The Free Market Isn’t Really Free

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, most 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 student debts.

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.

Featured image by Chad Person. 

Excerpted from SAVING CAPITALISM by Robert B. Reich. Copyright (c) 2015 by Robert B. Reich. Reprinted by permission of Vintage Books, an imprint of the Knopf Doubleday Publishing Group, a division of Penguin Random House, LLC. All rights reserved.