The Myth of the Free Market

John Cassidy’s article in this week’s New Yorker offers an unanswerable argument against what he calls “the myth of the free market” that flouts at common misconceptions among Americans by walking his reader through many little discussed but unavoidable historical facts.

His essay revolves around the popular claim that China’s burgeoning authoritarian model of state capitalism is supplanting the Western paradigm of laissez-faire by influencing emerging economies to emulate its formula. Cassidy argues that this is probably true only in a political sense, as developing countries such as Russia and Cambodia are employing China’s strategy.

But economically, this notion is false. Cassidy turns the argument on its head by explaining that if you analyze the historical record it becomes clear that China is merely doing what all powerful Western nations, especially America, have done to transcend the status of developing nations and become significant economic forces during the last few centuries—use state power to intervene in markets and protect domestic interests. This is what has enabled countries like the United States and Britain to emerge as financial superpowers, not free markets.

Cassidy’s case is extremely compelling. He begins his piece by pointing out that today’s trade skirmishes between China and the West are nothing new. Back in the 18th century, Britain resolved its debt crisis with China by forcing the latter to import opium from the London-based East India Company, which had a government guaranteed monopoly over the drug. When the Chinese finally resisted and banned the substance in 1839, England launched the Opium War, slaughtering thousands and ensuring that the trade would continue. Ironically, the English Foreign Minister, Lord Palmerston, cast the bloodshed as a measure to protect free trade, but it was obviously a classic case of government intervention in which an empire used its military might to secure a market for itself and balance its budget.

This is not an isolated instance of such behavior. Indeed, as with America, Britain became an economic world power through state capitalism. As Cassidy explains, the origin of its economic emergence dates back to the 14th century, when King Edward III “banned the import of woolen cloths from Belgium and Holland, the market leaders in textiles.” During the subsequent centuries, “Britain’s trade policy was geared towards promoting its wool and cotton industries” by placing duties “on exports of raw wool, to encourage British merchants to move into the more lucrative business of assembling finished cloths.”

Furthermore, in 1721 England placed tariffs on all manufactured goods, thus “erecting a protective wall around businesses that created the Industrial Revolution,” according to Cassidy. This policy continued, in some cases exceeding rates of 50%, until the 1860’s, “when the country’s competitive advantage in textiles, steel, and other industries was firmly established.”

The pattern of America’s rise as a financial force mirrors this approach. During the nation’s birth Congress imposed tariffs to protect important industries, and in the War of 1812 it “doubled import duties on manufactured goods, to twenty-five percent,” to quote Cassidy. This trend would continue to escalate for decades, as Congress raised tariff rates to 40% a few years later, and finally, Lincoln lifted the levies to 50%. The Republican Party (in stark contrast to today’s disgraceful incarnation of the party of Lincoln, which champions free market orthodoxy) extended this policy for the ensuing 50 years, and during that interval America eclipsed Britain and Germany as the leader in the steel, iron and chemical industries, all of which were protected by Congress.

In 1791, Alexander Hamilton introduced numerous policies to industrialize the U.S. economy, such as subsidizing exports, awarding prizes for inventions and investing public money in infrastructure. During the latter half of the 19th century the federal government played a crucial role in opening the Great Plains and encouraging Westward expansion with massive land grants and cheap funding. And, as Cassidy explains, “The Central Pacific and Union Pacific railroads were both government-chartered companies that benefitted from large land grants, not to mention vast sums in government loans.”

In recent years, Cassidy adds, government-induced innovation has come largely from the Pentagon, which almost exclusively works with American military contractors. To take two salient examples, the Internet was created by DARPA, and the Boeing 747 was modeled after military aircraft.

As Cassidy says, “the fact is that not one of today’s economic powers practiced free trade during its developmental stage.” As such, the idea that China’s version of state capitalism threatens to overtake the Western model as the best approach for developing nations is self-contradictory. By extension, Cassidy argues that the prospect of China starting a trade conflict with America seems unlikely, given that its growth depends almost entirely on cheap exports.

The biggest threat, as he sees it, is not the rise of China’s authoritarian system of state capitalism, but the pervasive ignorance-inspired delusion among Americans that the free market is the only driver of prosperity. This dangerous perception is on full display with the successful fear-mongering about “government takeovers” dominating the health care debate (the new laws feature no such thing even though a stronger governmental presence is needed), and when conservatives convincingly make the absurd claim that the stimulus is a socialist program that created no jobs. In order for us to retain our position of power, argues Cassidy, we must continue our historical practice of implementing smart government intervention to propel the economy.

But why is this concept nearly impossible to communicate nowadays? My theory is that the fall of the Soviet Union has not only derailed communism but ironically may have done the same to capitalism. Most people in the West perceive the outcome of the Cold War as proof that only free markets are sustainable. There’s a moment in Seinfeld when Kramer befriends a persuasive communist and, playing Santa Claus at a local toy store during Christmas, he admonishes the kids to reject their holiday presents because they were produced in sweatshops. The children protest not on a materialist ground, but on a philosophical level, shouting down the seemingly discredited heresy of criticizing free trade and prompting the store manager to kick Kramer out.

Sadly, as his recent capitulation to conservative obstructionism in the name of free markets indicates, President Obama apparently will not be able to transcend the poisonous pro-unfettered capitalist narrative popularized by Reagan, even though it nearly destroyed the global economy in 2008 and has led to mass bank runs and chronic boom-bust cycles every decade since its rise to prominence, in direct contrast to the absence of such catastrophes during the 40 years between FDR and Reagan.

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