Monday, October 29, 2007

Why Are Free-Market Economists Still Taken Seriously?


They've been shown to be wrong time and time again. And their policies have led to widespread disaster and misery for millions of people.

Who am I talking about?

The NeoCons and their wrong-headed views on Iraq?

Nope, I'm talking about free-market economists.

No group of "experts" has a worse track record on accurate information about how our world really works. And yet, mysteriously, free-market economists are still held in reverence and awe by many. And their proclamations are hailed as the gospel truth by everyone from politicians to academia to the mainstream media.

Free-market economics seemingly got an enormous boost in credibility in the 1980s and has reigned supreme as the only conceivable policy for running America's economy ever since.

There's only one problem with free-market economists and their followers: they're full of shit and they have a dismal track record on the truth. And worse, the world simply doesn't operate the way they believe it does.

Free-market economists are rabid advocates of a unfettered, dog-eat-dog, ruthless form of capitalism. Leaving everything to the "free market" is the best way to run a society, they maintain. And at the end of the day, no other economic system can possibly compete with capitalism, they say.

As "Exhibit A," the free-market economists proudly point to capitalism's vanquishing of the Soviet Union's style of communism in the Cold War.

What more proof could one want that capitalism is the best way to create wealth and prosperity?

Actually, in the years since the Cold War ended, a few dissenting voices have started to speak up about the supposed superiority of unfettered capitalism.

First, there is the issue of whether the United States really prevailed in the Cold War, after all. A number of commentators have pointed out that, without enormous sums we borrowed from Japan in the 1980s, the U.S. wouldn't have "won" the Cold War.

Indeed, as the brilliant author Chalmers Johnson has pointed, out, it was really Japan, not the U.S. that won the Cold War. Indeed, the decade of the 1980s was nicely summed up by MIT economist Lester Thurow when he wrote: "We borrowed a trillion dollars from the Japanese and threw a party."

I should point out here the irony of celebrating an economic system that is totally dependent on vast amount of foreign capital in order to function. And make no mistake, no matter how one views the Japanese economy, it is definitely NOT anything that a Western economist would recognize as "capitalism."

Indeed, the Japanese model couldn't be further removed from U.S.-style economics. In Japan, the nation's economic destiny is shaped by powerful technocrats at the Ministry of Finance. Industrial policy is set by the government, rather than determined the whims of the private sector. It is a heavily regulated system that is a million light years removed from American-style "capitalism."

What's more, the Japanese economic model has been widely imitated throughout East Asia (which is now by far the most dynamic and fast-growing area on Earth). From Taiwan to South Korea to mainland China itself, Japanese economic policies are widely implemented these days. For example, China has copied elements of Japan's employment system, its mercantile policies, its emphasis on manufacturing, and even its Keiretsu system of organizing companies into powerful groups.

This important development, of course, is completely ignored by U.S. economists. Many of them maintain that "unfettered, free-market, U.S.-style capitalism" is the model that East Asia aspires to. Indeed, the "conventional wisdom" in U.S. economics is that Japan itself is "yesterday's news" and is a fading power. It's a bizarre viewpoint indeed, when one considers that the supposedly "more efficient, superior" U.S. economy would collapse were it not for the hundreds of billions of dollars in Japanese capital that props up the American economy and the dollar these days.

A big part of the problem with U.S. economists is that they are a remarkably ignorant about the rest of the world. The only country that they've studied at all, or paid any attention to (outside of the U.S.) is Britain.

Which brings me to another misconception spread by U.S. free-market economists. The latter are constantly praising the era of Margaret Thatcher.

What more proof does one need that unfettered capitalism reigns supreme than the example set by Thatcher's Britain, they ask? After all, Thatcher busted the unions, cut regulations and decimated the welfare state---and as a result, the former "Sick Man" of Europe prospered in the 1980s.

At least that's the fairy tale we've been led to believe.

As they did with Reagan's revolution, though, the economists aren't telling the whole story of the Thatcher era as they breathlessly sing the praises of the Iron Lady. Over the years, a growing number of writers, like James Howard Kunstler,
have pointed out that what really made Britain shine in the 1980s wasn't Thatcherism at all. Rather, it was the incredible bounty that Britain reaped with the North Sea oil bonanza in the 1980s.

It's this latter point that really irritates me and makes me question the honesty of the economics profession. The field's dishonesty can be summed up thusly:

1. Starting in the 1970s, free-market "Chicago School" economists urged various "reforms," from gutting the welfare state to crushing unions to abolishing any and all regulations on business.

2. In the 1980s, the above prescriptions were implemented in the U.S. and Britain, under Reagan and Thatcher.

3. The economies of both the U.S. and Britain prospered, thanks to hundreds of billions of borrowed dollars (in the case of the U.S.) and the North Sea Oil boom (in the case of Britain).

4. As the U.S. and Britain boomed, economists proclaim their free-market prescriptions "vindicated"---completely ignoring the fact that the prosperity in both nations had nothing to do with their remedies.

Free-market economists are so arrogant and sure of the wisdom of their teachings that they've become oblivious to the fact that the real world simply doesn't work the way they believe it does. (For example, the real economic success story of the past quarter century has been China---a nation which completely rejects every single tenet of how a nation's economy should be run, according to the gospel of the free-market economists).

And their ideas remain in vogue to this day among American policy-makers. Never mind the fact that the U.S. is in increasing peril, thanks to their policies. The gigantic deficits that Reagan racked up in the 1980s now seem trivial, compared to the even-more titanic deficits that America faces today.

Free-market economics has been directly responsible for America's out-of-control and spiraling fiscal and trade deficits. The latter crisis threatens to force a collapse in the value of the dollar. And when the dollar melts down, America's reign as a superpower will come to an end.

Free-market economists, of course, are blissfully unconcerned about this looming crisis. For them, the solution to anything and everything is more of the same. More tax cuts for the rich, more union busting, more elimination of any and all red tape and the complete rejection of anything remotely resembling a national industrial policy. As far as deficits go, they maintain a "Don't Worry, Be Happy" approach.

I never thought I'd find myself agreeing with anything that Pat Buchanan ever said---but actually, he of all people, once made a comment that neatly sums up the view of all those who wear free-market economics blinders: "To worship at the altar of free-market economics is no less a form of idolatry than worshipping at the altar of socialism."

Free-market economists have done at least as much damage to our nation as the NeoCons over the past quarter century. How much longer will we as a nation continue to follow their disastrous, wrong-headed advice?


Anonymous said...

Many "free market" economists are nothing more than prostitutes, willing to whore out their "expert" advice anytime a right-wing think-tank prepares an offensive against some proposal like raising minimum wage. These economists can always be counted upon to predict doom and gloom if the minimum wage is hiked (and, of course, the MSM never calls them to task if they're proven wrong in their predictions).

Ron Southern said...

Good points. My brain shrivels and dies as I ponder it all...

Anonymous said...

Didn't Reagan slam the door shut for the Japanese car industry with high tolls in the 80s? "Free market capitalism" is just a smoke screen

Anonymous said...

The fundamental problem is that Adam Smith is still taken seriously. When Wealth of Nations was published in 1776, Smith did not know that his notion of surplus value, i.e. profit, arising from labor was not tenable because it violates the Second Law of Thermodynamics, promulgated 75 years later by Lord Kelvin. Even Karl Marx did not recognize this problem. When we are able to create a true science of economics recognizing the boundaries of thermodynamics, we will be able to dispose of nonsensical opinions offered by graduates of conservative diploma mills.
For an introduction, see:

Anonymous said...

Awesome. You have finally provided a concise, well-supported argument for the abolition of the Sherman Anti-Trust Act. It is just soooo un-Japanese of us to keep that old thing around. It hampers our ability to allow industry to "organize companies into powerful groups" OPEC. That is brilliant, and I support your call to abolish the Act.

Marc McDonald said...

>> You have finally provided a
>> concise, well-supported
>> argument for the abolition of
>> the Sherman Anti-Trust Act.

Are you a Rush Limbaugh fan by any chance? Because, like Rush, you're grossly oversimplifying complex issues.
The Japanese economy is vastly more complicated than simply allowing unchecked cartels and monopolies to run around, screwing the consumer (as well as society).
Corporations in Japan are FORCED by law to be run in manner that is beneficial to Japanese society as a whole. That's one reason you don't see Japanese corporations doing mass layoffs (or CEOs pulling down gigantic pay packages).
In the U.S. CEOs make, on average 500 times what the rank-and-file workers earn. In Japan that multiple is a mere 17 times. In fact, Japan is the most egalitarian society in the First World (and one of the most egalitarian societies on Earth).
I'm not saying it's a utopia there (no place is). But I think we Americans ought to look at what they do well and emulate it.

cwilcox said...

"How much longer will we as a nation continue to follow their disastrous, wrong-headed advice?" As long as we allow free market campaign contributions to determine who writes the laws in this country. As long as CEO's are able to buy the Congress and the White House to ensure that profit continues to be more valued than humanity and as long as the majority of mullet wearing, mouth breathing, trailer living, NASCAR watching white males think that gay marriage and Roe Vs Wade are the preeminent issues of our time we will see no change.

Aaron Weber said...

Seems to me that a well-regulated, open market is the best way to handle things like, oh, trade in goods and services, in the vast majority of cases.

I think that the vast majority of people would agree with me. The real question is: which cases are the exceptions, and how much regulation should we have?

Anonymous said...

It's good to see someone focusing on a topic that speaks to the heart of our current condition instead of just rehashing the details. I think the appeal of free market economists is simply the word "free". Free sounds like a real good thing to a "freedom" loving people who wouldn't pass up something that is "free".
Most people never probe the depths of economic systems nor have, even, a glimmer of a notion of what capitalism really means. They believe that our leaders have our best interests at heart and forget to factor in the crooks.

Marc McDonald said...

Hi Red Hog, good points.
>>"mullet wearing, mouth
>>breathing, trailer living,
>>NASCAR watching white males

Yes, and the interesting thing is that these simpletons don't realize that they are being played for a sucker by rich fat-cats who secretly have nothing but contempt for them.

Marc McDonald said...

Hi, Econeo: good comment; thanks for stopping by.
Another point is that these free-market economists rarely tear themselves away from their spreadsheets to take a look at the real world.

Anonymous said...

Complaints about raging deficits and spiraling national debt seem to be recurring themes on this blog, or at least they get repeated mention. Other than finger pointing, does anyone have a solution to these legitimate fiscal issues? It seems there are three ways to address the problems: 1) Reduce federal spending...drastically 2) Increase the tax base..drastically. 3) Both. What would be the ramification to society and to the economy if federal spending was reduced to say 25% of the current rate? Where would the cuts be made? Since approximately 45% of income for those who actually pay federal taxes is already taxed, what would be the impact on taxpayers if the marginal tax rate went to say 75%? If it went to that level and taxpayers actually paid at that level (as opposed to the late 70's when taxpayers winked and deducted everything they spent $ on) how long could the burden be maintained without financially crushing the creators of jobs and innovation and in the end throwing the nation into another depression era? Or maybe the 40%+ of the population who soak up government services without paying a dime in federal income tax might begin to do their patriotic duty and 1) take care of themselves and 2) assume a portion of the federal tax/debt burden. Or maybe, just maybe the Gipper was right and we can do both: If we reduce taxes and give the brightest and best incentive to produce goods and services that the world wants, income will soar and even at lower rates, the treasury will be filled like it was during the Clinton presidency (thanks to Regan and in spite of Bush, Sr.) If we then reduce spending (something that has never been tried) the theory says the national debt will go down. Wait, let me check the math...more coming in than going out equals a reduction in liabilities. Yeah it seems right. Maybe I am just oversimplifying complicated issues again. After all, how will the successful get the punishment they deserve for benefiting from their hard work and follow-through? It's not fair! What will fat, balding losers do if the trendy, good-looking winners get to keep what they earn? Oh well, they will always have their video games and their mothers to make them feel better.

Marc McDonald said...

In response to the previous poster who ponders how we can reduce America's deficit:

Hmmm, how about we reduce spending on the most bloated, inefficient, corporate-welfare-larded government program in the history of the world: the Pentagon.

That alone would save trillions of dollars. How about we abolish all corporate welfare, so that
leeches like Halliburton will never longer be able to stick their snouts into the trough of tax dollars?

Abolishing corporate welfare would save us $300 billion a year.

>>>maybe the 40%+ of the
>>>population who soak up
>>>government services without
>>>paying a dime in federal income

Ah, typical Rush Limbaugh talking points (which is highly ironic because the Fat One admitted on his radio show back in the 1990s that he himself was on the government dole because he
was too listless and depressed to find a job).

Incredible hypocrisy.

Anyway, do you have any proof that there are all these people out there (an incredible 40 percent of the population) who're soaking up government services without paying tax?

Who on earth are these people? And how, exactly, does one avoid paying tax? (That is, unless you're a billionaire and can afford
to buy your own tax lobbyist in Congress).

You Rush Ditto-Heads seem to be convinced that there are all these lavish government programs out there for the lazy poor.

Shit, one would think we were living in Sweden.

The interesting thing is, you Ditto-Heads babble on all day about wasteful welfare programs, but you never mention any specific government programs.

Which "welfare" programs, exactly,
are you talking about? Social Security? That's hardly a "welfare" program---in fact, I believe that it's nothing more than an accounting gimmick to help the rich avoid paying taxes. (Super wealthy people pay virtually nothing into Social Security tax as a percentage of income---and yet the money collected by S.S. is used for general government revenues, ranging from White House banquets
to the Pentagon).

So, when you say "welfare" programs---exactly, which programs are you talking about? And all these millions of people who're supposedly living the high life on welfare---how, exactly, are they avoiding paying tax?

I urge you to turn off Rush and read for a change. One does not get educated and informed on the issues by listening to talk radio.

Iowa Bob said...

Wow, I was just wondering, what color is the sun in your world?

Anonymous said...

So if the free-market is not a viable solution to world/US economics, then what is? Instead of jumping on the hate free market band wagon, can anyone offer an idea or a solution?

Anonymous said...

In response to the previous poster, I have a solution: why not implement something actually resembling the free market in the U.S.?
(You're kidding yourself if you believe the U.S. has a "free market" system....the reality is that it is a system of corporate welfare/socialism for the rich). Halliburton is only the tip of the iceberg.

Anonymous said...

Mixed economy is the only way to go.

The only people who voice up about what they call free market, and let me tell you nothing about it is free at all, as monopolys take over, they ensure they kick out the ladder once they climb up.

Anyhoo, the only ones who brick a brack about free market are those making the most money on it.

Economists such as that are simply the Joseph Goebbels of the right wing. Propaganda to blind us with bullshit as they make their masters richer.