerce with foreign Nations, and among the several States”.


We can joke about the conservative effort to deregulate our economy. “How many conservatives does it take to screw in a light bulb?” Answer: “None. If the government would just leave it alone, it would screw itself in.”


But saving lives is no joke.


Steve Hochstadt

Jacksonville IL

Published in the Jacksonville Journal-C ourier, October 27, 2015

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