America’s Free Market Myths

Joseph Shaanan

America’s Free
Market Myths
Debunking Market Fundamentalism
Joseph Shaanan
Bryant University
Smithfield, Rhode Island, USA

ISBN 978-3-319-50635-7 ISBN 978-3-319-50636-4 (eBook)

DOI 10.1007/978-3-319-50636-4

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 ACKNOWLEDGMENTS

From Palgrave Macmillan I would like to thank Sarah Lawrence for her
support for the project and Allison Neuburger for guiding me through the
publishing process. I am grateful to two anonymous reviewers who pro-
vided thoughtful comments and constructive suggestions. I would like to
thank the students in my “America and the Free Market” class whose
views, at times very different from my own, helped me gain a better
understanding of the issues involved. Finally, my greatest debt of gratitude
is to my wife for her support and understanding.

v
 CONTENTS

Introduction 1

Part I Economics

Myth 1: America Has Free Markets 17

Myth 2: A Great Wall Separates Politics and the Economy 35

Myth 3: The Less Government, the Better 49

Myth 4: Deregulation Always Improves the Economy 71

Myth 5: The Economy Has Superior Efficiency 89

Part II Socio-Economic

Myth 6: Exceptional Living Standards 111

Myth 7: An Egalitarian Nation 127

vii
viii CONTENTS

Part III Political-Economic

Myth 8: Free Markets Protect Democracy 149

Myth 9: Corporations Represent Economic Freedom 171

Myth 10: Free Market and Laissez Faire Are the Same 189

Myth 11: A Free Market Nation Does Not Need a Society 203

Part IV The Crash and Bailouts

Myth 12: The Government Caused the Crash of 2007–08 223

Myth 13: The Bailouts’ Purpose Was to Save the Free Market
Economy 237

Notes 253

Bibliography 275

Index 295
 Introduction

America’s Free Market Myths describes and refutes 13 myths

dealing with the US economic system and its underlying
principles. These myths are deeply ingrained in the nation’s
self-image and in political discourse. They have attained a near
monopoly position over explanations about how the eco-
nomic system works and are hailed as indisputable truths,
scientifically grounded. However, the book contends that
these fables were created and promoted to provide the illusion
that free market rules guide the economic system. The pur-
pose of the myths is to deceive and divert attention from
serious economic and social problems and, above all, from
the fact that the actual economy, dominated by giant corpora-
tions, is far removed from a free market description.
So why is so much effort and expense devoted to dissemi-
nating these stories? The answer is simple. While the moral of
these myths is similar, the ensuing recommendation is practi-
cally identical: the system’s rewards should flow upward to
giant corporations and a small group of very wealthy people.
Therein lies their attraction. The myths help preserve the
economic and political status quo while distancing America

© The Author(s) 2017 1

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_1
2 J. SHAANAN

from a more widely beneficial and productive form of capit-

alism resembling more closely the free market ideal.
America’s economic system is commonly described as free
market. The term evokes wonderful images. It suggests free-
dom of choice, natural markets untainted by barriers, an
efficient and decentralized economy with minimal govern-
ment intrusion all coordinated by an impartial invisible
hand. Additional connotations include vigorous competition,
deals negotiated by equals, no coercion, opportunities and
affluence. In fact these images are widely accepted and have
become an integral part of American beliefs with hostility
reserved for nonbelievers. Yet key aspects of the US economy
do not correspond to a free market.
Notwithstanding the effusive praise for the free market and
successful attempts to blur its difference with the actual sys-
tem, the term serves as a front for an economy distinguished
by the dominance of giant corporations. Ironically, these large
organizations readily engage in activities designed to circum-
vent or even eliminate markets when that is a profitable course
of action. The economy is indeed marked by a certain degree
of freedom, at times even unrestricted freedom, but it is not
the average consumer’s or employee’s liberty and not even the
market’s; instead, the prevailing freedom is that of giant cor-
porations to profit.
It is an economic system where firms with sufficient eco-
nomic power and political influence exempt themselves and
their top managers from the discipline of the market. At the
same time they fight to ensure that all those they deal with,
consumers, employees and suppliers, are subjected to the mar-
ket’s discipline. Market rules are imposed on the vast majority
of people but sanctuary from its dictates is afforded to a privi-
leged few. An increasing share of the system’s rewards is
reserved for the top echelon of the corporate hierarchy and a
 INTRODUCTION 3

very wealthy but tiny minority. Yet, for capitalism to succeed its
benefits must be widespread not funneled mostly to a few
thousand families.
Not only is the economic system contrary to free market
principles, but the prevailing philosophy appears to be an
unusual form of laissez faire.1 Purportedly it focuses on mini-
mal government intervention. However, a glaring inconsis-
tency exists in the skewed application of this principle. There
is a two tier classification for government help. When it is
done at the behest of a giant firm it is considered an economic
necessity, a market saving action not interference with the
market. Yet, intervention on behalf of the public is categor-
ized disparagingly as market interference; a gross violation of
free market principles. Both intercessions distort the market
outcome, but the second type is more likely to have an
economic justification and benefit the public. Given the
many cases of government intervention on behalf of large
companies designed to undo the market’s verdict, it is difficult
to argue that we have a free market economy or that we abide
by free market principles or, for that matter, even laissez faire
principles.
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 requi-
sitioning existing wealth, rather than creating new wealth.
Such activities do not lend themselves to a healthy economy.
They do not result in investment in the real economy or in
additions to the nation’s wealth. Rent seeking only enriches
the wealth extractors while misallocating the nation’s scarce
resources. Such activities abound and have the blessing of
government, especially in the past 35 years.
To arrive at such a state of affairs, not only was it
necessary for the dominant players in the economy to
4 J. SHAANAN

acquire political influence, it was also necessary to persuade

the public of the legitimacy and effectiveness of the eco-
nomic system and the truth of its philosophy. For that
purpose a variety of myths dealing with an imaginary free
market had to be created and promoted. Every facet of the
economy, especially its less savory activities, had to be
defended and extolled in terms of free market ideology.
The message praising free market economics was spread
throughout the land by an acquiescent media and a coop-
erative academia.

1 MYTHS
Whereas medieval kings legitimized their rule with the myth
of divine right, today’s corporate aristocracy makes use of a
skillfully fabricated mythology to justify its own rule. The
myths depict a utopia predestined by nature, based on scien-
tific principles and imbued with rationality, self-interest and
justice. It is said to be in conformity with the American quest
for good life while supposedly also upholding democratic
values. Free market myths play an important role in convin-
cing the public to accept the economic system as preordained,
to celebrate its self-evident benefits while turning a blind eye
to its deficiencies including a level of harshness unmatched by
its industrial rivals. The myths are used to justify the system’s
unfairness and lack of compassion as demonstrated by its
rather meager safety net. They serve as a substitute for con-
crete evidence to support claims of economic and moral
superiority. The myths – be they economic, socio-economic
or political – usually have a common denominator, the con-
clusion that the system’s rewards should flow upward to a
small group who just happen to possess economic power and
political influence. When the rewards flow in the right
 INTRODUCTION 5

direction, claim the myths, miraculously, the nation is better

off. These myths are the subject of this book.
The mythology described is rich in uplifting jargon such as
freedom, choice and individualism. It portrays pastoral images
of self-reliant farmers and inventive entrepreneurs while
avoiding carefully terms such as: giant corporations, corporate
subsidies, bailouts, “too big to fail” banks, market power,
collusion, speculation, cronyism, political influence, revolving
door and the buying of elections. It contains contradictions
which its proponents are reluctant to point out.
The most basic myth is that markets are guided by an
invisible hand – a natural phenomenon uncorrupted by poli-
tics, market power or the central direction of error-prone
humans. It represents the natural order of things, technolo-
gical progress, efficiency, and, in a way not easily understood,
even fairness. Its reward system is morally justified because
everyone has equal opportunity and earns a reward commen-
surate with their marginal product. Anyone who doubts the
merits of a system guided by the invisible hand need only look
at the fate of command economies such as that of the former
Soviet Union.
The free market system with minimal government interven-
tion creates a superb mechanism for the transmission of infor-
mation while providing for an unparalleled allocation of
resources. Therefore it is only logical that we let free markets
determine our economic lives, if not the totality of our lives. It
is true that not everyone succeeds but at least everyone has a
fair chance and the rest is in your hands and that of the
invisible hand of the market. America enjoys the economic
and political freedom that comes from having a free market
system.
Proponents of the myth claim that all private market parti-
cipants, regardless of size and power, represent the free
6 J. SHAANAN

market. When government substitutes the wisdom of the

market and its finely tuned guidance mechanism with
bureaucratic decision making it is a recipe for economic
and political disaster. America’s greatness is rooted in its
entrepreneurial spirit and the last thing policymakers ought
to do is interfere with entrepreneurial incentives including
those of giant corporations. The free market does not need
government’s protection, it originated naturally and it will
be sustained naturally.
Government redistribution activities harm the very fairness
which they seek to address and represent a violation of indi-
vidual freedom. They are contrary to the most fundamental
laws of economics. Restricting the activities of successful peo-
ple and firms and burdening them with heavy taxes will only
distort incentives and decrease the nation’s output. The same
is true of rewards for idleness and guarantees of government
handouts. Programs such as minimum wages, Medicaid, grad-
uated income taxes and a host of programs to help the poor
are bad for the economy because they warp the market’s
natural signals and interfere with an efficient market outcome.
Attempts to bring about more equal outcomes only shrink
overall output and result in a smaller pie for the nation
thereby hurting everyone including the poor. Let the free
market rule and greater income equality will follow.

2 REALITY
The original and most popular of economic myths conflates
the ideal with the actual economic system. The US economy
is far removed from a free market system. The economy and
the political system are not separated by a giant wall. Even the
theories upon which some of the myths are based contain
flaws. The free market argument is based on an assumption,
 INTRODUCTION 7

at odds with human history, about the supremacy of the

individual. Problems with the assumption of rationality in
economics are well known. The idea of maximizing the great-
est good (which could benefit a minority of the population)
and maximizing benefits for the greatest number are not the
same.2 The idea that consumers attain optimal satisfaction
when choosing their preferred combination of goods and
services is doubtful; especially, when individual satisfaction is
affected by other people’s spending patterns. Therefore con-
trary to popular belief, consumer welfare is not maximized
from current consumption patterns.3
Notwithstanding the rosy scenario predicted, as the econ-
omy became more laissez faire the promises made did not
materialize. The outcome for many has been stagnant or
declining standards of living and quality of life. The middle
class, whose progress was considered a major American suc-
cess, stopped advancing and poverty rates have not improved.
Economic insecurity and anxiety have increased. Family
incomes have become more volatile and it does not take
much for a middle-class family to become poor. Many families
require two income earners to maintain their standard of
living and many others cannot find a job that will pay for
the bare necessities. Large numbers of elderly do not have the
means to retire. Until recently 36 million people in the US
were without health insurance despite enormous government
expenditures on health care. Barriers to top universities are
high and pessimism about the outlook for future generations
has increased. Usury has returned with a vengeance as have
the Dickensian scourge of debtors’ prison and the nefarious
practice of ensnaring people into perpetual debt.
The deterioration is usually blamed on the market, i.e., the
impersonal, impartial market guided by an invisible hand. We
are told that unavoidable global and technological changes
8 J. SHAANAN

caused the situation and therefore it is nobody’s fault and

besides people have to learn to accept change. Yet, mostly it
is not impersonal forces of supply and demand that brought
about these changes. Rather it is the deliberate hand of giant
corporations, looking for every conceivable way to augment
their profits and power, at times by creating “market-free”
zones in the economy.
The economic system, contrary to popular myth, is based on
man-made rules and regulations, not natural laws, and more
generally, on a legal framework beneficial to giant corporations.
The same is true of the commercial, financial and even the
social framework where corporate influence plays a key role in
their design. To muddle the situation and camouflage the
working of the system, pro-business policies are often described
as pro-market although frequently their goals clash with free
market principles. The main objective of the system is to aug-
ment the income and wealth of the very rich and to protect the
status quo while cloaking the objective with a free market
fantasy. One obvious result is a redistribution of income that
has brought income inequality to levels not seen in a hundred
years. But that, after all, is a goal of these myths.
Propagators of the free market myths extol the virtues of
dubious economic activities and, more generally, the profit
motive regardless of its contributions or lack thereof to
society. In recent decades speculation and its rewards have
been elevated in esteem and are regarded as a worthy cause in
the fight for economic freedom. Yet, Joseph Stiglitz (2010)
points out that when individual rewards and societal contri-
butions are in conflict there is little if any gain to the nation.
Unfortunately, the beneficiaries of the system have managed
to drown out most criticism and the warning, until very
recently, has gone unheeded, in no small part due to the
help of free market myths.
 INTRODUCTION 9

There is the popular slogan “let’s get rid of big govern-

ment”. Yet, rarely is the question asked about what would
happen if Americans did follow that suggestion, or practice
it more aggressively, i.e., who would fill the gap? The
answer most likely is unelected giant corporations. And
yet prominent laissez faire advocates have not hesitated in
advancing the argument that their vision of free markets
protects democracy. The sad fact is that the prevailing
economic system has already seriously weakened democracy
and its political and judicial institutions. More realistically,
it is in the process of turning the nation toward a society
more closely resembling commercial feudalism than a
vibrant democracy.
“America’s Free Market Myths” challenges head-on specific
myths associated with free market fundamentalism.4 Instead
of offering a broad critique of free market mythology, the
book examines a variety of myths separately. There are poli-
tical, historical and philosophical studies critical of free market
myths but relatively few direct economic works that challenge
the different myths. The common approach is to treat the
myths as one: economic decisions should be left to the gui-
dance of the invisible hand. Even then, refuting the myth
often is secondary to discussions of economic-historic events.
That approach certainly has its use. However there remains
the problem of a lack of awareness that many seemingly
respectable ideas already assimilated into the culture and
regarded as common knowledge actually are fiction. There is
little understanding that these are exploitive myths linked
deceptively with the concept of freedom. Powerful and
wealthy families in the US are ardent supporters of laissez
faire. In fact some myths would have remained obscure if
not for the endorsement and financial support offered to
their authors by well-heeled backers.
10 J. SHAANAN

Notwithstanding the events of 2007–08 and the bitter

aftermath, for the most part free market myths remain well
entrenched. It is suggested that a combination of cognitive
dissonance and sunk intellectual capital have led economists
to continue with business as usual attitude; no need to rethink
theories or question the myths regarding the free market
economy.5 The media, for the most part, also have played a
part in protecting the free market image. So the usual sources
of information have offered relatively little that would lead the
public to change its opinions and acquire a more realistic view
of the economic system.
However, more recently there has been a growing aware-
ness that the economy does not quite fit the classic free
market description. The bailouts did produce some skepti-
cism about the existence of a free market economy. The
2011 “Occupy Wall Street” movement received national
attention; income inequality figures have been publicized;
some columnists and talk show hosts discuss socio-eco-
nomic issues. In 2015 and 2016 the idea of a living wage
gained momentum in some places with well-publicized
wage increases. The Presidential Primary campaign of
2016 brought to the fore social-economic topics that
were considered taboo in late twentieth-century America.
The above developments suggest that a growing number of
people have doubts about the claims of market fundament-
alism and whether its recommendations are in their best
interest or the nation’s best interest.
At this point it might be worth emphasizing that the objec-
tive here is not to dismiss the significance of markets or
belittle their contributions. The market method of economic
organization is an efficient way for conducting economic
activities and has been instrumental in raising living standards
and providing opportunities. Instead, the purpose of the book
 INTRODUCTION 11

is to debunk extreme and unfounded assertions attempting to

equate the free market ideal and its beneficial properties with
actual markets and the economy. It is argued here that mar-
kets (and people) need protection to ensure their survival;
whereas laissez faire advocates generally oppose government
protection of markets and, in Darwinian fashion, would not
object to their destruction.
However, while many economic activities should be
transacted through the market, some activities should
not; and not always for economic reasons. There are
political and social concerns that sometimes merit prece-
dence over profit maximization. The twentieth-century
experience of nations leaving all social and economic
decisions to the government turned out to be disastrous.
Yet imposing the profit maximization criterion in all areas
of life is also undesirable. A balance is required between
government (public) involvement and the market consis-
tent with America’s social values, democratic traditions
and economic efficiency.

3 TERMINOLOGY
The term “laissez faire” is used to describe the ideology of the
proponents of free market myths. However, there is also a
more recent and rather skewed version of laissez faire to
which we refer to as “contemporary laissez faire”. Writers,
outside the field of economics, and more so outside the US,
prefer the term “neoliberalism”. Because the term is less well
known in the US, we will use here “contemporary laissez faire”.
It should be noted that the objectives of both contemporary
laissez faire and neoliberalism are similar. Both schools of
thought believe in a private sector economy, individualism
and seemingly minimizing government economic intervention.
12 J. SHAANAN

They seek deregulation, privatization and reduced government

spending. However, both also seek tacitly to protect corporate
power and profit making opportunities even demanding gov-
ernment intervention for that purpose; thereby straying from
traditional laissez faire.

4 13 MYTHS
The myths presented here, including economic (5), socio-
economic (2), political-economic (4) and myths about the
Crash (2), deal either directly with some aspect of the free
market or else are used to defend its superiority. There are
additional myths not discussed here such as the alleged scien-
tific basis for the superiority of free markets. However, the
material presented here, with relatively little technical jargon,
should acquaint the reader with the free market mythology
and the attractive but misleading picture created to describe
the existing economic system.
Each chapter (myth) in the book is self-contained. At times,
different chapters examine a common topic but from the
perspective of the particular myth under examination. For
example the 2007–08 bailouts have implications for whether
or not free markets exist; for the relationship between democ-
racy and the economic system; for the efficiency of the econ-
omy; for the issue of equality and more. Similarly discussions
on the Federal Reserve Bank are presented in several chapters.
Below is a brief summary of each myth and its refutation.
The first five myths are well known and deal with different
aspects of the original myth that the American economy is guided
by the invisible hand of the market. In fact one could argue that
these myths should be treated as one. Yet each myth is prevalent
and often presented as a stand alone truth; therefore we analyze
each myth separately. The first myth is that the private sector
 INTRODUCTION 13

operates in conformity with free market principles. Given the

widespread presence of market failures, not the least of which is
the lack of price competition in many markets, it is difficult to
describe the economy as free market. The second myth claims
that there is a strict separation between the political and
economic sectors. Yet, government has a considerable role in
the US economy despite at times being concealed or under-
reported. In particular, substantial help from taxpayers to large
corporations dents severely the free market assertion. The third
myth is about the popular idea that shrinking government is
bound to improve the economy. However, government has
played a crucial role in improving the nation’s welfare. Its
economic and social-economic activities have been essential for
maintaining the well-being of the majority of citizens. A fourth
and related myth is that deregulation and privatization necessarily
improve the economy’s competitiveness and productivity. The
experience of the past 35 years suggests that it is a highly deba-
table proposition. A final economic myth is that the US economy
enjoys superior efficiency. Given the gap between the free market
ideal and an economy controlled by giant corporations often in
the interests of their top managers, US productivity rates are not
much different than those of other advanced industrialized
nations. The latter usually have larger social safety nets. There is
little macroeconomic evidence of a free market bonus.
Myth 6 claims that US living standards are unique.
Unfortunately following a long period of either stagnation
or decline, US living standards are not much different from
those of several European nations whose poor, in fact, are
better off. Myth 7 is that America is an egalitarian nation with
equal opportunity, a myth that has been used to justify grow-
ing inequality. The US does not have equal opportunity either
for children or adults and consequently the income gap
between the rich and the rest has been widening.
14 J. SHAANAN

Myth 8 asserts that the free market economy protects

democracy. Allowing corporations and wealthy individuals
to buy political influence and dominate the institutions of
democracy, contradicts that idea. Myth 9 claims that giant
corporations represent economic freedom. Regrettably, that
type of liberty consists of freedom for corporations whereas
other freedoms, including that of individuals, are margina-
lized if not destroyed. Myth 10 proposes that laissez faire and
free markets are identical. Not only is there a large disparity
between the two concepts but laissez faire can and does lead
to the elimination of markets. Myth 11 is that a free market
nation does not need a society. However, social protections
are needed to maintain our way of life and living standards.
Applying the principle of profit maximization to all areas of
life reduces the significance of many highly regarded values.
Myth 12 blames government for the Crash. Objective evi-
dence points to the role of private sector financial institutions.
More generally, the ever stronger link between economic
power and political influence led to financial deregulation, the
weakening of remaining regulations, financial excesses and ulti-
mately to the Crash. Myth 13 is that the sole purpose of the
bailouts was to save the free market economy. Yet an additional
objective was the rescue of large speculating financial institu-
tions, their executives and creditors contrary to free market
principles.
 PART I

Economics
 Myth 1: America Has Free Markets

1 MYTH
An admirable feature of the US economy is that it is guided by
the invisible hand of the market. The market through the
price system and the impersonal forces of supply and demand
determines which products and services will be produced and
which inputs will be used. This is done without coercion and
with the freedom to move resources in search of higher
returns. Unprofitable businesses can be broken up and their
resources shifted to more productive ventures. The market
system offers competition, efficiency and genuine choice.
Markets left to their own devices determine in a natural and
efficient way the right number and size of firms. American
markets are mostly competitive or workably competitive.
However, even if they are not, a free market is consistent
with any type of competition, including monopolies and
oligopolies,1 as long as there is no government coercion.
Monopolies may be less than ideal for allocative efficiency
but monopoly power cannot last forever and even then
market power may have its own advantages. The prerequisites

© The Author(s) 2017 17

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_2
18 J. SHAANAN

for successful innovation may lead to industries consisting

of large dynamic firms and at other times efficiency dictates
will result in numerous small firms but, regardless, such issues
are best left to the market to sort out. The huge numbers
of firms that enter industries annually are indicative of an
intense competitive process, sufficient to allay any concerns
about market power, barriers to entry and possible resource
misallocation.
The market for corporate governance functions smoothly.
Corporate chiefs are rewarded for the risks they take, their
management and leadership skills. They are rewarded in a way
that is consistent with maximizing shareholder returns. There
is no need to worry about corporate efficiency because if
private sector corporations are inefficient they will be taken
over by competitors or else management will be replaced by
disgruntled shareholders. Corporations’ sole task should be
profit maximization on behalf of shareholders and not some
vague and elusive goal such as social responsibility.
Opportunities are available to nearly all. Hard work and risk
taking can lead to phenomenal but justified rewards because
of commensurate contributions to the nation. Consumers left
to choose freely without government’s protection, advice and
warnings will maximize their satisfaction and obtain an opti-
mal combination of goods and services in a way which few
other economic systems can match. These are the traits of a
flourishing economy and its secret lies in faithful adherence to
free market rules.

2 FREE MARKETS
At this stage it might be worthwhile to examine the definition
of a free market. The term has different meanings to different
people. Sometimes it is used as synonymous with both
 MYTH 1: AMERICA HAS FREE MARKETS 19

capitalism and laissez faire. Economists also are far from unan-
imous in their definition of a free market but certain features
are generally accepted. It is usually seen as a market or decen-
tralized economic system where market forces determine
prices and quantities for products and services. All this is
done without coercion and without barriers to entry. There
are other definitions of a free market including those that
require the absence of fraud and deceit.
While the above definition is not controversial, controversies
arise in two not unrelated areas. First, some laissez faire advo-
cates restrict the definition of coercion to government interven-
tion whereas others emphasize the need for a more general lack
of coercion regardless of source, including that coming from the
private sector. Second, another contentious issue is competition
or rather how competitive does a market have to be in order to
be classified as free market. Some argue that a free market is
consistent with any type of competition, including monopolies
and oligopolies, as long as no government coercion is involved
to restrict competition. A contrary view is that competition, and
to economists this usually means price competition, is absolutely
essential for a free market to exist.
To laissez faire proponents, the presence of giant corpora-
tions controlling key markets has no bearing on the issue of
coercion and, more generally, on whether free markets exist.
These firms are viewed as similar to atomistic competitors and
powerless individual entrepreneurs subject to the vicissitudes
of market forces. Supposedly, consumers, employees and
suppliers can bargain with GM, GE or any other massive
commercial organization as equals. If wronged they can turn
to the courts for quick, automatic (and transaction free)
relief. The danger, after all, comes from government coercion
because, surely, there is no such thing as private coercion, or
so we are told.
20 J. SHAANAN

3 MARKETS
A market oriented economy, with the price mechanism guid-
ing the allocation of resources, may be more prevalent in the
US than in many other nations. The US economic system is
tolerant of change and there are fewer impediments than
elsewhere. Significantly, change is not only accepted but
even encouraged (especially in high tech industries.) Agents
of change – entrepreneurs – are held in high regard. It is
comparatively easy to open a business and to get a business
loan (at least until the Crash). Perhaps equally important are
the many inventions and innovations that have impacted and
changed the nation for the better. Examples are the iPad,
GPS, internet and Amazon shopping. There is great admira-
tion globally for Silicon Valley.
The idea of letting markets and the price mechanism prevail
in the economy seems like a good idea. It suggests arms-
length competition, “correct” prices reflecting all available
information, more opportunity, and less government med-
dling and favoritism. However, notwithstanding, the positive
features of the economic system, the existence of free markets,
especially competitive free markets, is highly questionable.
The description of the economic system provided in the
myth section represents some of the illusions commonly asso-
ciated with the system. Few US markets can be described as
free markets corresponding to Adam Smith’s vision of the
invisible hand. In fact, in many industries the phenomenon
of prices being set by impersonal forces of supply and demand
has either never existed or else has been weakened if not
eliminated. The existence, and even predominance, of a pri-
vate sector economy guarantees neither the emergence nor
survival of competitive free markets.
A serious issue is that actual markets often experience what
economists call “market failure”. In such cases the invisible
 MYTH 1: AMERICA HAS FREE MARKETS 21

hand of the market and the pursuit of profit maximization do

not lead to the best allocation of resources and potentially,
government intervention could improve allocative efficiency.
This applies to markets that lack price competition and may
have barriers to entry; situations where buyers or sellers lack
information; and markets with features such as public good
characteristics and principal-agent issues (discussed below).
Another obstacle to the free market label involves the role of
political influence in economic decisions which is the subject
of Myth 2.
The term free market has become a euphemism for a system
distinguished by the dominance of giant corporations and
their many activities. The conflation of free markets with
actual markets is remarkable because corporate activities
include attempts to destroy or circumvent markets when it is
a profitable course of action. The US economy’s dominance
by giant organizations often with tremendous amounts of
market (and political) power and resources is hardly compa-
tible with a free market. It is far-fetched to believe that left to
their own devices and greed giant corporations’ actions would
improve the welfare of a majority of Americans. Mounting
evidence in fact points to an opposite conclusion. Over the
past 30 years real wages have barely risen and income inequal-
ity has increased. Fewer people have pensions. Job security has
become a thing of the past, and employees have to pay a larger
share of the cost of their health insurance.
So what is the implication of the finding that the economic
system is defined less by free market features and more by the
presence of large hierarchical firms with market power and
absolute power that seek to evade the market? The main
implication is that leaving things to the market which is not
a free market means allowing giant corporations to do as they
please with an outcome that is not necessarily beneficial to the
22 J. SHAANAN

nation. It is difficult to defend such a system on conventional

grounds such as efficiency or fairness and argue that govern-
ment has no economic role. It demonstrates that reliance on
the profit motive does not guarantee competitive free
markets.
The paucity of evidence on behalf of the free market label
has not been an obstacle to dissemination of the myth. With
considerable promotion from well-funded advocacy groups,
academics and the media, the notion of a free market acquired
an unusual pro-corporate laissez faire association which has
prevailed since the 1980s. Actual markets are described as
being fairly close if not synonymous with the free market
ideal. Additionally, rather than the market system being
regarded as a useful method of economic organization that
helps improve economic conditions and living standards,
some of its proponents wish to sanctify the system as the
fulfillment of economic objectives if not of life itself.2 So
strong is the conviction about the goodness of markets that
globally privatization and liberalization have been touted as
proof of success instead of, e.g., the number of jobs created or
families that fell out of poverty.3 All the while the large
difference between the free market ideal and actual everyday
markets is glossed over.
A couple of questions arise. First, why the exhortation to
leave things to a market that is not a genuine free market and
where, e.g., price competition is not particularly prevalent?
Second, why insist on labeling such a system “free market”?
The answer to both questions is that behind the drive, suppo-
sedly, for the rule of free markets a very different objective is
sought. It is certainly not a quest for greater competition,
economic efficiency and the empowerment of consumers and
employees. The primary purpose is quite the opposite – it is to
strengthen the dominance of giant corporations.
 MYTH 1: AMERICA HAS FREE MARKETS 23

4 MARKET FAILURES
When the US economic system is described as free market or
approximating a free market, a problem arises. Not only are
many markets subject to varying degrees of government inter-
vention but also many markets are subject to market failure.
In such cases, as noted above, profit maximizing behavior
does not lead to the best allocation of resources. The pre-
sumed superior efficiency of such markets no longer holds
because they are not optimal in an economic sense and, as
mentioned above, there is room for government to improve
matters.
An efficient allocation of resources takes place under one
type of market structure known as perfect competition (and
even then there are exceptions). A key characteristic of perfect
competition, greatly admired by economists, is that price
equals the marginal (extra) cost of producing one more unit
of output or service. Unfortunately, perfect competition with
many buyers and sellers, each too small to influence price,
rarely exists in the real world. It is an ideal market structure,
a theoretical construct, which economists find useful for
purposes of comparison with actual markets but, basically,
nonexistent. Yet, the wonderful economic properties asso-
ciated with markets are based mostly on this rarest of market
structures.
Competition is an important element of free markets. A
genuinely competitive free market economy usually leads not
only to efficiency but it also has a built-in mechanism for
preventing the rise of economic power through decentralized
decision making of numerous economic units.4 From an
empirical perspective individual US markets seldom meet the
criterion of competitive markets free of private coercion and/
or public intervention. Yet, as noted above, it is common to
blur the difference between competitive free markets and
24 J. SHAANAN

actual markets. Some suggest that if a market or industry

approximates perfect competition then a reasonably good
allocation of resources may result; but that is debatable.
Additionally, the belief that American markets are essentially
competitive or “workably competitive” is more a leap of faith
than based on solid evidence because numerous statistical
tests have found the opposite – that important markets are
not competitive. Yet, there has been a concerted effort to
reject or ignore such findings. Academic proponents of laissez
faire have treated such findings as an affront to a theologically
founded belief, which they regard as self-evident (and a litmus
test of ideological purity), that US markets are competitive.
Therefore any evidence to the contrary has to be rejected with
prejudice regardless of scientific merit.5
Important US industries lack price competition. Major
industries consist of oligopolistic firms with large market
shares some of which have enjoyed high profits for decades6
with little threat to their profitability levels from either new
firms or smaller competitors. Oligopoly power can be found
in key parts of manufacturing and services. Many cases of price
coordination (collusion), both legal and illegal, have been
reported over the years, including pricing practices in autos,
cigarettes, electric turbines, glass containers, steel and vita-
mins. In those cases, it is not impersonal market forces that set
prices, but rather major firms engaged in collusion.
Over the past 30 years there have been endless rounds of
mergers often involving companies in the same industry and
resulting in greater concentration and higher prices. Mergers
have brought about higher concentration in radio stations,
media enterprises, and cable and internet companies7 and
also in railways, airlines and telephone communications.8 More
recently there has been a growing trend of mergers among
health insurance companies and hospital chains. Unfortunately
 MYTH 1: AMERICA HAS FREE MARKETS 25

such mergers often do not benefit patients. According to the

FTC, the cost of a hospital stay is on average $1900 higher for a
patient staying at hospital facing no competition as compared to
a hospital with at least four competitors.9 Banking has become
far more concentrated than it used to be and as the share of the
top firms increases so do their profits. Widely hailed import
competition has improved matters in some industries but has
had little effect in others.10
In the laissez faire environment of the last 35 years, com-
petition and its protection have been relegated to a minor role
if not completely disregarded. This has often been done in the
name of economic efficiency or, more accurately, a rather
deceptive definition of consumer welfare that is actually a
measure of producer welfare.11 It is based on the idea that as
long as wealth is increased, regardless of who benefits, the
nation is better off.12 Notwithstanding the clear benefits of a
competitive environment with increased opportunities and
less barriers to resource mobility and therefore greater effi-
ciency, never mind the intent of antitrust laws, competition
has not been protected vigorously either by government or
the courts.13 Curran (2001) suggests that powerful economic
interests have promoted the new antitrust values. These values
have been embraced by the upper echelons of the judiciary
and influential academics.14
Corporations’ freedom to profit is paramount and wins out
over the freedom of markets and individuals. The new philo-
sophy has replaced the original purpose of the Sherman Act.
Protection of competition, for all intents and purposes, has
become an outdated notion15 and with it the nation’s econ-
omy is further distanced from a free market economy.
Nineteenth-century legislators may have been unfamiliar
with the economic theoretical properties of competition but
it would seem that they were aware of the implications of
26 J. SHAANAN

concentrated economic power for individual economic and

political freedom.
Lack of protection for competition leads to outcomes that
conflict with the free market ideal. Many actual markets are
characterized by substantial private barriers to entry including
strategic (intentional) barriers. These barriers help reinforce
market power and absolute power which in some cases is trans-
formed into political influence. Contrary to the predictions of
neoclassical theory entrants often have not materialized in
response to signals of high industry profits, at least not in a
meaningful way. Entry into established manufacturing indus-
tries has been mostly inconsequential for competition with little
effect on prices. One outcome of high barriers to entry, high
profits and lack of price competition is that income and wealth
inequality cannot be reduced.16 Lynn and Longham (2010)
propose that in many sectors of the economy reduced competi-
tion and a rise in market power, due to the neglect of antitrust
laws, have led to a decrease in new job creation.
An additional market failure is that of imperfect informa-
tion where either the buyer or seller is at a disadvantage
because of an imbalance in information. Asymmetry of infor-
mation also leads to a misallocation of resources and is com-
mon enough to raise questions about how prevalent are
efficient markets.17 Examples include unnecessary surgery
and unnecessary car repairs. The latter according to a govern-
ment study amounted to over $20 billion dollars annually in
the 1980s.18 The problem of imperfect information has been
particularly serious in the US health insurance market prior to
the passage of the Affordable Health Care Act. Information
problems also are rife in the financial industry (as will be
discussed in the following Myths).
A not insignificant part of advertising and product promo-
tion is based on embellishment (putting it mildly) with the
 MYTH 1: AMERICA HAS FREE MARKETS 27

result that information is distorted. When food labeling does

not contain information that might have enhanced consumer
safety but is omitted because of political pressure, again,
markets become less efficient. The practice of fine print and
incomprehensible contracts reduces information and hinders
the efficiency of the economy. Hidden fees and misleading
rates for home mortgages and biased advice from credit coun-
selors have the same effect.
There are other market failures including industries with
public goods characteristics (consumers cannot be excluded
from the product or service and consumption is nonrival mean-
ing one person’s consumption does not reduce the amount
available for other consumers) such as in media, health and
education. An additional market failure relevant to a compar-
ison of free markets with actual markets is the principal-agent
problem where, e.g., shareholders’ (principal) interests may
diverge from that of the firms’ executives (agents). The aca-
demic literature proposes that to ensure that managers perform
in the interest of shareholders the former’s compensation
should be structured in accordance with shareholders’ objec-
tives. Yet the incentives established have not always had the
desired effect. In fact they have led to hefty, and at times
undeserved, rewards and also to decisions inimical to the
long-term interests of the company.19 The incentive structure
created led to an emphasis on short-term profits and at times a
disregard for the long-term health of the company including
avoiding long-term investments in plants and in employees.

5 CORPORATE ORGANIZATION
The US economy is at odds with the free market definition on
additional grounds. Giant firms are the predominant players
in the economy and their many in-house activities are
28 J. SHAANAN

inconsistent with arm’s length dealings usually associated

with a market. In fact planning, a word rarely mentioned
nowadays, by several hundred large corporations charac-
terizes a good deal of economic activity. Planning is asso-
ciated mostly with government bureaucrats but is also
carried out by large private sector firms whom John
Kenneth Galbraith (1985) describes as mini-planned corpo-
rate economies. He argues that they are keen on avoiding
the market and strive to minimize the market’s influence on
both the selling and buying side. Essentially, they attempt to
create “market-free” zones. Their goal is to subordinate the
market to the planning needs of the corporation and conse-
quently their operations hardly ever resemble those of firms
in a competitive free market.
Alfred Chandler (1977), who regards large corporations as
efficient and hence justified on economic grounds, acknowl-
edges that corporate management rather than the invisible
hand of the market directs production and distribution.
Galbraith is of the opinion that corporate management controls
not only supply but also the demand side. Galbraith and
Chandler refer to manufacturing firms in the third quarter of
the twentieth century. Since then trends have changed. There
has been more flexibility in production, including global out-
sourcing, a focus on specialization, quick reorganizations and
the sale of subsidiaries. In fact in some industries there was a
move away from vertical integration.20 For example auto
makers reduced the in-house making of parts. However in the
twenty-first century, high tech companies in particular, with
Apple being the leading example, have opted for increased
vertical integration and produce both software and hardware
notwithstanding the difficulties involved. There is suspicion that
some of these companies may be trying to control their
“ecosystem”.21
 MYTH 1: AMERICA HAS FREE MARKETS 29

When corporate management assumes the market’s func-

tions it is difficult to characterize such an economy as free
market. Powerful bureaucratic centers engaged in economic
planning are hardly the epitome of a free market. It should be
clear therefore that criticism of the prevailing economic
system is not a rejection of Adam Smith’s free market
vision. Questioning market circumvention and suppression
and doubting their efficiency is a very different proposition
from questioning the efficiency of genuinely competitive free
markets involving arms-length dealings. Needless to say, cor-
porate planning is not without its defenders who usually point
to transaction costs22 as the overriding factor. Yet, the point is
that this type of economic management usually is inconsistent
with a competitive free market23 regardless of transaction
costs.
An additional defence on behalf of markets dominated by
large bureaucratic organizations is that the stock market can
protect the economy from inefficiencies through the takeover
process. Badly run companies will be taken over by better
managed companies. Therefore there is an automatic mechan-
ism for maintaining efficiency without the need for government
monitoring. However, empirical studies indicate that takeover
threats and possible restructuring are not much of a deterrent
to inefficient management. There is also little evidence of take-
overs leading to efficiency gains. Additionally, takeover threats
can have adverse effects, especially when managers are willing
to endanger the health of the company to protect themselves or
else can reap high rewards from a (friendly) takeover.24
Berle and Means’s (1932) concern that the corporation’s
top managers, who are seldom its owners, may end up seizing
the firm to pursue their own interests has become even more
relevant than before. This is apparent in managers being
rewarded for short-term increases in the price of the stock;
30 J. SHAANAN

rewards not correlated with performance; gargantuan abso-

lute compensation that dilutes shareholder equity; golden
parachutes25; mergers beneficial to management; measures
designed to protect against hostile takeovers that weaken the
firm but save the jobs of management. To Joseph Schumpeter
(1962) the appropriation of the firm by its managers repre-
sents an attack on the very foundations of capitalism – private
property, and that was well before some of the above
described, more opportunistic, phenomena started to occur.
Particularly alarming is that the link between job perfor-
mance and reward has been disconnected to a large extent.
Executive pay rises with the stock market but rarely falls with
it thereby raising questions about economic efficiency at the
firm level, in addition to issues of fairness. Given the stagger-
ing amounts involved, it may even affect the efficiency of the
national economy.26 Corporate managers do not bear the
same type of risks that entrepreneurs do. In fact at large
corporations managers are well protected to an extent that
they are mostly shielded from the discipline of the market and
its efficiency reinforcing mechanism not to mention from
shareholders, employees and government.

6 CONSUMER CHOICE
According to laissez faire advocates, consumers’ freedom of
choice – consumer sovereignty – is a noteworthy advantage of
the economic system. However, Galbraith raises doubts
whether American consumers are buying what they really desire.
Instead he proposes that consumers are being brainwashed by
advertising to believe that what they are buying is what they
want. Galbraith argues forcefully that consumer sovereignty is
an illusion with consumers easily manipulated. Even a cursory
examination of actual market conditions would suggest that the
 MYTH 1: AMERICA HAS FREE MARKETS 31

extent of freedom of choice existing in US markets is exagger-

ated. Rob Walker (2008) points to a new and more sophisti-
cated marketing technique for manipulation of consumers’
beliefs known as “murketing”. The term refers to muddying
or blurring the difference between branding and other aspects
of life. Examples include hiring volunteers who identify with the
brand to spread the message, perhaps more authentically than a
professional actor would, sometimes sincere in the belief that
somehow they are rebelling against the system.27
There is another and more fundamental issue that casts
doubts on the benefits attained from current consumption
patterns. Robert Frank (1999) notes Americans’ strong prefer-
ence for large homes and expensive cars (conspicuous consump-
tion) over items such as clean air and water, uncongested traffic,
public transportation and less stress (inconspicuous consump-
tion). The explanation is that these preferences reflect the
importance attached to relative standing in society despite an
ideologically driven emphasis on absolute rewards. The result is
that people end up spending their extra money in ways that do
not give them lasting satisfaction. Such satisfaction, more likely,
would be gained by increased spending on inconspicuous
goods. However, Frank notes that people will not unilaterally
abandon the conspicuous consumption race because that would
lower their relative standing in society. Additionally it is unlikely
that the media would embrace inconspicuous consumption as it
would jeopardize their advertising revenues. The lesson is that
when individual satisfaction depends on other people’s spend-
ing habits adherence to Adam Smith’s rules does not necessarily
provide society with the optimal combination of goods and
services. Therefore contrary to popular belief, consumer welfare
is not maximized from current consumption patterns.
There is little in the way of an effective challenge to prevailing
consumption preferences. Modern consumption attitudes did
32 J. SHAANAN

not come about by chance and there are strong interests with
huge sums at stake in ensuring no change. For example,
recently, large corporations donated funds to defeat rather
modest proposals for labeling GMO products in several states,
including, Washington, Oregon and Colorado. The proposals
would have provided consumers with the information to
appraise and choose among food products. Quite often food
choices are skillfully manipulated through careful applications
of precisely calculated doses of salt and sugar, at times, intended
to addict28; somewhat at odds with the spirit of consumer
sovereignty. We have learned how sugar and MSG can have
numerous alternative names and, of course, this outcome is
rarely intended to enlighten the consumer. Another example
involves the tens of millions of Americans who subscribe to
cable television. They are offered large and confusing blocks
of channels to select from but rarely given the choice of select-
ing among individual channels. Consumers sign indecipherable
contracts, especially in financial products, and find, that they
have given away their rights to sue and have agreed to arbitra-
tion which rarely rules in their favor. In 2014 some politicians
expressed dismay on reading a Congressional Budget Office
report suggesting that many more workers might choose to
retire immediately. The reason being that the Affordable Care
Act (ACA) allows people to purchase affordable health insur-
ance thereby doing away with the old choice of “give up your
job and lose your healthcare”. Apparently, freedom of choice
does not elicit joy from everyone.

7 CONCLUSION
In many important industries the guidance of the invisible
hand of the market is replaced with coordinated private eco-
nomic power and with it the benefits associated with free
 MYTH 1: AMERICA HAS FREE MARKETS 33

markets disappear. Giant firms deal with the market in a dual

fashion. As sellers they do their utmost to exclude themselves
from markets’ competitive discipline. In markets where they
buy resources (including the labor market) they inject com-
petition with great intensity. The use of economic planning
aimed to limit the market’s influence is common among giant
corporations. The takeover process is not sufficient to serve as
the economy’s efficiency monitoring mechanism. A discon-
nect between job performance and rewards evident in cor-
porations is hardly conducive to efficiency. The shielding of
top executives from the market is again inconsistent with
efficiency and contradicts free market principles.
Notwithstanding their market power, information advan-
tages, in-house activities and the one-sided nature of most of
their transactions, the orthodoxy remains that these giant
corporations are no different from any small family owned
business. Despite their market circumventing and suppressing
activities they are considered an integral part of a free market
system. The conclusion is that the free market label is at best
an exaggeration and at worse a distorted description of the US
economy. We do not have free markets of the Adam Smith
variety. The purpose of the myth is not to promote the free-
dom of markets but rather the unrestricted freedom of giant
corporations to profit; unfortunately, the two freedoms and
their outcomes are very different.
 Myth 2: A Great Wall Separates Politics
and the Economy

1 MYTH
Separation between the economic and political spheres is
essential for individual freedom. The economic sector has to
be independent from control of the political authority. A free
market economy ensures such separation and enables eco-
nomic strength to be a check to political power.1 The US,
generally, has clearly delineated and well-respected bound-
aries between the economic and political sectors which,
while not perfect, are sufficient for the US to be labeled
“free market”. This has not come about without struggle as
liberals and collectivists attempt to involve government in
every aspect of the economy and life. Fortunately since the
1980s the tide has turned in the right direction and most
Americans accept the idea that government’s role in the econ-
omy should be minimized.
It is hard to ignore government’s economic intrusions and
impositions including irksome regulations and rules; exces-
sively generous social welfare programs; an inefficient tax
structure that discourages entrepreneurial efforts; and

© The Author(s) 2017 35

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_3
36 J. SHAANAN

burdensome labor laws such as minimum wage and environ-

mental laws. Yet, for the most part resources are allocated by
the private sector. The number of government run enterprises
has been limited and even reduced. Key industries have been
deregulated. Bureaucrats are required to refrain from indus-
trial targeting, i.e., from selecting the business winners, the
industries of the future. We abide by the principles of free
trade more so than most nations. So government and the
economy mostly are separate.
Occasionally there may be a bit of crony capitalism but,
unlike in many other nations, that is the exception. There are
no five-year central government plans for allocating resources.
No government committees decide what will be produced,
how, and who will get the goods and services produced.
These decisions are left mostly to the invisible hand of the
market. As a result the two sectors restrain each other’s power
and political freedom is complemented with economic free-
dom.2 However, we have to be ever vigilante to prevent
government’s natural tendency to encroach on economic
freedom in order to protect (unnecessarily) people from mar-
kets and the hardships they create.

2 POLITICS AND MARKETS

In Myth 1 we saw that based on the private sector’s activities,
serious doubts arise about classifying the economy as free
market. A similar conclusion is arrived at when we examine
the interactions between government and a private sector
dominated by large corporations. Ha-Joon Chang (2011)
argues that the idea of a free market is an illusion. After all
markets are subject to rules and regulations that limit free
choice. A market may seem free only because we have become
so accustomed to certain restrictions that we no longer
 MYTH 2: A GREAT WALL SEPARATES POLITICS AND THE ECONOMY 37

recognize them as such. Importantly, politics determine what

is considered the legitimate sphere of market activities and, by
the same token, what is to be excluded. The decision is not a
market determined one. For example human beings, govern-
ment jobs, votes, judicial decisions and university admissions
currently are all considered to be outside the domain of
market activities. The extent of market freedom also is more
of a political definition than an economic one and govern-
ment is always involved. Wages are determined by political
decisions including on matters such as trade and immigration.
Interest rates are influenced heavily by political institutions
such as political nominees at central banks. If two key prices,
wages and interest rates, are politically determined, then how
free can other markets be, asks Chang.
Another departure from free markets facilitated by political
influence is the legitimization of questionable profit opportu-
nities, including rent seeking. Rent seeking basically involves
wealth extraction activities without any productive addition to
the economy. It is especially likely to occur when government
acquiesces to private sector demands for special privileges.
Rent seeking is harmful to the economy and results in a
misallocation of resources. As corporations’ power is
enhanced by way of friendly government help, the little that
resembles a free market is further weakened or eliminated.
The present market system is neither a natural phenomenon
nor a neutral arrangement that evolved by chance without
regard to its distributional consequences (who gets what and
how much). Instead, it is a fragile institution with many man-
made rules and regulations and a legal framework that has
been designed primarily for the benefit of its most influential
participants – giant corporations. Stiglitz (2012) notes that
many alternative legal frameworks could have been estab-
lished, each one with different consequences for income
38 J. SHAANAN

distribution as well as for growth, efficiency and stability. The

legal framework currently in place has been established to
ensure that the benefits of the economic system go to the
wealthiest individuals and most powerful firms. The economic
system is not designed to maximize efficiency or fairness and
certainly not to benefit the poor or the middle class. The
privilege of setting the rules of the economic game goes to
those with political power (usually derived from economic
power). Through the passage of favorable laws it has enabled
economic players with political influence to create a system
that enriches their companies and themselves. Such laws deal
with competition, intellectual property, taxation, pollution
and protection from liability.3
Even in America, seen as a bastion of capitalism, often
markets alone are not allowed to determine economic out-
comes or, to put it slightly differently, impersonal forces of
supply and demand do not decide exclusively economic out-
comes. Laissez faire advocates would not necessarily disagree
with the above statement but would place the blame on a
meddling government intent on correcting fairness and dis-
tribution issues. However, that is not the primary reason for
market suppression and circumvention. Adam Smith’s invisi-
ble hand is allowed to guide the market but only when it is
advantageous to those with economic power and influence.
Protection and maintenance of competitive markets and their
efficiency properties are not a concern of large corporations.
In fact competition and free markets frequently are seen as
major obstacles that have to be eliminated before giant cor-
porations can fulfill their profit objectives.
Perhaps the strongest evidence that giant corporations’
activities are inconsistent with a free market environment is
the relationship between large corporations and government.
Galbraith suggests that the two groups are so closely linked
 MYTH 2: A GREAT WALL SEPARATES POLITICS AND THE ECONOMY 39

that in important respects they are the same. Therefore the

campaign to keep government and the private sector firmly
separated and allow corporations to maintain their indepen-
dence is misleading because the division is almost imaginary.
As we shall see below corporations have a large interest in
obtaining government’s help.
The driving force shaping the relationship between govern-
ment and the economic sector is corporate profitability.
Walter Adams and James W. Brock (1986) suggest that unlike
the checks on the power of the different branches of govern-
ment there are no checks and balances on access to govern-
ment. Economic power has increasingly gained access to
political influence. The great wall separating the economic
and political sectors, if it ever existed, has been breached and
the process for acquiring political influence has been institu-
tionalized to the extent that it is now perceived as a routine
part of the political process.4 This has allowed government
agencies, in effect, to become lobbyists for large corporations,
giving the latter an unfair advantage and, in the process,
distorting competition and the efficiency of the economic
system.5 The closeness of the relationship between govern-
ment and large corporations is demonstrated by the revolving
door phenomenon, where private sector executives transfer to
government and vice versa and also by corporations acting as
advisors to government on matters of international trade,
energy, finance, transportation and foreign policy.6
When government attempts to intervene on behalf of the
public whether to stop price fixing or pollution, correct health
issues or provide some other public good there is an outcry
from firms (often the same ones receiving government help).
They in turn are joined by laissez faire advocates who rally
against “government interference” while frequently turning a
blind eye to the aforementioned government help on behalf
40 J. SHAANAN

of industry.7 So we have a paradox, government intervention

at the behest of a giant firm is not considered interference
with the market while intervention to improve the public’s
welfare is described as interference with the market. Both
actions distort the market outcome, although the second
type is more likely to have an economic justification and
benefit the public at large. Given the prevalence of cases
involving government intervention to alter market outcomes
on behalf of companies, it is difficult to claim that there is a
giant wall separating the political and economic realms or that
we have a free market.
Talk of a market free of government intervention belongs in
the realm of fantasy. The US is no exception. Tariff protec-
tion, subsidies, research grants, exemption from taxes, dereg-
ulation, or the designation of a natural monopoly may be
attained through campaign contributions, lobbying, bribes,
legal tactics and other expenditures.8 Such spending, legal
issues aside, is profitable to the company but of dubious
value to society as a whole. So strong is the connection
between economic power and the direction of legislation on
economic matters that claims of a free market border on the
absurd and suggest a strong bias in favor of corporate dom-
inance. While textbooks focus on firms gaining market share
through product innovations, improved organization, brilli-
ant marketing or lower costs; reliance on government to
change the rules of the game in one’s favor may be an equally
effective strategy.

3 GOVERNMENT HELP TO CORPORATIONS

Government provides help to large corporations in a variety of
ways. This includes public works that benefit corporations;
the above noted laws and regulations passed on behalf of
 MYTH 2: A GREAT WALL SEPARATES POLITICS AND THE ECONOMY 41

private sector giants; refusal to enforce “troublesome” laws

such as antitrust laws that merely benefit the public and small
competitors; granting tax exemptions; privatizing govern-
ment business, training workers, building highways, subsidiz-
ing R&D, assuring sufficient demand for corporations’
products and, when the need arises, bailing them out to
avoid failure. For the past two centuries firms in key industries
have benefited from government generosity including autos,
railroads and steel, and notably, in the past 20 years, the
financial industry although many other industries also have
received help.9
The government is a major customer for many businesses.
It promotes American business interests overseas. Select
domestic industries enjoy various types of protection from
foreign competition usually determined on political grounds.
Agricultural subsidies stand out as examples of duplicitous
talk about promoting free markets and free trade globally
but sheltering one’s own industry. Government devotes con-
siderable resources to serve the dominant members of the
private sector. Government will even confiscate private prop-
erty (under eminent domain laws) when persuaded that it will
lead to increased commerce.
A remarkable aspect of the corporate-government alliance
is that objectives that represent corporate needs, such as con-
tinuous expansion of output and consumption, favoring of
goods over leisure, consumption over saving, and the conse-
cration of technological change, have been adopted almost
unquestionably as society’s goals10 and promoted as reflecting
the finest aspirations of the nation. Areas deemed unimpor-
tant by large corporations are given a low priority on govern-
ment’s spending list.
Government subsidies and other forms of aid are not always
wrong. However, economic justification for such actions is
42 J. SHAANAN

based on the concept of market failure (discussed in Myth 1)

especially when the overall benefits from a product or service
exceed the private benefits to the firm. Yet in the majority of
cases government assistance is not based on these types of
considerations. Political calculations rather than economic
ones are usually the decisive factor.11 Government may not
set or regulate prices but when it provides help through tax
exemptions, subsidies and protection from competition, and
so on, it changes resource allocation. Its actions represent a
move away from a market determined outcome. The conclu-
sion is that most industries and markets that receive govern-
ment financial assistance or some other form of direct help
cannot be classified as free market because they do not meet
the basic criterion.
It was argued many years ago that central bank manage-
ment of credit is incompatible with a self-regulating market
economy.12 The rescue of large commercial banks as well as
investment banks, mortgage and insurance companies whose
risky loans had backfired in 2007–08 violates a basic condition
for a free market. The Federal Reserve Bank had essentially
socialized risk for them. Some banks may have been aware of
this magnanimous “insurance policy” and it may have fueled
their speculative activities knowing that the Fed would be
rushing to their rescue. The Fed’s actions made it clear that
a very thin line, bordering on the invisible, separates financial
markets from government and politics.13 Similarly, since
1987 Wall Street has enjoyed the protection of the
“Greenspan Put” – the tacit promise to prevent a large decline
in stock prices. The low interest rates promoted by the Fed in
the early 2000s revived the hedge fund industry and led to a
bubble in housing.14
The US financial sector has been favored and within that
sector the largest players (who coincidentally or not exert
 MYTH 2: A GREAT WALL SEPARATES POLITICS AND THE ECONOMY 43

considerable influence over the Fed) were by far the great-

est beneficiaries – an outcome not determined by the
impersonal and invisible hand of the market. The political
sector and not the dictates of a free market play a key role
in the high levels of compensation awarded in the financial
industry.15 The high rewards and the capture of a hefty
share of the nation’s profits have little to do with individual
brilliance in financial matters, and even less with their con-
tributions to society. Instead it was brilliance and aggres-
siveness in influencing politicians from both major parties
to divert income in their direction through a multitude of
laws, policies and regulations and more generally activities
defined as rent seeking. Success did not come about
through the invisible hand of the market but from bene-
factors in the halls of power. The economy is not a free
market when powerful groups can impose laws and rules
favorable to a privileged few. Such a system is far removed
from free market principles but more in line with a
Darwinian survival of the fittest, and not necessarily the
economic fittest.

4 CORPORATE WELFARE
One of the more glaring departures from a free market system
is the aforementioned government money granted to large
corporations at immense cost to taxpayers and the economy.
This type of redistribution was not well documented and even
now only an incomplete picture is available. However, from
several recent studies that have examined in detail different
facets of government generosity to corporations it would
appear that the actual numbers are far higher than previously
estimated. This type of help to corporations has been dubbed
corporate welfare and it takes on many forms.
44 J. SHAANAN

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. In
2012, the USDA spent about $14 billion insuring growers
from loss of crop income.16 The cost to the nation does not
end there in that this uncapped and controversial program
encourages growers, often financial institutions and affluent
individuals, to gamble on risky plantings. In fact critics claim
that the program has almost eliminated risk from agriculture.
Bloomberg editors (2013) use a study by Kenichi Ueda and
Beatrice Weder Di Mauro (2012) to estimate that being
classified as “too big to fail”17 reduced the 10 biggest
banks’ costs of borrowing by about $83 billion annually and
can be regarded as a government subsidy (although some
disagree). The mortgage deduction amounts to a cost of
$70 billion of lost tax revenues and serves as a subsidy to
real estate and the mortgage banking industry.18 (It is difficult
to calculate how much of that amount can be apportioned to
corporations.)
Generosity at taxpayer expense is not restricted to the
Federal Government. Louise Story (2012) writes that local
and state government provided corporations with approxi-
mately $80 billion of subsidies in 2011. In the summer of
2015 the government of the state of Wisconsin decided to
grant the new owners of a professional basketball team – the
Milwaukee Bucks – a subsidy of a quarter of a billion dollars to
help pay for a new arena. Sports economists generally see little
merit in public grants to stadiums and arenas. A month earlier
the same government had cut the budget of the University of
 MYTH 2: A GREAT WALL SEPARATES POLITICS AND THE ECONOMY 45

Wisconsin System by an identical amount. The arena owners

had skillfully garnered political support from both Democrats
and Republicans. If Milwaukee County falters in its annual
debt payment of $4 million, state aid to the county could be
withdrawn.19
Government’s kindness to corporations, however, does not
end with subsidies. Tax breaks play an equally important
redistribution role. National Priorities Project (2013) esti-
mates, that tax breaks for hedge fund managers amounted
to $83 billion. A GAO report (2013) calculated that in 2011
Treasury lost about $181 billion from corporate tax expendi-
tures (more appropriately labeled exemptions). There are
many items listed here but the main exemptions include
items such as accelerated depreciation of machinery and
equipment, deferral of income from controlled foreign cor-
porations, a deduction for US production activities and credit
for increasing research activities.20 US PIRG (2013) estimates
that corporate offshore tax havens cost taxpayers approxi-
mately $141.5 billion in 2012. According to Dean Baker
(2012) patents raise the price of prescription drugs by close
to $270 billion a year compared with the free market price.
An additional category of corporate benefits, albeit some-
what more indirect but nonetheless representing a burden on
the nation, might be labeled the cost of inefficient pricing in
the energy sector. An IMF (2013) study for 2011, estimates
that post-tax energy subsidies in the US amounted to $502
billion. This large number includes the social costs arising
from different externalities caused by the subsidization of
fossil fuels and the resulting overuse. Subsidies, notes the
study, lead to excessive consumption of petroleum products,
coal and natural gas while reducing incentives for investment
in energy efficiency and renewable energy. The costs calcu-
lated include those of global warming and local pollution
46 J. SHAANAN

arising from carbon dioxide, sulfur dioxide and other pollu-

tants due to fossil fuel combustion. It also includes traffic
congestion, traffic accidents and road work resulting from
increases in auto usage as a result of incorrectly priced fuel.21
The above numbers are not exhaustive. They do not
include for example the trillions of dollars paid or risked in
the 2008 bailouts, or the large indirect subsidies given to the
mining industry from permission to mine on government
owned land for low fees. Not included is the cost of the
aforementioned bill that prohibits government from demand-
ing discounts from pharmaceutical companies.22 The above
numbers while not always precise do give us some idea about
the magnitude of government’s generosity toward corpora-
tions, especially the largest ones. From our current perspective
they only strengthen doubts about the existence of a divide
separating politics and the economy and consequently about
the existence of a free market economy.
Other types of government help to industry abound. The
auto industry has been the recipient of such help for many
years. The assistance ranged from indirect subsidies through
government funded highway construction to government
imposed limits on auto imports set in the 1980s. The latter
raised the average price of an American car by $370 and
Japanese cars by $90023 and involved an income transfer
from US consumers to foreign producers. Help to the auto
industry also includes allowing delays in requirements for
greater gas economy; limiting funds for public transportation;
and not holding the industry accountable for the large social
costs it imposes. Another industry benefiting from periodic
import protection has been the steel industry in the last third
of the twentieth century. The oil industry experienced con-
siderable government intervention, often with questionable
economic objectives24 including the granting of immunity
 MYTH 2: A GREAT WALL SEPARATES POLITICS AND THE ECONOMY 47

from antitrust laws. Notwithstanding an avowed aversion to

industrial targeting, the US may have devoted more resources
to such policies than many other nations.25 As noted pre-
viously, if this help was based on careful economic considera-
tions relating to market failures then it might be justified;
unfortunately that is rarely the case.26

5 CONCLUSION
Markets play a useful and important role in the economy but
the idea that they are or were self-contained, self-regulated
entities with little if any government intervention is a myth.
Markets are based on many man-made rules and regulations
and a legal framework that has been designed primarily for the
benefit of giant corporations. The rules and regulations origi-
nate from the political sector influenced in turn by the domi-
nant economic players, not the invisible, impersonal hand of
the market. Political power acquired by corporations, espe-
cially in the financial sector, resulted in massive redistributions
of taxpayer money to those companies representing nonmar-
ket outcomes. We allow these types of outcomes to proliferate
and even describe them as market solutions when they clearly
are not and produce inferior results in most respects. They are
not representative of the type of markets that we seek because
they diffuse neither economic power nor political power.27 An
interesting point made by Colin Crouch (2011) is that when a
corporation is in dispute with government, the arguments
made on its behalf are often phrased deceptively in terms of
“the market” whereas what is at stake is the private interests of
a firm not the market.
Finally, we saw in Myth 1 that because of numerous market
failures the US economic system does not fit the free market
description. Here we find that rent seeking is substantial and
48 J. SHAANAN

political influence frequently substitutes for the guidance of the

invisible hand of the market. It should be noted that there is a link
between the two findings. John Kay (2009) notes that as eco-
nomic concentration increases so do rents and rent seeking type
behavior. Business energies then are devoted to extraction and
redistribution of wealth as opposed to creating new wealth and
enriching the nation. To limit rent seeking activities there has to
be a dilution of economic power which is also a prerequisite for
limiting the economic sector’s control over the political sector.
 Myth 3: The Less Government, the Better

1 MYTH
Government economic activities are inefficient compared to
the operations of private sector firms. Government has neither
the expertise, nor the incentive to make efficient decisions.
Bureaucrats cannot match the market’s information proces-
sing capacity. Government is staffed with people who are at
best incompetent, lacking the purity of purpose and single-
mindedness of entrepreneurs and at worse seek to enrich
themselves at taxpayer expense. Government’s meddling
obstructs business from its primary mission of producing
goods and services for America. Its regulations are created
on behalf of shady interest groups, including unions and, all
too often, serve to protect incompetence and inefficiency.
Government’s intervention rewards the lazy and the unambi-
tious while penalizing hard working, risk taking and successful
Americans.
Without government’s red tape and redistribution agenda,
America would be on its way to reclaiming its birthright and

© The Author(s) 2017 49

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_4
50 J. SHAANAN

becoming once again a model to the rest of the free world as it

was following WW2. Instead, government has a penchant for
borrowing vast sums of money thereby driving interest rates
higher which undermines private investment and slows down
the rate of growth of the economy. All this is done for the sake
of ill-conceived social programs that augment the power of
bureaucrats and politicians but do not really help their
intended beneficiaries and are anathema to free market ideals.
A dangerous outcome of government economic intervention
is that it diminishes individual liberty. Therefore, it should be
obvious that reducing government’s role in the economy (and
society) will improve the nation’s welfare. People know how
to spend their own money better than government.

2 ATTACKS ON GOVERNMENT
Fear of big government is not a new phenomenon. One can
go back to the laissez faire era of President Jackson and the
antagonism to the federal government prevalent in nine-
teenth-century America. If in the early twentieth century
large corporations’ power was seen as more dangerous than
the federal government’s power then by the 1920s attitudes
had changed and laissez faire was popular.1 However, by the
1930s perceptions would change again, and drastically so.
The length and severity of the Great Depression contradicted
classical economists’ notion of the market as a self-regulating
mechanism and with it the appeal of a small nonintervention-
ist government declined.
Laissez faire ideology came back in vogue in the 1970s. It
was given considerable support although not many were
aware at the time (or today) of the organized push behind it
including from wealthy backers with strong ties to media and
academia and research foundations established specifically for
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 51

that purpose. It was not too difficult to persuade the public to

accept the message. In good economic times laissez faire was
hailed as the cause of prosperity2 and in bad times, govern-
ment, fairly or not, received a large share of the blame.
Government was an easy target and was criticized for dama-
ging the free market economy with its high taxes and needless
interventions.
Arguments were made in the 1980s that the US was falling
behind Japan and needed to improve its competitiveness.
The quick and obvious solution was to reduce corporate
and high earners’ taxes. Specifically, reducing marginal tax
rates would result in people working harder and reducing
corporate taxes would lead to more investment thereby
returning the US to economic pre-eminence. Regulation, it
was claimed, both economic and social (involving health and
safety), had become excessive and was burdensome to the
point of stifling innovation. Social programs were criticized
for having created a culture of dependency and needed to be
dismantled. The self-regulating market would take care of all
concerns and if the market is not sufficient the legal system
could plug the holes through private lawsuits. Privatization
and deregulation became synonymous with economic
efficiency.
The message driven home was that people had to learn to
live with risk and get used to change. A cradle to grave
government safety net may be fine for Europeans but not
Americans. Americans would not sanction idleness and permit
the unemployed to live “high on the hog” at taxpayer
expense. America cherishes self-reliance, individual initiative
and hard work; not dependency on government handouts,
especially, if the beneficiaries are able bodied and can work.
Consequently, laissez faire advocates with corporate backing
attacked support programs for the poor and, more generally,
52 J. SHAANAN

the relatively small US safety net that had been established

mostly in the 1930s. They would try to minimize or eliminate
all regulations that cut into business profits no matter how
important they were to employees, customers and the public
at large.
Another oft repeated message was that economic matters
ought to be left to the private sector. Markets are the efficient
mechanism for allocating resources; freeing the market from
the weight of government intrusion would allow the nation to
prosper and achieve its full potential. According to Milton
Friedman (1962) government’s function is to do what the
market cannot do for itself, primarily establish and enforce the
rules of the game (with a begrudging nod to market failures).
The reasoning being that government intervention beyond
the bare minimum threatens individual freedom. The smaller
and more limited is government the less likely are the
demands of special interests to prevail.3
While nineteenth- and early twentieth-century laissez faire
economists argued on behalf of market decisions, some were
amenable to a variety of government economic interven-
tions. Acceptable policies included those dealing with fac-
tory legislation, education and public health.4 In late
twentieth century American laissez faire proponents became
more doctrinaire. Friedman (1962), e.g., is adamantly
opposed to government involvement in education other
than possibly providing subsidies for poor parents. Parents
who can afford it should pay directly for their children’s
education. By so doing, he argued, government’s costly
machinery is avoided as is the specter of government control
of education.5
Some groups, such as libertarians, seek either no govern-
ment or a vastly reduced government with voluntary coopera-
tion replacing its functions. While acknowledging private
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 53

market failure as a real problem, they claim that such pro-

blems are more serious in political markets. Unlike private
markets, in political markets almost all decisions are made by
people who will bear few of the costs and receive few of the
benefits of those decisions.6 Similar arguments are found in
the public choice literature where a theory of government
failure paralleling market failure has been introduced.7 It is
suggested that either bureaucrats or politicians (and some-
times both) will seek to maximize their own well-being rather
than that of citizens.8 This argument is reinforced by pointing
out that bureaucrats being in a “nonprofit enterprise” will
resort to nonpecuniary goals (e.g., office perks) to augment
their incomes. The outcome is that government is far less
efficient than the private sector. However, this assertion
ignores the possibility that government employees may have
alternative goals to individual profit maximization such as
public service, sense of duty and so on.9
It is rarely mentioned that Adam Smith saw a role for
government beyond justice, police and defense. He recog-
nized that government could have a useful role in public
works such as in transportation and education. Additionally,
Smith supported legal ceilings on interest rates and regulation
of imports, banking and currency. Noteworthy is that he also
advocated something akin to minimum wages given what he
perceived as the uneven bargaining positions between workers
and employers. John Stuart Mill, while favoring laissez faire,
argued for exceptions to the doctrine based on utilitarianism
including on matters of distribution.10
In fact, modern laissez faire’s admiration for Adam Smith
may be somewhat misplaced. As Roger Backhouse and Steven
Medema (2009) point out, Smith’s case against government
had to do with objections to mercantilist11 policies (which
protected influential merchants and manufacturers), not
54 J. SHAANAN

because of any perceived inefficiencies in government opera-

tions. Smith wanted to do away with monopoly and major
impediments to competition and thereby help consumers.
Smith did not hesitate to criticize the major corporation of
his time – the East India Company – and he had little doubts
about the clash of interests between large companies and the
public.
Milton Friedman argues that shrinking government would
weaken the influence of special interests. Therefore it is puz-
zling that some of the most powerful special interests, includ-
ing billionaires and large corporations, fund the publication
and promotion of literature calling for reduced government.
The purported reason for their support is the threat to free-
dom. The so-called threat includes, among others, having to
abide by environmental laws, pay a fair share of taxes, pay
employees a livable wage, allow the great majority of
Americans affordable health care and allow for minimal edu-
cation standards for the children of the 99 percent.
Limiting government activities to restrain the power of
corporations might be justified but that is not what
Friedman (unlike Adam Smith) means. The outcome of his
proposals would be the rule of corporations rather than
elected government; so whose political freedom is being pro-
tected? Friedman would argue that corporations represent the
free market because everyone buys their products. Yet, in
essence he’s entrenching the status quo, the unique position
of corporations. Not surprisingly they support his ideas.
The efficiency-fairness tradeoff was used by economists to
warn against government redistribution. The tradeoff was
portrayed in terms of either having a fast growing economy
with a higher GDP or else being held back by quaint notions
of fairness and redistribution. The latter through distorted
incentives would impoverish the nation or at least prevent it
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 55

from growing while the former would benefit most people.

The tradeoff argument was popular throughout the second
half of the twentieth century but currently is viewed with
more skepticism (as argued in Myth 7). If the economic
efficiency arguments are not strong enough then there also
is the aforementioned Friedman idea, equating a weaker and
smaller government with greater individual freedom.
People will have more free choice without politicians
imposing their biased compromises. In Orwellian fashion,
reduced social protections and greater risk and anxiety thrust
on millions of Americans, combined with increased power
and profitability for giant corporations, are described as repre-
senting greater freedom for individuals. Laissez faire ideolo-
gists when making the above claim tend to ignore one of the
most crucial relationships in America – that between the state
and giant corporations – except for concerns about govern-
ment’s harmful impact on corporations but rarely vice versa.12
For them the damage inflicted by concentrations of economic
power on the economy and democracy is a nonissue.

3 THE MYTH’S PURPOSE

Notwithstanding promises of enhanced economic efficiency,
greater individual freedom and stronger democracy, the pur-
pose of the laissez faire campaign is to redistribute America’s
income and wealth in reverse Robin Hood fashion. The anti-
government ideology led Americans to ignore government
(and democracy’s) accomplishments and instead to see it as
an intrusive force whose social programs are to blame for their
hardships rather than government’s inaction. Milton
Friedman argued that Americans could do away with govern-
ment funded programs such as Social Security, public high
schools, health care and others, yet, did not provide evidence
56 J. SHAANAN

that these programs were seriously flawed. Friedman criticized

growth of government in the 1950s and 1960s. Yet, during
this period both US GDP and productivity grew at a fast pace
despite large increases in the share of spending by government
mostly on social expenditures.13 There was no such rapid
growth following the tax cuts and deregulation of the 1980s.
Laissez faire proposals to reduce government involvement
were implemented to varying degrees in the US starting in the
late 1970s. Darwinian rules effectively replaced antitrust laws
with the result being less protection for competition and
markets. Laws were changed and judicial bodies influenced
to adopt the efficiency hypothesis and its unproven associa-
tion with the operations of giant corporations. Government
responsibilities, accepted as the norm in a majority of Western
democracies, were dismissed as obstacles to economic growth
and as anti-American. America embarked on a deregulatory
push which left consumers and employees in a variety of
industries and markets with less protection, as did
privatization.
Social investments were curtailed and cuts were made in the
provision of public goods such as public transportation, high-
ways, bridges and public health. Government investments in
areas such as education, transportation and infrastructure
were lumped together with the notorious “bridge to
nowhere” and presented as unproductive and unsound eco-
nomic investments. Yet, as noted by Stiglitz (2012), these
investments are crucial to the growth of the economy. The
message drummed home was that only private-for-profit
transactions are worthwhile and their social benefits are com-
mensurate with their profitability.14
In the twenty-first century laissez faire policies were inten-
sified under the Bush administration. The private sector was
given the green light to reduce social protections. Increased
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 57

risk was passed onto individuals as pensions were phased out

and people had to take on responsibility for their financial
future without the training to do so. Health insurance for
many was reduced or terminated until ACA was passed. Fierce
attempts were made, albeit unsuccessfully, to privatize Social
Security and allow Wall Street a share of that money.
The results of the “pro-market” push that began in the
1980s proved to be dismal. It led to a widening gulf between
rich and poor and rich and middle class and slower economic
growth. The promise of significant productivity increases
resulting from ridding corporations of the burden of govern-
ment restrictions did not materialize. Reduced income tax
rates combined with deregulation and an indifferent enforce-
ment of existing regulations did not improve productivity
rates. There was also a cynical aspect to the various proposals
for tax cuts termed “starve the beast”. The reduced taxes
would also cause government to shrink in size and cut
spending – a double advantage from the perspective of its
advocates.15
Real wages barely rose over the next 30 years and family
income kept up mainly because a second wage earner entered
the labor force. The lot of the average American did not
improve. Yet, the top one-tenth of one percent of income
earners saw large increases in their income share. That’s what
it was all about. To that end resources were deployed to
influence academia, research centers and politicians. Under
the guise of liberating markets from government, the econ-
omy had been redirected to benefit the few with little in the
way of efficiency increases. Giant corporations, especially
financial firms, had more leeway and they proceeded to
stamp their own special imprint on the economy.
Criticisms of government economic involvement often are
less a matter of principle than a preference for one type of
58 J. SHAANAN

intervention over another.16 It is rather strange that govern-

ment help for a hedge fund and, more generally, speculation is
classified as essential to the well-being of the economy while
raising the minimum wage is seen as a heavy handed intrusion
in matters that are strictly the domain of the private sector.
Similarly it is ironic that laissez faire advocates seek to end
government redistribution from rich to poor while quite
comfortable with redistributive flows in the opposite direction
such as large subsidies and tax breaks for corporations. The
bailouts arousing the most opposition were not those for
reckless speculation but those intended for auto companies
and their unionized workers and, worst of all, plans to help
home owners pay their mortgage.17

4 ON BEHALF OF GOVERNMENT INTERVENTION

Markets help improve standards of living however they can
lead to severe inequality. They often fail to protect workers
and consumers and cannot provide adequately essential things
that people need. These include job security, decent wages,
good education, affordable health care, clean air and water,
and safe bridges. People also require a financial system that
can be trusted and a stable economy among others. John Kay
(2007) points out that there is a broader issue here which is
that some of the above issues cannot be addressed entirely by
markets based on self-interested individual decisions. They
involve political choices and require some social-political con-
sensus. It is in these areas that government has an important
role to play.18
Government is also necessary to help protect people from
unexpected and fast changes. In fact, without an active gov-
ernment a nation cannot respond well to change thereby
constraining growth and possibly leading to social upheaval.19
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 59

Government redistribution policies can be seen as a form of

insurance that provides help to all citizens from the risk of loss
of income more likely in a fast changing global economy.20
With social protections people may be willing to take on more
risk whether in enterprise or in a new job knowing they have
some minimal protection in case of failure and the same
applies to acceptance of change.21
Governments have played a significant role in all successful
large economies that have high standards of living and fast
rates of growth.22 More government spending and even
higher taxes are not necessarily bad for economic growth.
For many years the US government, through the use of fiscal
and monetary policies, stabilized the economy tackling unem-
ployment and inflation. The idea that big government
emerged at the expense of the private sector is fiction; large
corporations often need big government for maintaining
aggregate demand, training personnel, providing subsidies
for R&D, and building highways and airports.23
Several European nations have grown well and attained
good productivity rates (some with higher rates than the
US) and their citizens enjoy standards of living no lower
than those of Americans. They have accomplished this despite
what in the US would be described as high taxes, expensive
social programs (including single-payer health care) and gen-
erally heavy government involvement in the economy.24
Finland and Norway, post-1990, experienced fast economic
growth notwithstanding relatively large government spend-
ing. Sweden, seen as the archetypical welfare state, attained a
growth rate only slightly below that of the US, contrary to
laissez faire advocates’ warnings. More generally, most of
today’s affluent nations did not accomplish their high stan-
dards of living through laissez faire policies; instead, a signifi-
cant governmental role has been essential. However, many
60 J. SHAANAN

developing nations that adopted so-called market reform poli-

cies grew at a slower rate, with more income inequality and
more financial crises, than during the era of greater govern-
ment economic involvement.25
Colin Crouch (2011) takes issue with claims of alleged
government inefficiency in comparison with the private sec-
tor. He points out that the efficiency claims made on behalf of
the private sector are strange given the wide diversity of firms
and quality. The private sector includes sweat shops based on
child labor; manufacturers of poor quality goods and
unhealthy food; contractors that do not complete the job on
time; monopoly-like firms oblivious to their customers’ con-
cerns; software companies that prevent the entry of competi-
tors; numerous companies that engage in rent seeking
activities; corporations that pollute the air and water; compa-
nies that extend their monopoly patents through minor
changes to their products. In the past decade some private
contracting in the US has led to disaster, at times, of national
significance.26 The point is that the private sector consists of
all types of firms including those that are far from being a
model of efficiency, quality and integrity. The private sector is
not necessarily superior to the public sector.
Crouch also notes that the public sector in democracies is
held up to a much higher standard than the private sector and
government cannot use the profit motive as a justification for
either shoddy products and service or conduct that violates
ethical and moral standards. In fact, government operations
face considerable more scrutiny and transparency rules than
the private sector. Nepotism and favoritism are far more
acceptable in the private sector.27 Robert Kuttner (2007)
and Stiglitz (2012) claim that Medicare is run more efficiently
than private health insurance plans. Social Security operates
more efficiently than private life insurance with substantially
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 61

lower costs and offers a lot more than is available from the
private sector, including protection from inflation and stock
market instability.28

5 MARKET FAILURE AND GOVERNMENT INTERVENTION

On strictly economic grounds the justification for govern-
ment intervention is the case of market failure, as explained
in Myth 1. In markets and industries subject to market failure
the private pursuit of profit does not lead to an efficient
allocation of society’s resources. In such cases government
intervention could potentially improve matters. For many
years economists treated market failures as exceptions to the
general rule that markets yield efficient outcomes. More
recently there is growing awareness that market failures are
far more common than was once believed suggesting an
economic role for government.29
A key market failure is the lack of meaningful price compe-
tition in imperfectly competitive industries. Many important
US industries suffer from this failure. Unfortunately, antitrust
laws meant to protect competition and prevent the creation of
market power have been minimally enforced in the recent
decades. A second market failure is imperfect or incomplete
information on the part of either the buyer or seller.
Information problems, among other factors, led to food safety
regulation and regulation of drugs. In the financial industry
government insistence on more disclosure would most likely
improve allocative efficiency and protect many people. In
health care there is a large imbalance of information between
physicians and the public, especially with regard to surgery.
Another problem is “adverse selection”30 which potentially
could have led to the disappearance of private health insur-
ance because of high prices driving away healthier customers
62 J. SHAANAN

thus necessitating even higher prices and the loss of even more
customers.
Several advanced industrialized nations have solved the
adverse selection problem by introducing single-payer health
coverage. The US adopted employment-based private health
insurance albeit with large government subsidies estimated at
about $150 billion a year.31 Even then about 36 million
people were uninsured and, with little incentive for cost con-
tainment, health care costs were rising at a fast pace. The
Affordable Care Act (ACA) passed in 2010 maintains the
private health insurance system but extends some level of
insurance to millions who previously could not afford it or
else were denied coverage. ACA, though, requires an intricate
balance of specific conditions to support the system and pre-
vent its collapse. These include the requirements that insur-
ance be made available to all regardless of pre-existing medical
conditions (community rating); that everyone has to buy
insurance (individual mandate) and that government provide
subsidies to make the insurance affordable to all.32
So ACA represents a hybrid system where all are required to
purchase private health insurance but substantial government
subsidies are necessary. It is a rather precarious system that
could be toppled by foes fearful of a move away from private
health insurance and possibly from private health care. It is
unclear whether the costs or the increases in costs are going to
be reduced – the marketing costs and profit needs of health
insurance companies remain – long term in comparison with a
single-payer plan. There is also the issue of the rising cost of
medicine, at times, to astronomical levels.
Over the past three decades government, due to pressure
from powerful industries and strong ideological support, has
become more reluctant to correct market failures. One might
add that this especially applies to corrections that would
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 63

benefit the public at large. The drive to “liberate” the econ-

omy, and consumers in particular, from government’s protec-
tions regardless of need, efficiency, cost or suffering has been
relentless. Usually, the argument put forward is that indivi-
dual freedom is enhanced by “pro-market” solutions whereas
in reality it is about increasing corporate freedom to profit in
more ruthless and deceptive ways and in the process light-
ening the consumer’s wallet.
Market failures are the common justifications given in eco-
nomics for government intervention. However, there are also
socio-economic and political reasons for government inter-
vention based on widespread demand for services marked by
compassion and fairness. Kay (2007) argues that the desire for
such features has been instrumental in Britain’s (and possibly
other nations’) selection of public funding for health care
rather than economic arguments based on market failure.
Policies based on compassion, fairness and trust emerge
from widely shared views leading to a political consensus
about the nature of society. Demand for service incorporating
the above criteria cannot be satisfied by leaving matters
entirely to individual choice in the marketplace. Health care
and education require public decision making and public
actions. (Yet, Kay is careful to warn against assuming that
this necessarily means centralized direction and political con-
trol and the abandonment of individual choice.) In the US
there may be less of a consensus about the nature of society.
An example of Kay’s social-political concerns combined
with market failure is the current pricing practices of some
pharmaceutical companies. It involves shrewd gaming of the
US health care system at enormous cost to Medicare. Elgin
and Langreth (2016) write that the production costs of a
year’s supply of Gleevec, a drug used for chronic myeloid
leukemia, are about $200. This though does not take into
64 J. SHAANAN

account research costs, marketing costs and profits. Therefore

a somewhat higher price is required. Currently the price is set
at $120,000 a year. The drug cost Medicare close to $1
billion in 2014.
To get Medicare to pay for the drug and other very highly
priced drugs, several pharmaceutical companies donate what
appear to be generous amounts to patient assistance charitable
organizations (co-pay charities). Positive publicity aside, the
charitable donations allow hundreds of Medicare patients to
obtain an otherwise prohibitively expensive drug. The donor
company covers the patients’ out-of-pocket costs and there-
fore the patient qualifies for Medicare coverage for the
remaining cost. However, the drug company ends up receiv-
ing many times more money from Medicare; a rather lucrative
donation. A continuation of this trend could endanger
Medicare.33 The muted response from government to these
cases is also a lesson in how the executive and legislative
branches have become inured to laissez faire excesses.

6 GOVERNMENT INTERVENTION
Government played a prominent role in the economy of early
America, far more than is suggested by popular myths which
portray that era as a laissez faire paradise lost. In reality, both
price and quality regulations characterized the economy.
Government help was very important to two of the largest
construction projects of the nineteenth century; railroads and
the Erie Canal. More generally government help was crucial
to the development of capital and even the corporate struc-
ture. State bonds were issued to fund railroads and this
method of financing set a precedent in linking government
and corporate finance. In fact, huge corporations more likely
came about because of government granted rights, privileges,
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 65

and exemptions and not, as is frequently claimed, from market

determined efficiency requirements.34
As America transformed into an industrial economy in the
nineteenth century severe economic problems arose that
necessitated government intervention including help for
unemployed industrial workers. In the twentieth century no
event demonstrated more forcefully the need for government
economic intervention than the Great Depression. The mar-
ket could not extricate the nation from the grip of an eco-
nomic catastrophe that would last for almost a decade. This
economic calamity shook Americans’ belief in a laissez faire
system that had failed them so badly. At the height of the
Depression 25 percent of Americans were unemployed.
Wages had fallen in some places to seven cents an hour and
still this did not result in much hiring.35 In large cities bread
lines were not uncommon as were increasing numbers of
homeless people. Many banks went bankrupt and millions
lost their savings.36
President Franklin Roosevelt was willing to break some-
what from the laissez faire convention of that period and
challenge economic elites opposed to economic and social
reform. It became clear that the 1920s’ style speculative free-
dom had to be restricted and something had to be done about
sharp turns in the economy. The Roosevelt Administration
introduced unemployment compensation and Social Security.
To provide employment the WPA was created to build public
projects ranging from parks to bridges. The Banking Act
established the FDIC and would guarantee depositors’
money up to a specified amount. Kuttner (2007) notes that
despite government’s remarkable achievements during this
tough period, not the least of which was saving capitalism,
few Americans associate this success with more government
involvement in the economy.
66 J. SHAANAN

Markets had proven to be unstable. The economy needed a

boost which could not come from either business or consu-
mers. The only sector capable of rescuing the nation was
government through its spending power. The actual rescue
effort was partly intentional, and rather meager at that, and
partly unintentional (preparations for World War II).37
However, it did succeed eventually in reviving the economy.
So harsh was the Depression that for two generations it
became accepted that government had a responsibility to
shield people from the hardships of economic disasters. Not
only was this a caring and politically popular policy but it was
based on sound economic thinking (later derided at the
behest of wealthy individuals and large corporations) in that
it helped maintain overall economic stability. As a result of the
devastation brought on by the Great Depression, America
moved away from a laissez faire economy to a more managed
form of economic and social organization where government
played a greater role.
Another important policy change resulting from the lessons
of the Great Depression was regulation of the financial sector.
The significance of this change and its later overturn had been
largely ignored until the Crash of 2007–08. As Stiglitz (2010)
points out, for 40 years regulation led to a stable financial
system with good growth and with banks concentrating on
their primary function which is to lend money, particularly to
growing businesses, rather than engage in proprietary trading.
In those years government fought business fraud and
enforced antitrust laws thereby helping protect markets
despite the clash with corporate profits.
The institutions established during the New Deal era served
America well for the next four decades. However, later on
laissez faire forces were, once again, given free rein to spec-
ulate and take advantage of the public as financial regulations
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 67

were discarded. Not surprisingly, a new economic disaster

struck. After the financial crash of 2007–08, the forces that
had pushed for deregulation did not permit America to rein-
stitute regulation. Their leverage over politicians, the media
and academia was far too powerful to allow much more than
mild reforms in terms of increased government supervision.
Arguably, even newly introduced financial rules brought
about relatively small changes.

7 GOVERNMENT’S ACHIEVEMENTS
There is a strong reluctance to acknowledge government
contributions to the development of the US other than the
role of the Founding Fathers and the need for government to
defend property rights. Yet, US governments in the twentieth
century have a lengthy list of achievements that helped the
nation prosper. The US has benefited from stable government
enabling investors to find a safe haven for their investments.
After WW2 government passed a bill that made it easier for
returning GIs to enroll at universities, built a national high-
way system, passed a Medicare bill for the elderly, Medicaid
for society’s less fortunate, various consumer and worker
protections. Despite strong opposition, the US government
established minimum wages, maximum work hours, worker
safety laws, and provided public goods such as highways,
water and sanitation systems, and vaccines.38 The US was a
pioneer in providing free public education and later afford-
able higher education.39 The US had one of the highest
enrollments in elementary education and a large percentage
of young people studying in universities.40 Chang (2011)
points out that the nation’s most brilliant and enterprising
individuals could not have accomplished what they did
without the support of many collective institutions. These
68 J. SHAANAN

included a scientific infrastructure, an educational system that

trained their employees, a legal system to protect their orga-
nizations’ inventions and products and a financial system for
raising capital among others.
Technology’s role in enhancing the nation’s economy is
widely acknowledged, so it is surprising that the US govern-
ment’s contributions here are mostly ignored. Government
funding for education and for research and development led
to many twentieth-century inventions and innovations and
played a role in improving US productivity. Government
funded generously basic research, an essential building
block for many commercial applications. For most of the
twentieth century US expenditures on R&D exceeded
those of its industrial rivals and probably helped it gain a
lead in high tech industries.41 Government funding for the
development of the internet, gave American companies an
advantage in electronic commerce as did funding for bio-
technology, jet engines and several additional areas.42
Commercial products arising from research funded by the
Pentagon and NASA include satellite television, titanium
golf clubs, GPS navigation systems, water filters, cordless
power tools, smoke detectors, ear thermometers and scratch
resistance eye wear.43

8 CONCLUSION
Despite government’s significant accomplishments, including
its role in improving productivity and standards of living,
Americans were taught to look down on all government
economic involvement that did not profit large corporations.
Consequently public works and public investments were
reduced, regulations were abolished and consumers and
 MYTH 3: THE LESS GOVERNMENT, THE BETTER 69

employees were left with less protection as was economic

competition. Financial predatory practices that had been out-
lawed in the 1930s reappeared legally. Entitlements were cut
and many cheered without realizing that the Social Security
checks and Medicare benefits that their elderly parents receive
constitute entitlements. The pace of economic growth
declined during the laissez faire years. US income inequality
reached levels not seen in a hundred years. America by adopt-
ing laissez faire moved away from what had worked in pre-
vious decades.
And when was it considered appropriate for twenty-first-
century government to intervene in the economy and over-
turn the market’s verdict? It was when the top echelon of
giant commercial and investment banks demanded to be
rescued. To that end they utilized the politicians they finance
and America’s central bank which they largely control. It was
when these companies and their wealthy CEOs were about to
fail as a result of highly leveraged and speculative activities that
the national interest was invoked. For that purpose no
amount of taxpayer money was deemed too large or too
risky. On that occasion few representatives uttered their favor-
ite refrain to denounce government spending, “it’s not their
money it’s your money”. Government intervention to reverse
the market’s outcome for the sake of the wealthy and power-
ful was sanctioned, unlike help for struggling home owners
which was considered reprehensible.
When an advanced industrialized society weakens the eco-
nomic role of government it is large corporations and billio-
naires that benefit and not the majority of people. Contrary to
Milton Friedman’s claims, a market is not a democracy. A
government can ensure that children do not starve; that the
sick can get a minimum of care; that the elderly have enough
70 J. SHAANAN

money to survive in retirement; that children obtain some

education; and that banks do not take excessive risks with
other people’s money. Leave all this to the profit motive and
the result can be disastrous as we have learned already in the
New Millennium. All in all the US needs a careful balance
between the role of markets and government.
 Myth 4: Deregulation Always Improves
the Economy

1 MYTH
Deregulation and privatization are absolutely necessary for
improving the economy’s efficiency. It is vital to eliminate gov-
ernment regulations that provide unwarranted protections to
consumers and employees while burdening business and inter-
fering with working of the free market. It is also important to get
rid of government run enterprises and programs that supposedly
protect the public but more likely serve a sponsoring interest
group. Lessening government regulations would go a long way
to solve our economic ills and place us on the path to prosperity.
A nanny state is not compatible with a modern dynamic econ-
omy and, above all, clashes with free market principles. Other
nations also would be well advised to follow these guidelines.1
Deregulation represents a move toward free markets and
away from the tyranny of bureaucracies. Regulations and
restrictions stand in the way of innovation and technological
progress. Following deregulation, industries protected from
competition, from the need to innovate and reduce costs,
have to deal with the uncompromising realities of the market.

© The Author(s) 2017 71

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_5
72 J. SHAANAN

Deregulation spurs the economy and raises productivity and

living standards. Private sector businesses, regardless of size,
market power or political influence, are bound to be superior
to government run or regulated firms, especially, when the
profit motive replaces bureaucratic incentives.

2 REGULATION
There are different types of regulation including economic,
financial, health and safety, consumer protection, employ-
ment and environmental, among others. Yet, regulation,
while generally disliked, is not easily defined.2 It represents
government intervention but so do all laws, rules and admin-
istrative orders. A controversial issue is whether it amounts to
interference with people’s choices, as laissez faire critics argue,
or else is simply, and less contentiously, intervention in the
private domain.3 Some suggest that regulation can help peo-
ple improve their ability to make choices.4
A common objection to economic and social regulation is
that government’s intervention represents a diminution of free-
dom and as such is contrary to the American way. Yet, that is a
misleading description. 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.5
While such regulations may reduce some people’s freedom they
also afford greater, possibly much greater, freedom including
from hunger and fear.6 Regulations, notes Polyani, are what
make the market economy tolerable. It protects the market
from itself by lessening some of its most harmful effects and
the inevitable outrage. Interestingly, as noted previously, early
laissez faire economists including Adam Smith were willing to
 MYTH 4: DEREGULATION ALWAYS IMPROVES THE ECONOMY 73

accept some government economic and social interventions

(even on grounds of fairness) that modern laissez faire propo-
nents oppose.7
Regulation has been at times undermined by regulatory
capture (regulatory commissions become controlled by the
regulated firms8 themselves and therefore do not focus on
protecting the public and competition). Economic regulation
has been expensive to administer and usually contains few
incentives for cost cutting or innovations. The entry of new
firms has been blocked – a highly undesirable outcome.
Inefficient firms have been protected from the market’s ver-
dict. Rate change hearings involve waste and sometimes
amount to a charade. It is not clear that regulators have the
necessary information to set reasonable prices. Therefore, the
myth is not the inefficiency of regulation, because it certainly
contains inefficiencies. Instead, the myth is that the regulatory
system is a cynical ruse that never has the public interest at
heart; that its benefits always are outweighed by its ineffi-
ciency and that deregulation is bound to be an improvement.
In the twentieth century there was a debate about the origins
of economic regulation. A long held belief was that it came
about because of a desire to protect the public. George Stigler
(1971) challenged that assumption and proposed instead that
industries, firms and interest groups seek regulation, not the
public. Now why would firms invite government to meddle in
their affairs? The answer is that regulation may provide greater
profits and afford a higher probability of survival. Regulatory
commissions could be persuaded to block the entry of new firms
into the industry as happened in airlines and banking.
Regulatory commissions also could put a stop to price competi-
tion in an industry by setting prices for the entire industry,
something that firms themselves cannot do without violating
antitrust laws.
74 J. SHAANAN

However it is important to note that just as firms may

demand regulation when it is the profitable course of action,
there is little reason to doubt that they will demand deregula-
tion when it is the more profitable option. (The firms in
question are not always producers but could be suppliers or
coalitions of large customers.) Deregulated firms’ higher prof-
its may not come from reduced costs or from greater innova-
tion. Instead, they may come from greater market power or
rent seeking activities. Accordingly, one cannot jump to the
conclusion that deregulation is necessarily beneficial and
increases automatically the nation’s welfare.
Throughout most of the twentieth century business was
not particularly hostile toward regulation and even saw its
advantages. However, by the 1970s large corporations came
to the conclusion that regulation was no longer serving them
exclusively. It may have given them an advantage over smaller
competitors, but it had become overly protective of the pub-
lic. There were economists who also saw regulation as oner-
ous but for the opposite reason in that it was too protective of
business and kept prices high.9 On the whole, despite ineffi-
ciencies, the regulatory system probably limited the more
egregious activities and outcomes likely to emerge from an
unrestricted market system. In comparison with the following
30–40 years, during the years of “heavy” regulation there was
a more solid and stable economy, less reliant on speculation,
leverage, market power and political influence.10

3 DEREGULATION
In the 1970s regulation was blamed for many of America’s
competitive woes and even for inflation despite the fact that
there were far more plausible explanations, not the least of
which was OPEC’s hike of oil prices. Promises of an economic
 MYTH 4: DEREGULATION ALWAYS IMPROVES THE ECONOMY 75

boom following deregulation and privatization turned out to

be mostly wrong. There were clear beneficiaries of deregula-
tion and privatization that encouraged and sometimes even
funded the promotion of deregulation. In the late 1970s
America began a deregulatory era.
The administration of President Carter, influenced by the
rising tide of laissez faire ideology11 initiated deregulation. It
gained further momentum during the administration of
President Reagan. At first it was economic deregulation that
was sought as for example in airlines, trucking and natural gas
and later retail electricity in states such as California (at the
behest of Enron).12 Among other industries deregulated par-
tially or completely were banks, stock brokerages, railroads,
satellites and the telecommunications industry.13 If regulated
industries’ share of the economy was 17 percent of GNP in
1977, then by 1988 it had fallen to 6.6 percent.14
It was no longer carefully selected industries that were
targeted for deregulation. Success in attaining economic
deregulation led to a shift in focus and to a more aggressive
agenda. The new goals included the elimination of health,
safety and environmental regulations. Such deregulation was
justified at times with questionable scientific arguments.15
The objective became broader – part of a more general
campaign aimed at forcing government to shrink through
reduced funding and tax cuts. It included cutting funding
for regulatory agencies and placing in charge people hostile
to regulation.16
Notwithstanding valid criticisms of regulation, the case for
deregulation was carried to an extreme. Quite often the
motives or incentives behind it had little to do with efficiency.
Deregulation appeared to work in some industries such as
trucking where significant entry ensued and prices declined
and also in railroads.17 Yet, in other deregulated industries the
76 J. SHAANAN

expected competitive outcomes did not materialize. In the

airline industry, prices initially declined and new airlines were
established; however, several airlines disappeared, at times,
because of anticompetitive practices.18 More generally, an
ongoing merger trend diminished competition, a possibility
foreseen by airline deregulators in the 1970s.19
California’s deregulation of electricity resulted in power
outages and large price hikes which some blamed on collusion
among power suppliers.20 The Federal Energy Regulatory
Commission refused to accept criticism that it had failed to
create reasonably competitive markets upon deregulation of
electricity prices. It argued that its role was to prevent mono-
poly power not oligopoly power, despite oligopoly’s ability to
set monopoly prices through collusion.21 As noted by
Johnston (2006) the Commission’s own studies suggest that
the rules created make it possible to inflate prices artificially
during periods of high demand. Despite California having
numerous power plants, ownership was sufficiently concen-
trated that six plants could set an artificially high price for
electricity almost anytime. Sometimes the buyer and seller
were related companies and another factor was Wall Street’s
involvement in bidding for electricity.22
On balance the nation suffered from deregulation and con-
tinues to do so. To date the economy has just about recovered
from deregulation’s greatest failure – financial deregulation.
Regulation and restrictions on 1920s-type speculative finan-
cial activities (including passage of the Glass-Steagall Act
requiring separation of commercial and investment banking),
helped bring about financial stability in the quarter of a cen-
tury after World War II.23 Contrary to modern critics’ asser-
tions, the restrictions on speculative activities did not dampen
investments in the real economy. In fact, investments may
have been channeled to more productive outlets.24
 MYTH 4: DEREGULATION ALWAYS IMPROVES THE ECONOMY 77

The lessons from the deregulation of the 1920s were lost or

ignored. Forgotten was the role of financial laissez faire in
promoting speculation and leverage25 with little protection
for small investors. Late twentieth-century experts were reluc-
tant to criticize large financial corporations and remind the
public why it was necessary to have strict financial regulations
in the first place. There was also the traditional Chicago
School argument that companies’ concern about their image
and brand name, competition and the fear of law suits was
enough to ensure safe products and services free of deceit and
fraud. The conclusion was that regulation was unnecessary.
Forgotten also was that the regulatory framework that sur-
vived until the 1970s included protection from banks as well
as ensuring banks’ safety. Industries such as banking need
regulation because some of their activities can endanger the
financial health of the economy at large not just the banking
system.26 Overlooked was that the American economy did
well during the years of broad regulation.27
Financial deregulation came about as a result of powerful
lobbying and large campaign contributions. The financial
industry spent billions to accomplish their objective. It had
learned how to apply its resources and influence in dealing
with government. The control it acquired over both political
parties was impressive but the consequences for the nation
were dire. Political donations were accompanied by heavy
promotion of laissez faire ideology elevating it to religious
like status. There was no shortage of universities willing to
accept funding and the accompanying stipulations concerning
the proper message and its dissemination.
Financial deregulation led to new products such as
derivatives.28 It led to hedge funds and more generally to a
shadow banking system29 that was kept free from regulation.
These “innovations” (discussed in more detail in Myth 12)
78 J. SHAANAN

combined with the new found freedom for financiers, would

come back to haunt the nation. There was an argument that
financial deregulation would result in reduced capital costs
because of the introduction of new efficiencies and innova-
tions. Similarly it was claimed that new technologies and
quantitative techniques had made it easier to manage risk
and higher leverage.
Under President Carter Regulation Q, which prohibited
banks from paying interest on demand deposits, was wea-
kened as were state usury laws protecting consumers. In
1982 the much criticized Garn-St. Germaine Act was passed
that deregulated Savings and Loan banks. These banks could
now diversify into junk bonds, derivatives and leveraged buy
outs. The new found freedom led to the debacle of the early
1990s. Commercial banks were allowed to merge and giant
banks were created that became too big to fail and on several
occasions had to be rescued. Banks were also allowed to
engage in interstate banking and their range of permissible
investment activities increased.
In 1999 the Gramm-Leach-Bliley Act did away with the
required separation between commercial and investment
activities. Banks now had the freedom to make any type of
financial investment which in a sense extended government
guarantees from commercial banking to the much riskier invest-
ment banking.30 Fed Chairman Greenspan promoted the erro-
neous argument that private parties were already regulating risk
in the financial sector and there was no reason to believe that
they were worse at this job than government.31 Bankers argued
that given the combination of SEC regulations, private rating
agencies and knowledgeable investors, commercial banks should
be allowed to branch into investment banking, especially, to
match international competition.32 It became accepted wisdom
that a deregulated financial sector was good for America.33
 MYTH 4: DEREGULATION ALWAYS IMPROVES THE ECONOMY 79

The realistic possibility of price and fee hikes unrelated to

costs, reduced service, semi-fraudulent deals, greater latitude
to cheat the elderly, the senile, the uneducated and the unin-
formed were not mentioned as reasons for promoting dereg-
ulation. Yet higher profits regardless of source were rarely
ruled out. Speculation, questionable financial products, high
leverage and a bubble that occurred in the late 1990s and
2000s were reminiscent of the late 1920s. Once again a
deregulation experiment, designed primarily to make
America free for speculation, would end dismally.
Speculators found the freedom they desired but with the
massive bailouts Americans forfeited some of their freedom.
The Fed had argued for years against government economic
intervention34 but became heavily involved in rescuing the
banks. A revisionist explanation of the Crash is currently
thriving where history is rewritten and blame is placed on
overregulation not lack of it.

4 THE DAMAGE FROM FINANCIAL DEREGULATION

Financial deregulation brought about a recklessness that came
close to destroying the US financial system. The damage
inflicted on financial markets, the expensive bailouts and the
costly recession that ensued were the price for leaving the
rules and regulations to be determined by those who stood
to gain the most from abandoning them. Before deregulation,
the financial industry had served a useful function in providing
capital to the real economy.35 After deregulation its focus
shifted to speculation and private equity deals resulting,
almost inevitably, in a financial crisis. The highly touted self-
regulation mechanism turned out to be ineffective. This could
be seen in the way credit rating agencies evaluated mortgage
backed securities.36
80 J. SHAANAN

Regulation of the financial sector or rather lack thereof has

been much debated following the Crash and the bailouts. The
primary reason banks are subject to regulation, states Stiglitz,
(2010) is that their failure can be very damaging to the rest of
the economy as we learned after 2008 and in the 1930s.
Other reasons include a desire for stability in the financial
sector and to prevent banks from taking advantage of unin-
formed people as was the case with subprime mortgages.37
Given Adam Smith’s views on banking and John Stuart Mill
and Alfred Marshall’s warnings about the financial sector’s
potential threat to the economy, it is puzzling why modern
laissez faire advocates refuse to disseminate this part of their
wisdom.38 Hyman Minsky, who had warned about the dan-
gers of financial deregulation and the need for government
monitoring of this crucial but unstable industry, was a voice in
the wilderness. Derivatives and hedge funds were protected
fiercely from regulation just as commercial banks were
allowed to engage in speculation.
A carefully constructed mechanism to prevent risky beha-
vior on the part of banks had been removed. A shadow bank-
ing system was allowed to emerge partly to avoid regulations
safeguarding the banking system.39 Banks’ freedom to profit
is all that mattered; dangers to the national interest or the
global economy were seen as useless abstractions. Any sugges-
tions in the late 1990s or early 2000s that financial specula-
tion be restricted or regulated were met with a torrent (often
well paid) of criticism. Given the fuss one might be inclined to
believe that financial innovations ranked only slightly below a
cure for cancer in their importance. Yet, according to Stiglitz
(2010) these financial innovations were often meant to get
around accounting rules and facilitate cheating on taxes. They
boosted industry profits and redistributed income upward but
there was very little in the way of social benefits.
 MYTH 4: DEREGULATION ALWAYS IMPROVES THE ECONOMY 81

5 THE FED AS A WEAK REGULATOR

The Federal Reserve Bank until 2007, for the most part,
escaped the kind of criticism directed by laissez faire econo-
mists at other regulatory institutions. Criticism abounded
over policy but less so over the fundamental nature of the
Fed’s role. Apparently contemporary laissez faire economists
are reasonably comfortable with this type of regulation and its
framework and one might wonder why that is the case.40
A popular myth is that the Fed, despite its quasi-govern-
ment status, is an independent institution. In a narrow sense
this is true but few textbooks point out that this independence
is mainly from democracy and its political institutions, not
from the financial sector. Contrary to common perception,
the Fed is run by and for the largest and most powerful banks
in the nation. Seen in this light, the Fed’s refusal to enforce
regulations, protect consumers from financial abuse and
shield the nation from a speculative bubble is more under-
standable, although hardly defensible.
The most important of the regional Federal Reserve
banks is the New York branch. Stiglitz (2010) explains
that given that six of its nine directors are appointed by
the banks themselves, self-regulation is involved and this is
not a coincidence. The Fed was created to play precisely
such a role with minimal regulation of bank activities but
with a strong bailout option. The Fed was supposed to
restrict risk taking but in the Crash of 1929, following
highly speculative activities, it became clear that it was not
doing so; it refused to deflate the financial bubble caused
by debt. It provided a bailout program for New York’s top
financial firms but it did not help the nation’s economy too
much. The banks were in control and the Fed would not
curtail their risk taking.41 The same pattern repeated itself
70 years later and culminated in the Crash of 2007–08.
82 J. SHAANAN

The Fed turned a blind eye to massive speculation, exces-

sive risk, high leverage, shady financial deals, dubious
“financial innovations” and consumer abuse. The Fed did
not intervene in the housing and mortgage markets.
The Fed, among other financial regulators, steadily dis-
pensed with its regulatory obligations thereby allowing banks
to earn higher short run profits. The Fed kept loosening hard
fought banking rules and regulations dating back to the 1930s
created to prevent a repeat of the 1929 disaster. Many of the
previously forbidden risky investments were now permitted as
was the intermingling of banking and securities business. The
major banks were delighted. Perhaps they realized that they
were operating under ideal conditions of “heads we win, tails
the public loses”. Top executives, regardless of the outcome of
their speculative activities and their institution’s fate, would get
to keep all previous compensation.
Alan Greenspan was opposed to regulation and thought
it unnecessary believing that markets could manage risk and
even prevent fraud. He refused to put an end to predatory
lending by subsidiaries of bank holding companies,42
objected strenuously to the regulation of derivatives and
praised adjustable rate mortgages. He opposed the regula-
tion of hedge funds yet when LTCM in 1998 was on the
brink, the Fed rushed to organize a rescue on favorable
terms. The same was true of investment banks. The Fed
opposed regulation of their risky activities but not an
expensive bailout.

6 WEAKENING REGULATION
For the past 30 years a combination of legal changes, delib-
erate weakening of regulations, reluctance to enforce existing
regulations and the appointment of staunch laissez faire
 MYTH 4: DEREGULATION ALWAYS IMPROVES THE ECONOMY 83

regulators helped enfeeble the regulatory system. This, of

course, did not happen in a vacuum, instead, as noted
above, broad political support was carefully cultivated as was
media backing and academic endorsement. The SEC practi-
cally abolished limits on brokers’ leverage and accepted
investment banks’ arguments for self-regulation of risk.43
More generally, write Johnson and Kwak (2010), the SEC
failed to regulate the securities industry for ideological reasons
and because of the political influence of the financial sector.
Only a few years earlier the public had witnessed the fall of
companies such as Enron and WorldCom, among others,
because of corruption and lack of regulation. Yet, Wall
Street did not want to learn the lesson and curtail its profits.44
Regulators reluctant to enforce the remaining financial reg-
ulations were mostly supporters of laissez faire, i.e., until their
deregulated charges demanded to be rescued. One might
argue that they were “captured regulators” seeking the best
for the industry although not the best for consumers, compe-
tition or the nation’s welfare. Some regulators indeed may
have been captured but others were full-fledged ideological
warriors with an opportunity to strike a blow for (what they
perceived to be) economic freedom. This attitude, notes Y.
Smith (2010), turned some regulators into enablers for the
industry. They saw their mission as destroying regulations
rather than enforcing them. They certainly would not stand
for new or stronger regulations. A case in point was Alan
Greenspan’s attack on proposals to regulate derivatives.
Weakened regulation and deregulation were followed by
an avalanche of reckless speculation and then bailouts.
Regulators just shrugged their shoulders and treated this
cycle of events as unpredictable and unavoidable market
occurrences. The fact that some groups profited enor-
mously from these disasters often at taxpayer expense was
84 J. SHAANAN

conveniently overlooked as were the generous political

donations that helped make this outcome acceptable.45 If
by coincidence the antiregulatory policies enriched the
firms in question then so be it, after all that is the market’s
verdict.
In the financial industry there were overlapping jurisdic-
tions that could be exploited by the regulated. To further
weaken the regulatory system, policies were introduced such
as allowing financial institutions to select their regulatory
agency. Injecting competition among the agencies meant
that the winner usually would be the agency that promised
the least regulation46; and that was the objective. Banks were
not properly regulated despite or perhaps because of the
different agencies involved. Other agencies such as the FDA
and the patent and trademark office had to fund most of their
operations from fees paid by the regulated which tended to
change the nature of the relationship and weaken the mon-
itoring aspect of their duties.47
In the 1980s the antitrust units of the Justice Department
and the FTC were weakened. Jobs were cut at other govern-
ment agencies including the Food Safety and Inspection ser-
vice, the Consumer Product Safety Commission, and the
Occupational Safety and Health Administration. Penalties
imposed for safety and labor violations were reduced.48 An
insidious outcome of weakened regulation, combined with
misplaced incentives and dubious accounting, was the oppor-
tunity for profit via bankruptcy. Owners rewarded themselves
in excess of their company’s worth and then declared bank-
ruptcy and reneged on their debts.49 The misaligned and
unchecked incentives resulted in a conflict between private
profit maximization and the public interest.
The Dodd-Frank Wall Street Reform Act requires the
Commodity Futures Trading Commission (CFTC) to set
 MYTH 4: DEREGULATION ALWAYS IMPROVES THE ECONOMY 85

limits on the amount of future contracts held in any one

commodity. The purpose is to limit excessive speculation in
energy markets. Yet, David Dayen (2016) reports how the
CFTC attempted to evade the very regulation it is supposed
to enforce by turning to an advisory committee. The advisory
committee recommended that the agency not impose posi-
tion limits. This was not surprising given that most of its
members came from companies that profit from speculation;
not exactly the wide diversity of opinion envisioned in
Dodd-Frank. The justification provided was that there is little
evidence of current or past speculation in energy markets; a
somewhat puzzling claim given the wild gyrations in oil
prices in 2008.50 Another setback to the avowed goals
of Dodd-Frank came again from the CFTC which voted in
2013 to continue allowing swaps and derivative dealers to set
prices for derivatives as opposed to requiring some semblance
of market pricing.51

7 PRIVATIZATION
Some of the most notable privatization in the US in recent
decades have been in areas such as education, highways,
water and defense where private contractors’ share rose
from 36 percent in 1972 to 50 percent in 2000.52
Regrettably privatization, notwithstanding the free market
connotation, often represents an attempt to profit at tax-
payer expense. Promises of greater efficiency and improved
quality have rarely materialized. The private sector needs
profits; executives, usually, are not averse to large compensa-
tion packages; and then there are the marketing costs such as
those incurred in health care. Combined, these factors sug-
gest that huge efficiency savings are required to justify the
transition from the public to the private sector. Crouch
86 J. SHAANAN

(2011) warns that moving from state provided services to

private subcontracting increases the scope for rent seeking
activities and, most importantly and surprisingly, privatiza-
tion frequently does not represent a switch to market eco-
nomics. Instead, the outcome often is some sort of a
compromise between markets and regulation with question-
able efficiency and motives.
Despite all the talk of efficiency enhancement, the customer
is not the eventual consumer but rather it is government.
There may be cost savings to government and therefore to
taxpayers but consumers do not necessarily benefit from pri-
vatization. There may even be deterioration from the centra-
lization of services by some large corporation. So if the goal is
strictly increasing actual consumer welfare then the objective
has not been attained. Additionally, consumers now have
reduced input in the matter. Benefits accrue to the winner (a
corporation) of the service contract possibly for many years to
come with little possibility of change; so much for market
flexibility and competition.53
Clearly the goal is not the much heralded criterion of
consumer choice but rather corporate profits, no matter
how well it may be disguised by the phraseology of modern
laissez faire economics. Mirowski (2013) notes how laissez
faire advocates apply the term “marketization” to question-
able arrangements, insisting that they represent shrinkage of
government, whereas in practice they may require even more
cumbersome administration. The rent seeking factor present
in these types of arrangements is hard to ignore and it is
difficult to describe the solution as a “market outcome”.
Given the worldwide push to acquire such profitable con-
tracts, even international organizations insist on these types
of arrangements despite the obvious departure from true
arms-length market dealings.54
 MYTH 4: DEREGULATION ALWAYS IMPROVES THE ECONOMY 87

8 CONCLUSION
Not only did deregulation harm the economy but it also
contributed to widening inequality and greater job and
income instability for millions of Americans.55 The primary
beneficiary was clearly the financial industry. It prevailed in
the halls of political power and would not permit correction of
market failures. Additionally, notes Kuttner (2007), deregu-
lation and weak enforcement contributed to the destruction
of professional standards and encouraged opportunism not
seen for decades. This was evident among auditors who were
in cahoots with management; security analysts who were
promoting jointly stocks with their company’s underwriting
department; boards of directors helping CEOs enrich them-
selves and not shareholders; and mutual funds that consis-
tently sided with management at the expense of their
investors. Insider trading reappeared as did market manipula-
tion followed by the high tech stock bubble and eventually
the Crash. Kuttner estimates the losses involved in the high
tech bubble at about $7 trillion and asks how this cost com-
pares to the oft mentioned cost of regulatory inefficiency used
to justify deregulation.
When one examines the case of Enron, the similarities with
the late 1920s are striking. Involved were financial manipula-
tion, conflicts of interest, pyramiding, borrowed money, the role
of investment banks, all facilitated with lax regulation. When
Enron’s true financial situation became known, and rating agen-
cies finally were about to downgrade it, giant banks with large
stakes at risk attempted to postpone the downgrading.56 The
deregulation of public utilities made fraud easier as was the case
with Enron and the formation of holding companies that looted
the utilities they acquired.57 In 2006, electricity deregulation,
which was supposed to result in all kinds of efficiencies, led to
one clear outcome – a 55 percent larger increase in electricity
88 J. SHAANAN

rates in states that deregulated as compared to states that kept

regulation. Enron, which had campaigned successfully for
deregulation, worsened the California electricity shortage of
2000 by selling electricity out of state and then selling it back
to California for a huge profit.58 Yet the Bush administration
claimed that shortages were the result of environmental regula-
tions and incomplete deregulation. The shortages vanished
when regulations were reapplied.59
Deregulation of electricity had been a failure with retail
prices rising faster after deregulation but that was its real
objective, not more competition. The banking industry
became far more concentrated, its power increased as did its
profits and the compensation of its top echelon. In telecom-
munications deregulation led to stock fraud and massive
investment waste.60 Perelman (2007) concludes that govern-
ment lost the ability to control some of the worst of business
abuses and the ability to protect the environment. More gen-
erally, deregulation has not brought about the much pro-
mised competition, efficiency gains and large productivity
increases. The promises turned out to be mostly myths and
the beneficiaries of deregulation were neither consumers nor
the economy. Regulation had its faults but it provided more
benefits to consumers than deregulation.
 Myth 5: The Economy Has Superior
Efficiency

1 MYTH
A good economy is characterized by having a high ratio of
private to public spending. Fortunately, in the US the private
sector’s spending is relatively larger than in comparable
economies. The public sector’s economic activities amount
to about one-third of GDP but even that number should be
reduced. So while the private sector prevails there is room for
additional reductions in tax rates for both individuals and
firms. Current tax rates border on being confiscatory. Tax
cuts would improve the economy by offering incentives for
individuals to work harder and for companies to invest more.
America’s economy is guided primarily by the price system
and millions of independent entrepreneurs, not government.
People earn what their productivity suggests they should earn
and not a penny more, unless they are in the public sector.
America’s entrepreneurs occasionally earn exceptionally high
rewards but that is in return for taking big risks so it is justified
and good for the economy. Interference with the incentive
mechanism, by either limiting speculation or its rewards, is

© The Author(s) 2017 89

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_6
90 J. SHAANAN

bound to lower the economy’s efficiency. Such restrictions

shrink the overall pie and leave everyone with a smaller share.
The door is wide open and anyone with the energy, con-
fidence and an entrepreneurial spirit has the opportunity to
build a successful company and prosper, which many do. The
US economy has a well-deserved reputation for efficiency.
The economy is marked by dynamism and receptiveness to
technological and organizational innovations. Markets moni-
tor corporate efficiency rather than government. Additionally
one would be remiss not to mention the immense contribu-
tions of the nation’s deregulated financial sector.
In terms of managing the overall economy little is required.
Fiscal policy1 is outdated and lacks a solid microeconomic
foundation and, above all, is unnecessary because markets
self-correct. Therefore fiscal policy with its focus on short-
term changes in demand has been rightfully replaced by
monetary policy.2 One of the finer aspects of monetary policy
is that it is conducted by independent experts, objective tech-
nocrats free from meddlesome and corrupt political interfer-
ence. They seek what is best for the nation which, of course,
entails a focus on price stability because once inflation has
been tamed everything else, including unemployment, will fall
into place. Therefore, there is no need for government inter-
vention in the economy which, anyway, is counterproductive.

2 CORPORATE CAPITALISM
In many respects the economy, as discussed previously,
diverges significantly from the free market ideal. Milton
Friedman’s quest for an economy based on noncoercive forces
means minimizing government’s involvement in the econ-
omy. However it is oblivious to coercion arising from private
economic forces and such coercion represents the Achilles
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 91

heel of both the American economy and democracy. A key

feature of the US economy is its domination by a few hundred
giant corporations. Their influence extends beyond the econ-
omy to nearly all aspects of society and the nation, especially
to government. Politicians in particular understand that to
succeed they have to be willing to accommodate large cor-
porations. So one-sided is this relationship that democracy in
the US has been weakened, and with rising economic influ-
ence so are the economy’s free market elements.
Notwithstanding popular descriptions hailing large cor-
porations’ efficiency and their many contributions to the
free market economy, their actual role, as noted previously,
is in some respects closer to that of bureaucratic planners in
collective societies. They select the goods and services to be
produced and the necessary inputs. Despite their presumed
efficiency (based mostly on the Darwinian notion that they
have survived) most economic studies fail to find evidence of
economies of scale in production to justify their size. The
same applies to arguments based on the requirements of
research and development, including arguments about the
high risk involved and the need for large sums of money.3
Economic studies mostly suggest that large firm size does not
necessarily result in more R&D efforts or output.4 There is
though some evidence of marketing economies. Every decade
or so new economic arguments emerge to justify giant firm
size.
Despite the prevalence of massive business organizations
run by hired managers, the legend persists that the
American economy is driven by small independent entrepre-
neurs. Surprisingly, international comparisons suggest that
Americans are not exceptionally entrepreneurial5 and do not
have an unusually large percentage of self-employed people.6
Scott Shane (2008) points out that few new enterprises result
92 J. SHAANAN

in great companies, more employment and increased eco-

nomic growth. Despite the praise heaped on small businesses
and entrepreneurs, the economy is run primarily by giant
corporations.

3 ECONOMIC TRENDS
The US economy attained notable success with rising liv-
ing standards throughout most of the twentieth century.
The majority of people have the basic necessities and more.
A multitude of consumer products and services are avail-
able. In recent times several nations have surpassed the US
in terms of standard of living but the US, at least in terms
of GDP per capita (not always a meaningful statistic),
maintains a high ranking. The US benefits from an open
and impersonal job market. Taking into account differ-
ences in the definition of unemployment, US unemploy-
ment rates for many years were lower than those in most
European nations. The inventiveness and creativity of the
US economy, particularly Silicon Valley, is held in high
regard globally. Admired are the combination of techno-
logical and entrepreneurial skills and the availability of
financial support for new ventures which have led to a
steady stream of innovative products and services.
Unfortunately, the presumed efficiency and flexibility do
not always extend to established industries where a combina-
tion of market power, political influence and rent seeking lead
at times to inefficiency and a misallocation of resources.
Additionally, the creativity displayed in producing the new is
sometimes misleading because from a societal perspective a lot
of waste is involved (e.g., telecommunications in the late
twentieth century). There is also the global phenomenon of
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 93

quick and cheap imitation, and the questionable policy of

granting domestically 20 years of patent monopoly.
Historically, corporations introduced mass production and
played a role in boosting American living standards.7
However, explanations for their success vary. Alfred
Chandler (1977) argues that it was cost saving changes in
management and organization and in mass production tech-
niques while Richard Nelson and Gavin Wright (1992) point
to technology development. For most of the twentieth
century, the US led the world in labor productivity8 and
after World War II it led in total factor productivity9 as
well.10 From the 1970s to the mid-1990s the growth rate of
productivity declined,11 and during those years US growth
lagged that of European nations.12 Reduced growth did not
help improve wages.
Despite US resurgence after the mid-1990s some European
nations with large social welfare systems grew at a faster pace.
The US relative decline has been blamed on several factors such
as outdated management methods and economic organization
including informational and coordination problems related to
size, hierarchical organization and worker dissatisfaction.13
Large corporations attempted, with mixed success, various
forms of reorganization involving conglomeration, diversifica-
tion and global production.14 Corporations also emphasized
inventory control and hard bargaining with domestic suppli-
ers15 and unions. To some the problem was a lack of invest-
ment in capital equipment and possibly weak productivity in
the service sector.16
A puzzling phenomenon was that in the late twentieth
century new technology did not appear to boost productivity.
Earlier Joseph Schumpeter had expressed concerns about an
excessive bureaucratization of innovation and the declining
94 J. SHAANAN

role of entrepreneurs in innovation.17 Corporations could not

emulate adequately the spirit and initiative of entrepreneurs.
Taylorist style management18 in research labs of large cor-
porations in the 1960s and 1970s may not have been con-
ducive to innovation.19
Others point to more fundamental problems in the corpo-
rate world. The threat of corporate takeovers may be insuffi-
cient as a monitoring mechanism to ensure efficient corporate
behavior.20 Opportunistic behavior inside corporations may
have increased. Self- governance of corporations is fraught
with problems and has allowed many excesses. Takeovers,
starting in the 1980s and continuing into the 2000s, took
on a life of their own. All too often they were driven not by
economic fundamentals such as economies of scale but by the
profit considerations of their financial promoters and com-
pensation of top management.
Management focus shifted from the long-term health of
their companies and employees, to mergers that enriched
management. Companies fearing a hostile takeover took mea-
sures to ward off the threat by making themselves less appeal-
ing. This included layoffs and using idle cash to buy other
companies. Leveraged buyouts21 also led to inefficiencies with
companies taking on high debt levels and reducing R&D
spending. When there was no takeover threat the balance
sheet had to look good to Wall Street.
In many instances myopic financial motives and neglect of
long-term capital investments were beneficial neither to the
company nor to the economy at large. There was also a pur-
suit of size implemented not through internal growth but
through mergers. Madrick, (2009) using the example of
GE, notes how in the 1990s managers seeking to maximize
short run profits focused on cost cutting resulting in many
layoffs; sometimes the cuts were at the expense of innovation.
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 95

The emphasis on high and immediate rewards and the

trend for those who control rewards to help themselves gen-
erously has impacted the entire culture of remuneration in the
US. The notion of public mindedness and civic duty has fallen
by the wayside. Professionals such as physicians, scientists and
academics sometimes feel obliged to emulate financiers and
CEOs. They seek to obtain maximum financial rewards even
though that was not their intent upon entering their
profession.22
One extreme of individual reward maximization is the phe-
nomenon of looting. Top executives pay themselves so hand-
somely that they bankrupt their company. Looting, write
George Akerlof and Paul Romer (1993), will occur when
owners have an incentive to pay themselves more than their
firms are worth and then default on their debt obligations. In
such cases firms focus on maximizing current extractable value
rather than on the more traditional maximization of eco-
nomic value. Basically, the strategy involves a limited liability
corporation taking out a loan, placing the money into the
owner’s bank account, and then declaring bankruptcy and
defaulting on the loan.
The new financially induced model of management with an
emphasis on the short run has resulted in a far less hospitable
environment for employees. It has led to downsizing, out-
sourcing, temporary employment without benefits, an end to
lifetime employment, age discrimination, the disappearance of
pensions and many unsettling reorganizations. Companies
also are reluctant to invest in their employees deferring to
taxpayers. Not surprisingly, the loyalty and trust of employees
has declined while feelings of alienation have increased.23
Significantly, barriers to competition and government
protection of rent seeking, such as discussed by Mancur
Olson (1982), have become more widespread. Advantages
96 J. SHAANAN

originating from influence over government and the political

process have become an overwhelming factor. The outcome is
an increasing numbers of market distortions and inefficiencies.24
In response to rising import competition in manufacturing
some large corporations did reorganize and improve efficiency
but others opted for the merger route and became multina-
tionals to ensure survival.25 Rather disconcerting is that in the
New Millennium, when productivity seemed for a while to
improve, the benefits appeared to show up in profits but
not wages, and productivity may have increased because of
nonrising wages.26
Notwithstanding a quarter century of economic success
following World War II when both GDP and wages rose
substantially, corporate leaders, as noted in Myth 4, became
concerned about government intervention in the economy.
They began to criticize it as a major obstacle to continued
prosperity.27 Corporations began to exert more influence
over Washington and especially over laws and policies affect-
ing them. In the early 1970s some economists, overlooking
the global oil crisis, blamed stagflation on government inter-
vention. Leading the attack was Milton Friedman who
ignored the economic success of previous decades, especially
government investments in education, infrastructure and
technology28 and argued for tax reductions and deregulation.
Unfortunately, except for a few years in the late 1990s, the
laissez faire oriented economy did not attain the prosperity
achieved in earlier years when more “activist” or progressive
governments were in charge. Regulation was not quite the
obstacle to growth and prosperity that it was portrayed to be.
In fact regulation of banking and finance appeared to have
curbed the excesses of the 1920s. It also may have led to more
robust economic growth based on real enterprises and inno-
vation rather than speculation.29 At the very least financial
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 97

crashes were avoided in that era and money flowed to more

productive investments.30
Another alarming trend was that health care unlike in most
other advanced industrialized nations became less available
despite enormous government expenditures. A health care
system, marked by severe inefficiencies and ranked relatively
low in global comparisons, was consuming a larger and larger
percentage of the GDP, more than in any comparable nation.
Despite the large public expenditures, its benefits appeared
(and still appear) to flow more to its private sector providers
and insurers than to the population at large. The recently
introduced ACA has enabled many more people to afford
some health insurance but the structure of the program is
complex and rests on rather tenuous foundations.

4 ECONOMIC POLICIES
In the aftermath of the Crash, the nation’s political leaders
failed to respond effectively to the ensuing economic crisis.
Instead of adopting an aggressive fiscal policy to boost
demand, they catered to the wishes of the financial sector
and decided to leave matters mostly to the Federal Reserve
Bank. Congress refused to increase sufficiently government
spending to get the US out of a severe recession and provide
employment for millions of Americans (except for a relatively
small fiscal boost which was less than half of what President
Obama’s economic advisors had proposed and was negated
partly by state and local government spending cuts). In fact
matters were exacerbated by Congress taking the opposite
approach and focusing on deficit reduction and reducing
government spending in the midst of a downturn. Rarely
mentioned was that increasing employment would help cut
the deficit.
98 J. SHAANAN

Surprisingly, a Democratic president felt obliged to go

along with Republicans and dwell on the deficit. All of a
sudden it had become a matter of great urgency which it
was not. Reducing deficits has merit but not during a reces-
sion. So great was the desire to shrink the US government and
return to a pre-Great Depression era – where the very rich
could keep a larger percentage of their income – that the
destructive economic and social effects of such policies were
ignored. Instead the nation and the world were subjected to
the oft repeated charge that the deficits were the cause of our
misery and a strong dose of austerity31 was the remedy to a
severe downturn.
The lessons of the Great Depression were ignored. It
was doubtful that reducing spending could bring about
prosperity when the problem was lack of spending. Years
of stripping away Americans’ safety net only served to
worsen the crisis. The only politically palatable solution
was monetary policy which consisted of reducing interest
rates. It was more helpful to financial institutions than to a
recession stricken economy given the lack of incentive for
capital investment.32
For 25 years after World War II, US policymakers applied
Keynesian fiscal policy (managing aggregate demand) to fight
recessions. During that period the US did not experience
serious macroeconomic problems, certainly not a depression.
Government success came to be linked with successful man-
agement of the economy. America’s largest mass producers
tacitly supported this active approach. It was in their interest
because it ensured a stable consumer base. In later decades
an ideologically driven change took place involving a switch
from fiscal to monetary policy. The change appeared to coin-
cide with manufacturers’ declining power and the financial
industry’s increasing influence over government.
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 99

Starting in the early 1980s and continuing in the New

Millennium taxes were reduced for top individual earners as
were effective tax rates for corporations. If in 1950, corpora-
tions’ share of the total US federal tax burden was 26.5
percent by 1990 it was only 9.1 percent. Their local property
taxes were also reduced.33 Top marginal income tax rates for
individuals which had been 70 percent in 1980 were reduced
to 50 percent and eventually to 35 percent (later raised to 39
percent). There was a special emphasis on reducing taxes on
nonearned income (especially from speculation). The tax cuts
were labeled “middle class tax cuts” despite modest cuts for
the middle class. They were followed by demands for cuts in
social benefits for the poor and middle class to make up for
the resulting deficits.34 This was not accidental; the tax cuts
may have been enacted to bring about a fiscal crisis which
would necessitate a shrinking of an already meager social
safety net.35
The drastic tax changes were hailed by some as efficiency
enhancing; they could only improve the economy.
Enterprise had been unshackled and the US would once
again take its rightful place as a leader in productivity and
in generating new businesses. This fable has enjoyed a long
life despite contrary evidence. For example, after taxes were
raised during Bill Clinton’s Presidency the US experienced
growth and the incomes of well-to-do individual earners
did not decline.36
A closely related argument was that trickle-down economics37
and the ensuing prosperity would benefit all, not just the
wealthy. Once again there is little evidence to support trickle-
down arguments.38 The outcome of the tax changes was to
encourage speculation, rent seeking and many other wasteful
uses of resources. The tax cuts did little to encourage new jobs
or new investment and hence its premise was faulty. Even when
100 J. SHAANAN

investment did take place it did not necessarily lead to new jobs
but rather to job replacing machines.39

5 MONETARY POLICY
Monetary policy is conducted by the Federal Reserve Bank. Its
policies, as explained above, usually reflect the interests of the
largest financial institutions. Between 1987 and 2006 Alan
Greenspan headed the Federal Reserve and most of the time
low inflation was the top economic priority. Some economists
suggest that the excessive focus on inflation led to reduced
growth, low productivity and more unemployment.40 The
focus on inflation was based in part on the unproven hypothesis
that broadly shared prosperity is contingent on low inflation.
The benefits to bondholders from a rigid anti-inflationary pol-
icy were rarely mentioned.41
The outcome of the shift away from fiscal to monetary
policy with a focus on inflation was given the flattering
name “the Great Moderation”. It was based on the optimistic
belief that monetary policy coupled with financial deregula-
tion had succeeded in taming or at least stabilizing the busi-
ness cycle. Eventually, it turned out to be a failure. The label
was misleading even when the policy appeared successful.
While national economic statistics indicated more stability
that was not the case for individuals and families for whom
risk and instability intensified. The strange phenomenon of
jobless recoveries, albeit with increased output, took place
following the recessions of 1991 and 2001. One needed
exceptional powers to discern a recovery.42
It is argued that when the Fed, in early 2000s, lowered
interest rates sharply this led to bubbles in stocks and later in
housing. Given the large amounts of excess capacity existing
in the economy, the lower interest rates failed to spur
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 101

additional capital investment; instead they found an outlet in

the housing market.43 Financial deregulation turned out to be
a major source of instability. Monetary policy proved inade-
quate for dealing with the Crash and even less so with the
subsequent severe recession. After the Crash the Fed, under-
standably, kept interest rates low to boost the economy.
However, it had only limited success because a lot of the
money lent at very low interest rates was not used by compa-
nies to invest in physical capital. Instead it was used to buy
back the company’s shares or else for mergers and acquisi-
tions, thereby illustrating the limitations of monetary policy.
The Fed was remarkably tolerant if not encouraging of
many forms of speculation oblivious to the lessons of the
1920s. It believed that unleashing market forces, especially,
in finance would spur the economy. The Fed therefore cham-
pioned deregulation. The widespread presence of market fail-
ures in competition, information and externalities44 was
ignored. However, regulation’s purpose was not only to pro-
tect banks from themselves but, more importantly, to protect
the public and the economy from speculative risks undertaken
by banks. It was also designed to protect the public from
various types of financial abuses. Yet the Fed rejected many
of these ideas believing that the market left to its own devices
would also protect consumers.45 Greenspan pointed to the
financial innovations emerging from deregulation. Yet, as
previously noted, their benefits were questionable. They
increased risk and the information gap between banks and
their customers to the detriment of the latter. They contrib-
uted to a housing bubble but did not lead to sustained
economic growth.46
When the interests of major financial institutions were at
risk the Fed was willing to forsake laissez faire and the invisible
hand for intervention. This was evident during the Asian
102 J. SHAANAN

financial crisis in 1997 and in the Fed’s rescue efforts on

behalf of LTCM in 1998. Another exception to the Fed’s
laissez faire policy was its treatment of the stock market.
Following the Fed’s intervention during the stock market
crash of 1987, the markets and banks realized that if trouble
arose the so-called Greenspan Put was at their disposal.47
When stock prices were declining the Fed intervened to
prop up the stock market by cutting interest rates. There
was no corresponding intervention to restrain stock bubbles
or for that matter the housing bubble. Bailouts (the subject of
Myth 13) involving trillions of dollars were used to rescue
large financial institutions during and after the Crash of
2007–08 thereby placing taxpayers at risk contrary to free
market principles.

6 DEBT AS A WAY OF LIFE

The quasi-official sanctioning of individual debt and the idea
that carrying debt is a perfectly acceptable way of consuming
and living has had a profound impact on American culture
and life. The balance was already tilted heavily toward con-
sumption. There are few if any policies to promote saving
notwithstanding the positive influence on productivity and
living standards. The rationale is that consumers’ economic
freedom and freedom of choice is involved, although this is
debatable. Few if any policymakers dare discourage consump-
tion in favor of saving. By 2005 American personal savings
rates had become negative which had not happened since the
Great Depression.48 Figures for net national saving which also
contains business and government saving were not much
better.49 Easy availability of credit and pervasive advertising
encourage consumption. The media promotes debt-based
consumption as a reasonable path to the American dream.
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 103

Buying on credit became an integral part of the economy

and when it was slowed down by the Crash, the economy
slowed with it. Crouch (2011) notes that instead of govern-
ment going into debt to boost the economy, individuals and
families do so. He labels this phenomenon as “privatized
Keynesianism”. Initially it occurred by chance and then
became policy. Raghuram Rajan describes this as a form of
“bread and circuses” where low interest mortgage loans were
provided to people at the lower end of the socio-economic
scale so that they would forget their stagnating incomes.50
Credit availability was often based on the value of one’s home
and sometimes could be extended beyond that. With the
effective repeal of usury laws in several states, outlets for
loans, especially for low income families, multiplied.
Unfortunately some of these involved predatory loans, some
intended to ensnare people into perpetual debt. Financial
institutions benefited but the health of the economy did not
improve.

7 THE FINANCIAL SECTOR

The financial sector has evolved into the predominant eco-
nomic sector, both in terms of its impact on the economy and
in terms of its political influence. A lengthy campaign, alleg-
edly, on behalf of economic freedom, turned out to be mostly
a fight for the right to speculate. Contrary to claims from
financial experts, it did not enhance the economy’s efficiency.
It was a campaign to profit without restrictions regardless
of the impact on the economy and the welfare of millions of
Americans. A good example is the campaign waged to pre-
serve the freedom of derivative trading. Among its staunch
supporters were prominent figures at the intersection of
politics and finance.51
104 J. SHAANAN

Repeal of the Glass Steagall Act was supposedly a blow

struck on behalf of free markets. The forthcoming innovations
would place America at the forefront of nations and financial
markets. Instead, the repeal ushered in a period of greed,
speculation, recklessness and financial abuse. Financial institu-
tions could also profit from high document preparation fees,
appraisals and recording fees.52 Subprime mortgages were
securitized53 and received unrealistic ratings. Mortgage
issuers became indifferent to the safety of their loans.
Deregulation led to rising bank concentration and less com-
petition in the industry. The big banks could now offer a
supermarket of financial services. Concerns about the result-
ing conflicts of interest were dismissed out of hand. The
financial giants consolidated power and influence but eco-
nomic efficiency did not materialize.54
Starting in the 1990s, writes Madrick (2011), corruption
spread throughout professions; including in banking,
accounting, ratings agencies, mutual funds and hedge funds.
Lack of effective regulation compounded matters. The result
was a waste of the nation’s resources. Sometimes the motives
behind fraud and deception at corporations were incentives of
CEOs. Their compensation was tied to the short-term per-
formance of the firm’s stock, in accordance with academia’s
recommendations for dealing with the principal-agent pro-
blem. Making matters worse were Congressional restrictions
on law suits against investment firms, and the Supreme
Court’s ruling limiting the responsibility of accountants, law-
yers and investment banks against claims of fraud.
Companies could be taken over (by private equity firms) and
with opaque disclosure rules, basically, looted55 while their
employees were cast aside. Companies taken over and stripped
of assets, often, were healthy firms with money to invest in
workers and R&D. Tax deductions were granted for financing
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 105

such destruction. At times firms were bought specifically for a

quick sale of their assets. Management takeovers often came at
the expense of shareholders with the former contriving to pay
low prices for the shares, lower than an outside buyer might
pay.56 The generous amounts of liquidity made available for
such transactions were not beneficial to the real economy.57
Few financial regulators attempted to protect the public or
the national interest in the traditional sense. The broad laissez
faire rationale adopted was that the magnitude of Wall Street’s
profits was correlated with benefits to the nation.
Unfortunately, as noted above, there was little if any benefit
to the nation; it was more in the nature of a zero sum game.
The incentive system was skewed to encourage enormous risk
taking. Individual rewards for short-term success outweighed
any concerns about a company’s destruction or shareholder
equity loss, let alone the jobs of hundreds or thousands of
employees. Executives paid with stock options had an incen-
tive to push up the firm’s stock price by almost any means
possible. This included manipulation of the balance sheet and
willingness to undertake risk of default. The risk was aligned
with their private interest but not their firms’ or the econo-
my’s. Investors in high tech firms experienced trillions of
dollars of losses in the late 1990s and early 2000s. This was
the case with dot com companies and the telecom industry
and amounted to a national waste of resources.
The immense rewards earned by a few imposed huge costs
on the rest of the nation. However, as Stiglitz (2010) warns,
private rewards have to be related to social returns for the
economic system to function effectively and this was not
happening. Kuttner (2007) observes that the dominant posi-
tion of finance over enterprise is a threat to real economy firms
because the financial sector often has little interest in firms’
long-term prosperity. Financial firms’ profits reached
106 J. SHAANAN

40 percent of all corporate profits58 and over a 30-year period

preceding the Crash the sector’s share of the economy increased
from 3.5 percent to 5.9 percent.59 Additionally many real econ-
omy firms turned to financial activities to boost profits.60
Post deregulation financial markets eschewed their most
essential societal functions, including managing risk, allocating
capital and promoting savings. Numerous inefficiencies in
financial markets reduced the economy’s overall efficiency.
Examples include the lack of an efficient credit card electronic
payment system which is blocked by the banks that own the
major credit cards and the student loan program where despite
no risk to the lenders the rates charged are relatively high. Then
there is the issue of the wasted human talent in finance because
society does not benefit from many of their activities.61
With the Crash millions ended up losing their jobs and for
six years after the Crash the recovery was fairly anemic. Many
Americans saw their wealth decline as homes lost value. Giant
influential corporations, including investment banks, insur-
ance companies and auto companies were all rescued. They
were exempted from market rules and bailed out to the tune
of trillions of dollars with taxpayer money. They did not have
to relinquish their resources to other market participants and
enhance the efficiency of the economy. There was no penalty
for failure. Free market rules were set aside and moral
hazard62 was ignored. New ad hoc rules, more common in
socialist nations, were applied and the public was told that this
course of action was absolutely essential.

8 CONCLUSION
The US economy is dominated by a few hundred giant cor-
porations. Large corporations are not defenders of the free
market elements of the system. Not only because of the
 MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY 107

breach in the wall supposedly separating politics and econom-

ics, but because their operations may circumvent markets, and
at times resemble bureaucratic planning in collective econo-
mies. Economic studies generally fail to find evidence of
economies of scale in production or R&D to justify their
large size. The new high tech industries may be efficient and
innovative but in more traditional industries, market power
and rent seeking often result in a misallocation of resources.
The US economy attained notable success with rising living
standards for most of the twentieth century. However, in
recent decades, the growth rate of productivity has declined
and with it came stagnant wages and living standards. When
productivity improved, the benefits showed up in profits but
not in wages. The decline in productivity growth has been
blamed on several factors, perhaps most worrisome though is
corporate inability to emulate entrepreneurs. The much-hailed
threat of corporate takeovers does not appear to be sufficient to
ensure corporate efficiency. Self-governance of corporations is
afflicted by serious problems, including opportunistic behavior.
Takeovers are often motivated not by long-term economic
considerations, but by the incentives of financial promoters
and top executives. Additionally, the new trend of “the sky is
the limit” for those in charge of their own compensation, has
affected the entire business culture including the professions
and not in a beneficial way. It also played a part in the corporate
workplace with the advent of downsizing, outsourcing, tem-
porary work and the disappearance of benefits and pensions.
Advantages originating from rent seeking and influence over
government have become a decisive factor leading to market
distortions and further inefficiencies. Government investments
in education, infrastructure and technology have been shrunk
in favor of tax reductions, primarily for the well to do. The tax
cuts were followed by demands for cuts in social benefits for
108 J. SHAANAN

the poor and middle class to make up for the resulting deficits.
The tax changes favored speculation and rent seeking but did
little to encourage new jobs or investment.
The financial sector has become the predominant sector. It
conducted a campaign for deregulation, supposedly on behalf
of economic freedom, but in reality, for the right to speculate
and engage in chicanery. Financial deregulation and the ensu-
ing “financial innovations” did not improve risk management,
resource allocation or the taming of the business cycle. In fact
they did the opposite and helped bring about an economic
disaster. Giant, mostly financial, corporations were bailed out
by the government; their management was left unchanged and
free market rules were discarded. The rewards generated by the
speculating few imposed tremendous costs on the rest of the
nation.
In dealing with the economy in the aftermath of the Crash,
instead of adopting an aggressive fiscal policy to boost
demand, government, catering to the financial sector and to
ideologues, decided to leave matters to the Federal Reserve
Bank. Matters were exacerbated by Congress’ stubborn focus
on deficit reduction. Monetary policy was not enough to
correct the inordinately long downturn. Money loaned at
very low interest rates to boost the economy ended up being
used for pursuits other than long-term economic investment
in physical capital. It did little to help the economy recover.
 PART II

Socio-Economic
 Myth 6: Exceptional Living Standards

1 MYTH
Americans enjoy one of the highest living standards in the
world. It is true that real wages and income have not
increased much in recent decades but the focus should be
on consumption and here Americans are doing fine.
Americans enjoy a plethora of consumer goods and services
unparalleled in history; whether it is the convenience of a
smart phone, advanced safety features in cars or the world’s
finest medical technology.
A focus on income statistics and on claims of income
inequality obscures Americans’ improving economic well-
being. The income data provide a misleading account of living
standards in the US because the poor spend substantially
more than they earn through numerous (and generous) gov-
ernment support programs. Such programs range from unem-
ployment compensation (for those unwilling to apply
themselves and search in earnest for a job) to food stamps
and Medicaid. Additionally the income numbers do not tell
the whole story in that fringe benefits have increased and

© The Author(s) 2017 111

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_7
112 J. SHAANAN

therefore workers receive indirectly a higher income. If it was

possible to measure increased opportunities in free agency,
job opportunities for spouses, greater labor mobility, part-
time work and second jobs, we might find that Americans’
living standards have actually risen.1
Americans may choose to go into debt to finance consump-
tion but they do so rationally and of their own volition. Only
liberals would see this as a reduction in quality of life and have
the temerity to challenge the majority’s freedom of choice
with insinuations about servitude and indenture. What is tak-
ing place is that consumers are borrowing from future, most
likely higher earnings. It is an exaggeration to suggest that
this represents a turn for the worse in people’s well-being.

2 DECLINING LIVING STANDARDS

If once living standards were seen as a gauge of material well-
being, in recent times the concept has been broadened. It
now contains both economic and noneconomic measures of
human well-being. Included, in addition to income or GDP
per capita, are for example measures of employment, housing,
affordable health care, life expectancy, class differences, envir-
onmental factors, safety issues and other features that bring it
closer to the more abstract notion of quality of life. Here the
focus is more on the economic aspects.
For most of the twentieth century the US was regarded as
an affluent nation with a high per capita GDP with mostly
rising standards of living. It was also acclaimed as the richest
nation on earth. Americans were seen as having access to
unusually large amounts of goods (especially after WW2)
and benefiting from unparalleled economic opportunities
and social mobility. In the past three decades improvements
have occurred in nutrition, educational levels and declines in
 MYTH 6: EXCEPTIONAL LIVING STANDARDS 113

birth rate mortality.2 Many new products and services have

been introduced including new medicines, computers, flat
screen televisions, safer cars, smart phones, home delivery of
most goods and many more.
However, at the same time, standards of living for many
have become stagnant if not declining, while other nations’
progress has ended the uniqueness of America’s standard of
living. More worrisome, the middle class, whose progress was
essentially America’s social-economic claim to fame, stopped
improving as have poverty rates. Family incomes have become
more volatile and it does not take much for a middle-class
family to fall into poverty3 especially, without the broader
safety net available in other industrialized nations.4 Well-pay-
ing jobs for those without higher education have become
scarce.
Many families’ standard of living can only be maintained by
having two income earners. If once millions could assume
with some certainty that they would enjoy a stable middle-
class life, today that is less likely. Income and wealth inequality
have grown and there are clear signs of the emergence of a
“hereditary elite” with reserved places at top universities, an
important factor for success in America’s meritocracy.
Economic insecurity and anxiety have led to a most un-
American phenomenon that of diminished expectations
regarding economic advancement, social mobility and the
prospects for future generations.
According to the IMF, in 2012 the US had a GDP per
capita close to $50,000. The number was among the highest
in the world5 and second only to oil rich Norway among
advanced industrialized nations. Yet it would be wrong to
infer from these numbers that a typical American family has
a higher standard of living than residents of other industria-
lized nations argues Paul Krugman (2002b). The US average
114 J. SHAANAN

is higher because rich Americans are much richer than the rest
of the nation and as the rich gain more there is less for every-
one else.
Given differences in income distribution among nations
a comparison based on median rather than mean incomes
might provide a clearer picture. The GDP per capita
statistic is more relevant for describing standards of living
in nations with a high degree of income equality which is
not the case for the US.6 Additionally, the higher income
of Americans is not without cost; an unusually high per-
centage of the population participated in the labor force7
and Americans work more hours than Europeans.8 Once
hours worked are accounted for, the US per capita
income is less than that of several European nations.
Additionally, working less hours and enjoying more
leisure, as some Europeans prefer, should not be consid-
ered automatically as a diminished standard of living9
especially when US workers may be required to work
longer hours.10 GDP statistics, for purposes of compar-
ison, are somewhat biased because of the greater com-
mercialization of life in the US. The GDP becomes
smaller when the elderly stay with their families instead
of moving to a senior citizen home, when people eat out
less often and clean their homes themselves.11
By and large typical families in several West European
nations have similar standards of living to a typical
American family. However, where a discernible difference
exists is when one compares the poor. America’s poor fare
worse suggesting that affluence is distributed more
broadly in Europe.12 Poor families in Western Europe,
especially with children, usually have higher standards of
living13 in part because of the greater availability of public
services such as health care. Europeans also enjoy higher
 MYTH 6: EXCEPTIONAL LIVING STANDARDS 115

life expectancy rates, literacy rates and lower infant mor-

tality.14 They benefit from universal health care and in
several nations have government financed child care and
pre-kindergarten. Workers also have greater benefits and
protection in Europe.15
The US household median income, adjusted for inflation,
was $50,054 in 2011. The comparable number in 2001 was
$53,646. In 1991 it was $48,516 and in 1981 $45,260.16
The above growth pattern is one of the slowest that the US
has experienced. Additionally, most of the increases over the
past 30 years were probably due to an increase in the number
of two income earners. A rising income trend came to be
expected as an integral part of America’s affluence and upward
economic mobility. When the trend stopped this became a
source of considerable frustration.17 It may have led to the
cultural wars over values and more generally contributed to a
dislike and mistrust of government.
Kuttner notes that not only has the rate of income growth
declined sharply but, there is perhaps a more worrisome pat-
tern. From 1947 to 1973 income growth corresponded to
productivity increases, however, during the next 30 years
productivity increased by 71 percent but median income
increased by only 21.9 percent. A severing of the link between
productivity and income growth represents a turning point
for the economy. Interestingly, several OECD nations with
much higher taxes and social spending than the US had
higher rates of productivity growth.18
Unlike workers in many European nations, Americans do
not have government paid child care or parental leave and
therefore the extra financial burden requires a second income
earner. Additionally, health care until recently was contingent
on employment. Not all companies offer health care benefits,
so employment decisions often hinged on the availability of
116 J. SHAANAN

such benefits and even then many people were underinsured

or uninsured. Most companies have eliminated pensions (and
some firms that maintained pensions found legal loopholes to
raid those funds.)19
Companies switched from clearly defined benefits20 to
401K retirement funds thereby placing the burden of financial
planning on employees, a development that is part of a
broader trend where greater risk and uncertainty are passed
on to employees. The result is that many retirees depend more
heavily on Social Security benefits. The common mid-century
obligation to protect people from the instability of the market
and provide some modicum of security has almost vanished.21
Declines in public spending such as in public transportation,
beginning in the 1980s, hurt working families, aside from
environmental and traffic congestion concerns.22
With a massive and successful consumption campaign
most Americans end up with little or no savings. People
often go into debt to maintain a middle-class lifestyle, espe-
cially with costs of health care and higher education rising
faster than incomes. Living in debt has become a common
way to maintain an otherwise unaffordable lifestyle. In the
current environment it is difficult to envision drastic changes
taking place.
Increased uncertainty also comes about from the influx of
products and services hailed as technological advancements
but replete with flaws and even dangers. Companies find ways
to take advantage of those flaws. They pass on the burden of
liability to consumers whose vulnerability and insecurities
provide additional opportunities for profit making. An exam-
ple is the prevalence of identity theft and some of the solu-
tions offered to deal with it.23
Another aspect of living standards in the US is the wide
gulf separating consumers. The poor, the less educated, the
 MYTH 6: EXCEPTIONAL LIVING STANDARDS 117

uninformed and minority members24 often encounter less

choice, lower quality goods including food, health care and
education. Frequently they have to pay higher prices. They are
more likely to be preyed upon and deceived, especially the
elderly.25 Particularly noteworthy is mistreatment in financial
dealings where members of the above groups are more likely to
be charged much higher interest rates,26 sometimes even
usurious.
A slew of new and expensive financial services have prolifer-
ated such as payday loans and check-cashing services. People
without a checking account and without savings are more likely
to seek the alternative financial industry’s services usually char-
acterized by high interest rates.27 Poor consumers end up
paying very high interest rates for short term and relatively
secure loans. One of the gravest dangers secondary consumers
encounter is being trapped into perpetual, never ending
debt.28 Then there are the debt collection agencies with
enhanced freedom to harass debtors including a de facto rein-
troduction of debtors’ prison via a variety of legal maneuvers.29
In 2007 we learned how home buyers were steered into
subprime mortgages that were rewarding for the lenders
but unnecessary for many borrowers who would have
qualified for a conventional mortgage. The true costs of
the loan were often concealed.30 Due to political pressure
from financial and other interests seeking to exploit vul-
nerable people, growing numbers of consumers were left
to fend for themselves. Contrary to the mid-century trend
of more protections, government policies in recent dec-
ades have exacerbated matters. Such policies are defended
on grounds of economic liberty, yet it is the seller’s free-
dom that is protected not the consumer’s.31
In the past two decades changes were made in federal
regulations to weaken consumers’ rights to sue producers of
118 J. SHAANAN

unsafe food, drugs and other harmful products.32 In the

process a key protection that laissez faire advocates had
claimed gave consumers an equal standing with corporations
to redress commercial grievances, was eliminated. The 2003
Medicare law does not allow states to protect the sick and the
elderly from abuse.33 Under the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 those in
financial difficulty are required to seek help from credit coun-
seling agencies. Yet unbeknown to many consumers these
agencies often work on behalf of credit card companies
and their objective is to prevent consumers from declaring
bankruptcy and stopping payments.34 The terms of student
debt were also modified in favor of creditors and on behalf of
for-profit schools.35
Woolf and Laudan (2013) and Laudan (2013) point to
disturbing findings on the status of Americans’ health.
The authors report that Americans die younger and suffer
from more illness and injuries than people in other
wealthy nations, notwithstanding considerably higher
expenditures per person on health care. This applies to
infant mortality, lung disease, diabetes, heart disease (sec-
ond highest) and traffic deaths. The findings also apply to
better educated, insured and high income Americans. No
one specific factor can account for these findings.
However, socio-economic conditions, diet, drug abuse,
driving habits, sedentary life and violence play a role in
addition to high barriers to affordable care, lack of health
insurance and miscommunications between clinicians and
patients. Unfortunately, note the authors, there is not
much support among either the public or politicians for
effecting serious change.
It would appear that the enormous sums being spent by
taxpayers on health care are not spent in the most effective
 MYTH 6: EXCEPTIONAL LIVING STANDARDS 119

way to minimize sickness and injury. Instead, the direction of

public spending is influenced, as in many other areas, by
powerful commercial interests. As for preventive measures
that enrich neither pharmaceutical nor insurance companies,
well they are not a high priority. ACA has allowed 15 million
previously uninsured to have some health coverage; unfortu-
nately the problem has not been solved entirely. Insurance
plans are being issued with increased deductibles. The result is
that millions of people with health insurance are underinsured
and medical bills can mean large out-of-pocket payments
often beyond the reach of many.36 A New York Times and
Kaiser Family Foundation study finds that 20 percent of
people under age 65 with health insurance had difficulty
paying their medical bills in 2015.37

3 WORK
Between 1970 and 2002 annual hours worked per person
declined in most advanced industrialized nations; however,
in the US they increased by 20 percent.38 By 1999, Americans
worked on average 350 hours per year more than
Europeans39 and more hours than the citizens of any other
country40 (the gap is even more pronounced for low income
families).41 In many wealthy nations manufacturing workers
have incomes at least equal to those of American workers, in
addition to more generous social programs.42 Few American
employers pay the full cost of health insurance. US workers
have the least vacation time and maternity leave and the
shortest notice of termination among Western nations.43
The EU requires companies to provide their workers with
paid sick leave and a minimum of 20 days’ paid vacation44
and several nations exceed that minimum. Under US law paid
leave is not required except for government contractors under
120 J. SHAANAN

the Davis-Bacon Act.45 On the positive side for the past 30

years America has had lower unemployment rates than most
of its industrial rivals. However, that may be because of lower
wages at the bottom of the wage range.46 The European
tradition of investing in workers or apprentices has not caught
on among American employers.
The oft mentioned implicit social contract between US
employees and their corporate employers, which supposedly
existed for several decades in the twentieth century, began to
disappear in the 1980s. The social contract, originated in New
Deal legislation that included a minimum wage law, and labor
laws that gave workers bargaining power in wage negotiations
with corporations.47 An underlying belief was that employees
who worked hard and followed the rules would prosper and
benefit from rising living standards, job security, and a reason-
able retirement48 and, more generally, share in the American
dream. In turn workers accepted a rather harsh “scientific
management” in the workplace. Labor relations between cor-
porations and their production workers were far from ideal
and American corporations used a higher ratio of managers
to workers than Germany or Japan.49 Nonetheless, American
factory workers usually did not agitate against the interests of
their employers or join radical trade unions. Employment
with the promise of a middle-class life was sufficient induce-
ment for the acceptance of corporate capitalism.50
One of the more significant outcomes of the disappearance
of the social contract is said to be the discontinuation of the
link between productivity gains and wage increases noted
above. Profits as a percentage of national income have risen at
the expense of wages and other forms of labor compensation51
thereby challenging a basic principle of economics. Stagnation
of wages has been accompanied by government cuts in
social spending. The decline in union membership has given
 MYTH 6: EXCEPTIONAL LIVING STANDARDS 121

corporations more flexibility to reduce wages and benefits.

Import competition, globalization and price competition in
several deregulated industries such as trucking and airlines
have had a similar effect.52
Other unfavorable developments for workers include
downsizing, the threat of outsourcing, the trend away from
permanent to temporary jobs without benefits, and loss of
privacy and legal rights.53 The number of high paying manu-
facturing jobs has declined as has the availability of well-pay-
ing jobs for those without a college degree. There has been
deterioration in working conditions as business feels less pres-
sure from government. An unusually harsh feature of the US
labor market in comparison with many advanced industria-
lized nations is the right to dismiss workers on short notice.54
It had been argued that such flexibility helps workers because
by permitting quick termination US employers are less reluc-
tant to hire new employees. It is pointed out that, unlike
France with its more protective labor laws, US corporations
know that if business conditions take a turn for the worse they
can dismiss easily their employees. With the demise of the
social contract mass layoffs became more common and job
security declined with little protest. Many of those dismissed
found jobs in the service sector but often at substantially
lower pay. For them the American dream became a thing of
the past.55
With structural changes, frequent reorganizations and a
preference for temporary workers without benefits, job stabi-
lity which was already lower than in other industrialized
nations56 mostly disappeared. American workers and their
families had to be ready to reallocate to find a new job. With
a move away from family, friends and familiar surroundings
there is a reduced quality of life. With a lessening of job
stability comes heightened anxiety at all income levels57
122 J. SHAANAN

although more so among older workers who are more likely

to lose their jobs58 and less likely to find a new job.59
Switching jobs results in a significant decline in earnings and
lifetime earnings; this holds even for those obtaining a new
full-time job.60
There is also the psychological damage from the impact of
repeated job changes and the health hazard involved in
experiencing long periods of uncertainty.61 Henry Farber
(2005) writes that labor flexibility adds efficiency to the econ-
omy but workers bear most of the burden. With increasing
layoffs and frequent reorganizations workers, understandably,
experience a loss of trust and loyalty.62 Then there is the
increased surveillance, drug testing, detailed psychological
tests and the requisite pretence of loyalty to an impersonal
and uncaring organization.
The US does have unemployment insurance albeit begrud-
gingly provided and a frequent target for laissez faire propo-
nents despite employee contributions. Yet this system is
insufficient because more than half of the unemployed do
not receive such benefits.63 If that wasn’t bad enough, until
ACA loss of a job also entailed loss of health insurance at the
worst time possible. Not only was there the issue of how to
pay for health insurance without a job but with unemploy-
ment comes added stress that is hardly conducive to one’s
health. Perhaps, because it is difficult to quantify the impact of
unemployment on family life, self-esteem and identity, these
issues are mostly overlooked when calculating the costs of
unemployment.64
From the perspective of many workers, the workplace
has undergone a negative transformation. We have already
discussed increased job insecurity, the decline in benefits,
the widening pay gap between the top hierarchy and other
employees. However, there has also been a fundamental
 MYTH 6: EXCEPTIONAL LIVING STANDARDS 123

change in individuals’ perception of their identity in relation

to work. Whereas in the past people identified themselves
with their work, it has now become more difficult to link
one’s identity with a workplace65 and thereby benefit from a
desired sense of belonging.66 Firms, intent on constant
restructuring and reinventing themselves, cannot provide a
“life narrative” to employees that would allow them to gauge
their career’s progress.67 The positive aspects of workplace
paternalism have been replaced by a more contractual rela-
tionship, akin to free agency. Reducing costs is the reason for
the change. Shades of Polyani’s industrial revolution night-
mare, derided by some writers as a myth, has reappeared with
employees increasingly being regarded as an input and trea-
ted with matching warmth. The race to the bottom has been
restarted.
It would be a mistake to assume that before the above
changes the US workplace was harmonious and democratic.
Surprisingly, for a nation proud of its democratic tradition and
egalitarian outlook, the workplace, with the possible exception
of some new high tech firms, is generally characterized by
authoritarian attitudes. The chief executive upon ascendancy
to the top inherits almost absolute power, including authority
to order mass layoffs. Motives, such as self-interest, are rarely
questioned. The explanation for this power, we are told, has to
do with ownership and property rights, which may be more
applicable to owner controlled businesses than to shareholder
owned corporations.68 With the decline in employee bargain-
ing power (and a general acceptance that in matters of business
might is right), work conditions have further deteriorated.69
Racial discrimination persists in the workplace with minorities
often being paid less.70
In recent years a good deal of attention has been drawn
to employment conditions at one of America’s largest
124 J. SHAANAN

companies – Wal Mart. The giant retailer has had considerable

success selling products at low prices due in part to an efficient
use of technology but also because it has been paying its
employees relatively low wages. Additionally it assumes that
employees can supplement their income with public assistance
and have Medicaid cover their medical costs. So in today’s
laissez faire environment we encounter a new harsh reality
that working for large corporations does not always assure
pay sufficient to support a family.71
In 2012, in seven of the ten largest occupations, US work-
ers earned less than $30,000 a year, substantially less than the
nation’s average annual wage of $45,790. Average annual
earnings in the three most numerous occupations were:
$25,310 for 4.3 million salespersons in retail; $20,370 for
3.3 million cashiers and $18,720 for 2.9 million food pre-
paration workers.72

4 CONCLUSION
The image of Americans enjoying exceptionally high living
standards is outdated. Notwithstanding twentieth-century
economic achievements, currently US living standards are
not too different from those of other advanced industrial
nations. Maintaining a traditional middle-class living stan-
dard has become more difficult and involves sacrifices and a
devotion to work to the exclusion of other activities. It
includes working longer hours with a smaller safety net
than in other industrialized nations. Sometimes it also
includes the acceptance of a semi-nomadic life for one’s
family. Many employment features that provided peace of
mind (long-term jobs, jobs with benefits and jobs with a
pension) have been either weakened or destroyed.73 The
introduction of policies such as downsizing, reorganization
 MYTH 6: EXCEPTIONAL LIVING STANDARDS 125

and outsourcing led to increased uncertainty, instability and

less rewarding work for employees.
As real wages have become stagnant it is more difficult to
enter and maintain membership in the middle class even for
families with two income earners. Fundamental changes have
taken place in the workplace, including reduced protections and
less opportunity for advancement for those without higher edu-
cation. The outcome is that many have experienced stagnation
or a decline in their standard of living. Even those who maintain
their standard of living have to accept a reduced quality of life by
either having two members of the household work or else accept
debt as a way of life with the accompanying loss of freedom.
The blame for declining individual economic opportunities,
increased risk and uncertainty and reduced living standards is
placed on the invisible hand of the market, on impersonal
global forces responding to shifting economic trends and new
technology. Yet, the hand of large corporations plays a major
role in bringing about the unwelcome changes. The profit
motive and claims of economic efficiency, apparently, excuse
all.74 However, the presumed economic efficiency is narrowly
defined and ignores the physical and emotional stress inflicted
on the many whose life and livelihood is turned upside down.75
 Myth 7: An Egalitarian Nation

1 MYTH
For over a century America has been seen globally as a land of
opportunity, and with a good deal of justification. We enjoy
equality of opportunity and a level playing field. Our system is
described correctly as a meritocracy. All children have access to
education (although too many are required to use public educa-
tion) and a high percentage of students enroll in higher educa-
tion. People who apply themselves and demonstrate initiative
and ambition are the ones who succeed. These are desirable
traits for the overall welfare of the nation and have helped
America become an economic superpower. The small number
of chronically lazy and unmotivated people will stay at the lower
end of the income scale but that, of course, is a matter of choice.
America’s rich prosper because they are willing to work harder
and take more risks than others. They did not become rich
through government handouts; they have earned their promi-
nent position. Corporate CEOs deserve their pay or else they
would have been ousted. Market rules apply to corporate gov-
ernance just as they apply to every other aspect of the economy.

© The Author(s) 2017 127

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_8
128 J. SHAANAN

Both rich and poor enjoy greater material comforts than in

the past. Many of the poor are young people who will over
time avail themselves of the numerous opportunities found in
America. Eventually they will climb up the income and wealth
ladders. We do not have classes or an aristocracy. We cannot
be classified by our clothes and for the most part one cannot
tell the rich from the poor by their accent. We enjoy similar
food and pastimes.
Government should never redistribute income in order to
achieve a more equal society. Its redistribution activities harm
the very fairness which it seeks to attain and amounts to a
violation of individual freedom. They are also contrary to
economic laws. Placing restrictions on successful people and
firms and taxing them excessively will only distort incentives
and result in a diminution of the nation’s output. More
fundamentally, why penalize success? Programs such as mini-
mum wage, Medicaid, graduated income taxes and a host of
welfare programs for the poor are bad for the economy
because they distort the market’s signals and interfere with
an efficient outcome. For the truly needy there are plenty of
private charities.
There is a tradeoff between economic efficiency and greater
equality. Attempting to generate more equal outcomes
shrinks overall output and results in a smaller pie for the
nation thereby hurting everyone including the poor. Let the
free market work and greater income equality is bound to
follow. The obsession with income equality is unhealthy.
Quite often it involves erroneous analysis that does not take
into account the relatively high levels of consumption of
America’s so-called poor. It is based on envy and the biases
of academics with government ties.1
The way we examine economic outcomes is misleading. We
should be looking at whether the outcomes come about
 MYTH 7: AN EGALITARIAN NATION 129

through a fair and effective process not whether the outcomes

themselves are equal.2 If the process and its institutions are
fair one can have no complaints about the outcomes. In fact
there is nothing wrong with inequality; it may be the driving
force, the incentive system that motivates people in market
economies.3 A guarantee of equal outcome is not going to
inspire people to prodigious efforts. As long as most people
and their children have the opportunity to succeed and
become rich we should not fuss over income or wealth
inequality. As noted by Milton Friedman and Rose
Friedman (1980) the free market brings about an unprece-
dented equality of opportunity and standards of living.

2 INCOME INEQUALITY IN AMERICA

Once, the US prided itself on being an egalitarian society.
However, a reading of recent income and wealth distribution
statistics suggests a different conclusion. Income inequality
has been getting worse since the 1980s to the extent that the
US has greater income inequality than many European
nations.4 This difference is even more pronounced when
after-tax income inequality is compared because there is less
redistribution in the US.5 Poverty rates are not improving; the
middle class has been diminishing as have the high hopes of
the mid-twentieth century for a broad-based middle-class
nation.
There are large differences in income and wealth between
America’s top echelon and the rest of the nation. In recent
decades the disparity between the income of the top one
percent and the remaining 99 percent has grown substantially.
As noted previously, in 2011 the median household income
adjusted for inflation was lower than it had been 10 and even
15 years earlier and only slightly higher than 20 years before.
130 J. SHAANAN

By contrast, the top one percent of income earners experi-

enced significant improvements in their income both in rela-
tive and absolute terms. Alvardo et al. (2013) find the share of
total annual income received by the top one percent rose from
9 percent in 1976 to 20 percent in 2011; increases for other
groups within the top five percent were much smaller. The
authors believe that this dramatic increase in the share of the
top one percent has had a major impact on overall income
inequality in the US.
If wages and productivity were once correlated then, as
mentioned previously, starting in the 1980s and continuing
until the mid-1990s this pattern broke down, with little or no
increases in real wages, a pattern which would reoccur in the
early 2000s. Stiglitz (2012) points out that in 2007 the
average after-tax income of the top one percent amounted
to $1.3 million; while the 20 percent of Americans with the
lowest income received on average only $17,800. Examining
a much smaller category – the top one hundredth of one
percent (about 16,000 families) – reveals that from 1980 to
2010 their share of total income rose from one to five
percent.6 The average pay of the top 100 CEOs went up
from $1.3 million in the early 1970s to $37.5 million in
2004.7 By the 2000s, income inequality had returned to levels
not seen since the 1910s.
To gain additional perspective we can examine Gini
inequality coefficients that range from 0 (complete equality)
to 1 (extreme in inequality). Based on OECD data for 34
nations in the late 2000s, the US had a Gini income coeffi-
cient (before taxes and government transfers) of 0.486 which
placed it 29th out of 34 OECD nations. When the data is
adjusted for taxes and transfers the US Gini income coefficient
improves to 0.378 but the US ranking falls to 31. More
generally fewer Americans benefit from the once famous
 MYTH 7: AN EGALITARIAN NATION 131

social and economic mobility8 that was believed to define

America.
Studies finding growing inequality have had to deal with a
well-financed campaign to discredit their research.9 There
have been many counterclaims over the past 20 years that
levels of inequality are not as bad as suggested. These claims
are publicized by a growing number of policy journals and
think tanks founded specifically to fight redistribution by
preaching laissez faire.10 These counterstudies claim that the
efforts to draw attention to inequality not only distort the
truth but also represent class warfare. They criticize redistri-
bution policies’ destructive impact on economic incentives,
businesses, employment and the GDP thereby hurting even
the poor – the intended beneficiaries of redistribution. These
arguments misrepresent how the economic system works and
their objective is to protect the income of the wealthy.
Three common arguments are offered in defense of rising
inequality. The first is to deny the accuracy of the data. Yet,
with the accumulation of data from different sources this
becomes increasingly difficult to do and in fact some
researchers11 suggest that if anything inequality may be
worse than what the data shows. A second argument claims
that America’s poor seem poor because of the exclusive focus
on income statistics. If we were to look at consumption
patterns and the many cheap consumer goods available
then we would see that the so-called poor are far better off.
Additionally government programs help make up the differ-
ence between income and consumption.12 Krueger and Perri
(2006) suggest that consumption inequality has risen but
less so than the increase income inequality. However, more
recently, Attanasio and Pistaferri (2016) find that over the
past few decades there has been a substantial increase
in consumption inequality for nondurables and services,
132 J. SHAANAN

paralleling income inequality trends. The third argument is

that we need to focus on lifetime earnings rather than on any
given year. However, studies using this approach find that
lifetime income inequality is also large and has increased
substantially in recent times.13 Wealth inequality is even
greater than income inequality14 and is at historic highs,15
with some studies suggesting that the top one percent pos-
sess close to half of all wealth.
US government programs for improving income inequal-
ity are not generous. In comparison with other advanced
industrialized nations the US appears to have an aversion to
income redistribution programs. Existing programs often
are provided reluctantly and sometimes even in a demean-
ing manner. There is little urgency or understanding shown
about the need to come to the aid of the less fortunate
with public funds. Often existing redistribution programs
are influenced by the profit opportunities of some firm or
industry and not by the wishes or needs of its intended
beneficiaries.16
Economic textbooks describe the US tax system as progres-
sive or graduated meaning that high income earners pay not
only a larger absolute amount but also percentagewise. Yet,
with tax cuts, tax loopholes, special exemptions and subsidies
the original intent has been circumvented to a large extent.
Top income earners often pay a smaller percentage than mid-
dle-class people. In the past 35 years tax changes have been
mostly regressive. Starting with tax cuts under President
Reagan, the changes ended up benefiting the rich more than
any other segment of society because income tax cuts, pre-
dominantly for upper tax bracket earners, were combined
with increases in payroll taxes.17 The Bush administration
tax cuts in the 2000s that reduced income and capital gains
taxes, again, favored heavily the well-to-do.
 MYTH 7: AN EGALITARIAN NATION 133

3 CLASS AND NONINCOME INEQUALITY

Income and wealth levels aside, there are also large and related
disparities in areas such as education and health. In UNDP
measures of human development for 2011 (which includes
income, health care and education) the US ranked fourth.
However, once inequality was factored in the US ranking
dropped to 23rd, below all European nations included.18
Janny Scott and David Leonhardt (2005) suggest that class
is a strong differentiating factor in America and rising in
importance. Class is evident in varying educational opportu-
nities, in access to health care, in greater longevity and lower
incidences of death from heart disease, strokes, diabetes and
different types of cancer.19 Raj Chetty et al. (2016) show that
the top one percent of income earners live 15 years longer
than bottom one percent. Children from poor families often
go to schools with fewer resources20 and eat less nutritious
food, conditions at odds with the idea of equal opportunity. A
related and disturbing finding from two recent studies is that
there are significant differences in the brain structure of chil-
dren from poor and rich families.21 ACA to date has allowed
millions of Americans, who previously were without insur-
ance, to have some level of health insurance, undoubtedly a
major improvement, although other aspects of the program
do not ameliorate inequality.
Sean Reardon (2013) reports that children from rich families
are increasingly entering kindergarten better prepared than low
income and middle-class students. This difference in preparation
also persists at higher levels of schooling. Rich parents can spend
more time educating their kids and providing access to better
pre-school programs and child care. Additionally, high income
families are devoting considerably more time and money than
before on their children’s cognitive development and educa-
tional success, much more than parents with less means. The
134 J. SHAANAN

result according to Reardon is a growing education gap between

rich and middle class that did not exist 30 years ago.
At America’s top universities the vast majority of students
come from well-to-do families and relatively few from poor
ones.22 This is blamed, in part, on government assistance for
higher education which often benefits the well-to-do rather than
the poor as well as “legacy preferences” at elite universities;
another blow to the notion of equal opportunity. Kuttner
(2007) writes that it is difficult for young people who are not
from well-to-do families (top 20 percent) to join the middle
class; family income and status turn out to play an important
role in children’s success. The decline in opportunity has resulted
in American children being far less likely to move to a higher
income category than their parents as compared with European
children23 who benefit more from social programs. The assur-
ance of a better future for one’s kids seems to be a thing of the
past and with it improving intergenerational mobility.24
Finally, an additional area of inequality (noted in Myth 6)
pertains to levels of uncertainty in one’s life. The poor in
America, more so than in most advanced industrialized coun-
tries, have greater uncertainty and the greater stress that goes
with it. Uncertainty from not knowing how they will provide
for their families upon losing a job; have enough money to
retire; pay for health care; and whether they will be able to pay
for a car repair or a leaking roof.

4 BELIEFS ABOUT INEQUALITY

Exactly what is meant by equality is not entirely clear.
Egalitarian attitudes may be common but are quite different
from equal incomes or equal access to top universities, hospitals
or lawyers. Equality in terms of political liberties is taken for
granted and is a source of pride. However, with states fighting
 MYTH 7: AN EGALITARIAN NATION 135

for the right to restrict voters, usually members of minority

groups and the poor, it cannot be taken for granted. Equality
of opportunity, according to Daniel Bell (1976), is the equality
that usually comes to mind in the US (and many other Western
nations). Equality of outcomes, though, is regarded as objec-
tionable and contrary to the American way because of the belief
that people deserve the rewards resulting from their efforts.
Additionally economists have warned that attempts to equalize
incomes may reduce the nation’s overall output.
In the US there has been until fairly recently a belief in the
fairness of the economic system and in equality of opportu-
nity, a level playing field and a reasonable chance of attaining
success. Yet, Thomas Piketty (2014) finds that even in the
early twentieth century the US, in terms of income equality,
was already far removed from the egalitarian image of a pio-
neering society. Nonetheless the idea persisted that Americans
were equal if not in terms of income than in terms of oppor-
tunity. The prevalence of this belief led to a general accep-
tance of the system, including inequality of income and
wealth, with less hostility displayed toward the rich than in
most places. It was conceded that children of billionaires and
high ranking politicians may have some advantages but other-
wise the competition is open to all and anyone who has
enough drive and motivation can do well. Consequently,
and in combination with a forceful propaganda campaign,
inequality was accepted as a necessary component of
America’s economic success.25
Despite significant flaws in the above beliefs, it has not
always been easy to express contrary opinions. Pointing to
increasing income and influence of large corporations and
wealthy individuals carries the risk of being charged with class
warfare.26 A recent example includes some of the attacks on
Thomas Piketty and his book “Capital in the 21st Century”.
136 J. SHAANAN

Norton and Ariely (2011) show that Americans, generally,

do not have a good idea about the extent of wealth inequality
and underestimate actual wealth distribution patterns.
Interestingly, the authors also find that Americans would
prefer far more equal wealth distributions than actually exist.
This viewpoint is shared by all demographic groups in their
survey including Republicans and the wealthy. There is agree-
ment also that redistribution should involve shifting wealth
from the top quintile to the lowest three quintiles. The study
suggests that Americans though favor some wealth inequality
over complete equality, but less than the present pattern.
Lack of knowledge about existing wealth distribution,
causes of inequality and economic policies to improve
income inequality help explain why Americans, especially
lower income Americans, have not demanded more redis-
tribution. Recently, though, a greater awareness may have
arisen regarding opportunity and a level playing field.
After the Crash and the “Occupy Wall Street” demonstra-
tions, newspapers started to write about US inequality and
the fact that real wages had barely risen in 30 years. The
issue unexpectedly, gained considerable attention in the
Presidential primaries in 2016.

5 ECONOMIC CAUSES OF INEQUALITY

While social and cultural factors play a role, for the most part,
the causes of rising income inequality can be divided roughly
into two categories – economic and political. As argued in
Myth 2, the divide between the economic and political is far
from clear and frequently the two are intertwined. The focus
here is on economic explanations and they include market
changes on the one hand, and power-induced changes on
the other and, again, the demarcation can be hazy.
 MYTH 7: AN EGALITARIAN NATION 137

Changing technology has led to increased demand for

highly skilled workers and consequently rising wage gaps
between skilled and unskilled workers. There is some evidence
to confirm this hypothesis,27 however, it cannot explain huge
income and wealth increases at the top. Globalization has
increased inequality, especially, because of the rise in imports
of manufactured goods and the loss of jobs to cheaper labor
overseas. Once again, this explanation accounts for only part
of the increase in inequality. Increased overseas outsourcing
and the threat of plant closings place pressure on workers to
accept pay cuts or at least not demand wage hikes. Given
government involvement in international trade and corporate
influence in such matters, it is difficult to consider globaliza-
tion as a purely market factor.28 Instability in employment
also has led to greater inequality with the advent of part-time
employees without benefits and layoffs to please Wall Street.
The decline in union membership has also played its part in
rising inequality.
There are additional economic factors involved possibly no
less significant than the above. Giant corporations have
applied, whenever possible, greater economic pressure on
their employees, suppliers and customers. In the 1980s and
1990s it was claimed that such moves improved the econo-
my’s efficiency. However, it also meant a lower standard of
living for millions and rising inequality. Inequality also
increased due to the removal of various restrictions on cor-
porations’ behavior and reduced opportunities for individuals,
especially those without a college degree.29 Corporations
could move production overseas and dismiss workers with
little notice. Costs were cut and profits and compensation
for top managers increased.
Krugman (2002a) points to another aspect of the large pay
raises for corporate managers. The raises were not market
138 J. SHAANAN

driven (the work of the invisible hand) but rather resulted

from the “invisible handshake” in the boardroom. Based on
the principal-agent theory it was claimed that CEOs’ interests
and incentives had to be aligned with those of shareholders in
order to maximize shareholders’ returns. Yet, subpar perfor-
mance has not prevented large pay raises. In many other
instances executives are rewarded for stock price increases
that simply reflect a general rise in stock prices or even a
temporary rise. In practice many top executives can set their
own compensation with the almost automatic approval of
corporate boards of directors.30 These incentive schemes
have helped increase income inequality by pushing CEOs to
focus on very rewarding short-term results that appeal to the
financial industry although not necessarily in line with the
long-term interests of the firm.
The rise in top managers pay, often without corresponding
productivity increases, is possibly the most important reason
for the increase in income inequality. Piketty (2014) sees the
emergence of the new elite based on work-related remunera-
tion and not inheritance, as an American invention, suppo-
sedly, in accordance with the principles of meritocracy.
Krugman (2002a) suggests that corporate executives taking
for themselves a larger share of the firms’ revenues became
possible by the increasing social acceptance of large pay for
executives devoid of the need to set an example. Declining
paternalism and responsibility for one’s workers and their
families and, more generally, the transition to more ruthless
market relationships also helped increase executive
compensation.
Some economists suggest that incomes in the financial
sector are based on the recipients’ marginal product31 and
hence are justified economically. The evidence does not sup-
port this defense especially given the difficulty of calculating
 MYTH 7: AN EGALITARIAN NATION 139

individual contributions while factoring out all other contri-

butions. Additionally, marginal productivity differences can-
not explain the diversity of wage distributions among
advanced industrialized nations over the past 30 years given
similar productivity growth and technological advances.32

6 INEQUALITY AND THE POLITICAL-ECONOMY

The greater equality of the mid-twentieth century as com-
pared to either today or 1900 was not an accident. It was
based on deliberate attempts by government to bring about
more equality. This included progressive taxes, wage regula-
tion, allowing stronger unions, stronger regulation of banks
and utilities, restrictions on financial speculation and also
social investments such as in higher education.33 However,
in the past 40 years the trend has been reversed and income
inequality has been rising.
Markets are the result of laws, including laws on property
rights, laws giving corporations privileges and rights, laws on
competition and laws on unions and wages. Therefore mar-
kets, and consequently income distribution, are shaped by
politics. Indeed the aforementioned reversal in income equal-
ity may have less to do with the work of the invisible hand of
the market, and more to do with laws and government poli-
cies. The latter often are determined by giant corporations
and billionaires who have donated and lobbied successfully for
changes designed to increase their share of the nation’s
income and wealth.34 Possession of economic power and
political influence has allowed them to attain a legal-commer-
cial framework immensely advantageous to themselves. The
political influence gained by the financial industry, led to the
elimination of many of the laws and regulations legislated
during the Great Depression to protect Americans from
140 J. SHAANAN

speculation and financial abuse. Later bankruptcy laws were

toughened to the detriment of consumers, low income house-
holds and students. The outcome has been a notable increase
in inequality.
In the mid-twentieth century government enforced
antitrust laws to ensure that consumers were not price
gauged by firms with market power thereby limiting reverse
redistribution.35 Since then government and the courts’ views
have changed considerably. The courts, with a new emphasis
on economic efficiency and less on protecting competition (as
discussed in Myths 1 and 4) have permitted the entrenchment
of market power and a re-emergence of anticompetitive beha-
vior. A new criterion in the appointment of judges was intro-
duced during the Nixon36 and later Republican
administrations.37 The new criterion was based on the
appointees’ opinions on competition and antitrust.38 Many
new appointees turned out to be adherents of the Chicago
School’s economic efficiency hypothesis.39 The outcome, not
surprisingly, has been an increase in income and wealth
inequality.
Rent seeking, as discussed in Myth 2, involves the use of
political and economic power to obtain a larger share of the
pie but without increasing the size of the pie. Political dona-
tions facilitate acceptance of rent seeking activities. The poli-
tical sector has either legitimized or turned a blind eye to
many rent seeking practices resulting in a worsening of
inequality as a result of the transfers involved. The financial
sector is a prime example of rent seeking. The industry’s
influence over government resulted in deregulation and lax
enforcement of remaining financial regulations. The industry
was given the freedom to take advantage of customers; to
engage in highly risky activities; and then granted massive
bailouts after the Crash of 2007–08.
 MYTH 7: AN EGALITARIAN NATION 141

One outcome facilitated by the above developments is that

the four largest banks in the US currently control nearly half
of all banking assets. Prices and profits are commensurate with
the robust increase in concentration. The anticompetitive
trend combined with the rent seeking practices has had a
major impact on inequality with huge rewards flowing to
the top echelon of the industry.40 The financial industry is
not the only group to engage in rent seeking. Others include
top lawyers who are well rewarded for advice on rent seeking
opportunities; industries exempted from paying for the costs
of the pollution they create; and natural resource industries
refusing to pay a price reflecting the scarcity of the resources
they use. Such activities distort the utilization of resources and
damage the economy while again aggravating inequality.41
The large tax cuts passed in the 1980s and then again in
2001 and 2003 contributed heavily to rising inequality. The
tax cuts applied nominally to all taxpayers so were deemed
fair, yet, they were not. They did not alleviate the nation’s tax
burden but shifted it from the rich to the rest.42 Income tax
rates were reduced, but payroll taxes were raised and the latter
did not affect the wealthy. Inequality worsened when govern-
ment tax investigators were told to spend less time examining
the returns of the wealthy and more time scrutinizing the
taxes of income earners who were not rich but had declared
an earned income tax credit.43
The corporate tax has been subjected to criticism because
of its alleged high nominal rate. Yet many major corporations
pay little or no taxes and few pay the full rate. The result is
that the percentage of tax revenue from corporate taxes has
declined in recent decades. In 2012 individuals through
income and payroll taxes paid $1.9 trillion while corporations
paid less than $0.25 trillion.44 To put matters in perspective at
the end of War World II corporations paid 50 percent more in
142 J. SHAANAN

taxes than individuals.45 Laws on global commerce written for

the benefit of multinational corporations have had a similar
effect enabling them to pay lower taxes thereby further
increasing inequality.46
Scheiber and Cohen (2015) report on a thriving industry that
helps the very rich avoid paying taxes. While President Obama
promoted a campaign against tax evasion by the rich, the actual
outcome was rather unexpected. The top one-tenth of one per-
cent of income earners had paid an average rate of 20.9 percent
on Federal taxes in 2008; four years later the percentage paid
declined to 17.6 percent. The very wealthy have created their
own private tax system at an individual cost of millions of dollars
but with a rewarding return, possibly in the tens of millions of
dollars.47 Help is provided by expensive lawyers, estate planners,
lobbyists and antitax activists from different foundations. These
experts come up with many complex and creative strategies
to evade taxes. Additional strategies have included attacks on
the IRS resulting in significant cuts in its budget, “buying”
well-designed tax policies and organizing the “Private Investor
Coalition”. A favored technique is changing the source of one’s
income from a higher to a lower taxed category.48
Political redistribution in favor of the wealthiest hardly ends
with the tax system. Perhaps more egregious is the govern-
ment’s corporate subsidy program known colloquially as cor-
porate welfare.49 This topic is discussed in detail in Myth 2;
however, it is worth noting that the combination of direct and
indirect tax payer subsidies, tax exemptions and other govern-
mental benefits to business plus the cost of the resulting dis-
tortions to the economy amount to hundreds of billions of
dollars. State and local governments also offer subsidies and tax
exemptions and numerous other inducements. Included are
appropriation of public or private land, relaxing environmental
and labor laws, paying for the cost of training workers, for
 MYTH 7: AN EGALITARIAN NATION 143

access roads and other infrastructure to persuade corporations

to settle in their particular locality and not another. All these
inducements amount to transfers from taxpayers to corpora-
tions. For the most part this redistribution exacerbates income
inequality with little economic rationale and great unfairness.
More than a few fortunes have been created through the
US government’s generosity. Redistribution most likely was
involved in the 2008 bailouts (notwithstanding the indeter-
minate amounts repaid) that propped up financial and other
firms with taxpayer money. Behind those policies was the
Federal Reserve Bank, in effect ensuring that America’s finan-
cial elite continued to receive a large share of the nation’s
income and maintain their positions. The Fed’s long focus on
inflation prevention had major distributional implications
favorable to the wealthy. Some critics suggest that the Fed’s
policies often seemed to parallel the interests of bond-
holders50 (although perhaps less so in recent years).
Long-standing practices involving pensions and job secur-
ity (discussed in Myth 6) were allowed to disappear without
complaint from government. No official objections were
raised about outsourcing, the introduction of temporary
jobs, work without benefits and frequent workplace reorgani-
zations resulting in worker dismissals. Spending on public
education, public transportation and infrastructure was
reduced. Assistance for the needy declined. Government
when not actively supporting the changes looked the other
way. The outcome was an increase in inequality.

7 CONCLUSION
After 1980, a tide of “free market” literature appeared that
railed against government attempts to reverse the market’s
outcome. It was argued that allowing the rich to become
144 J. SHAANAN

richer would give them incentive to work harder and

invest more and benefit the entire nation. Therefore gov-
ernment should avoid interfering with the creative spirit
of the wealthy. Government efforts to reduce inequality
were contrary to the American way. Lulled by false pro-
mises the nation went along with policies to augment the
income share of the rich. It became much harder to argue
on behalf of redistribution. Additionally, laws and regula-
tions to prevent financial abuse, fraud and deception that
would have lessened inequality were rejected as antifree
market.
In the 2000s the National Debt was designated as
America’s number one economic enemy. Most of the
claims and some of the research used to support this idea
were not much more convincing than those on behalf of
trickle-down economics. Nonetheless the idea was pro-
moted aggressively. Politicians willing to address the issue
of inequality were, for the most part, intimidated with the
accusation that they favored higher taxes. In the process
public investment declined as did relative spending on
public education and with it the gap widened between
children from rich and poor families.51
Decreases in health and well-being are linked to rising
inequality.52 Chang (2011) points out that equality of
opportunity is rendered meaningless without some minimal
equality of outcome for children in schooling, nutrition
and health care. Another casualty of rising inequality,
according to Madrick (2009), is the public’s trust in the
fairness of the economic system and that can harm the
economy. Several writers have also pointed out the role of
racism in the reluctance to address inequality in America53
which may help explain the reluctance to adopt a stronger
social safety net.
 MYTH 7: AN EGALITARIAN NATION 145

Recent economic studies suggest that, contrary to the

widespread twentieth-century belief in a tradeoff between
fairness and efficiency, inequality may hurt growth and effi-
ciency.54 The reason is that much inequality results from rent
seeking behavior that does not create new wealth and rewards
people in ways that are unrelated to their social contributions.
Rising inequality is costly. It also leads to social instability. We
have allowed inequality to reach levels more commonly asso-
ciated with poor nations with dictatorial governments and
little social cohesion.
When the economic system is endangering the nation’s
well-being because it is steeped in rent seeking and other
distortions favoring the rich and organized, the case for
change becomes that much stronger. Changes that bring
about a level playing field (such as a genuinely progressive
tax system that would enable increased spending on educa-
tion) would provide a handsome return to the economy.55
This would also restore belief in the political system that has
suffered from a decline in esteem with the deterioration in the
fortunes of the middle class.
Piketty (2014) suggests that, contrary to Simon Kuznets’
well-known claim about an equalizing trend in market econo-
mies, there is no natural and spontaneous process to prevent
inequality. Economic growth by itself is insufficient. Rising
equality in the first 50 years of the twentieth century followed
by a reverse trend in the last 20 years, had more to do with
politics than anything else. The attainment of greater equality,
if so desired, lies in a political consensus to address the issue.
However, America continues, with few exceptions, to move in
the opposite direction. Income and wealth gaps widen and
the future of America as a middle-class society is in doubt.56
For the most part politicians, especially those of a quasi-
progressive stripe, make the obligatory comments. However
146 J. SHAANAN

laments aside no action is taken and none is contemplated to

reverse the growing trend. Such actions are not possible as long
as the political system is dominated by donations, the media
owned by the beneficiaries of inequality, and the direction of
research in academia influenced by billionaires and corporations.
Inequality increases and with it the quality of life for many is
reduced.
 PART III

Political-Economic
 Myth 8: Free Markets Protect Democracy

1 MYTH
The market is the ultimate in democracy. The invisible hand
of the market provides far greater freedom than representative
government. The market reduces the range of issues that
politicians need to determine and in so doing minimizes
government involvement and demands for conformity. The
market provides more choice and diversity and less coercion
and therefore is superior to any type of political arrangement1
that usually requires compromise. It is advisable to switch
from government run services to private run operations not
only because economic efficiency is enhanced but democracy
gains as well. Corporations represent genuine democracy rea-
lized through the daily “votes” of tens of millions of consu-
mers. Their presence, regardless of size, is in line with free
choice and reflects the demands of millions of Americans.
A smaller weaker government, barred from the economic
sphere, with less ability to coerce and censor, would increase
Americans’ freedom. Those who argue for an economic role
for government have no appreciation for freedom. Freedom

© The Author(s) 2017 149

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_9
150 J. SHAANAN

requires that political and economic power be separated.

Competitive capitalism promotes political freedom because
it separates economic power from political power, a kind of
checks and balance system. The separation also allows people
to advocate against political authority knowing that their jobs
are safe.2 Therefore the essence of a free market is the absence
of government.
If one is worried about undesirable political links between
the private and public sectors the solution is obvious. Weaken
government; reduce its spending power and ability to reward
favorites with subsidies, tax exemptions and other forms of
help. When government cannot grant financial favors, cor-
porations will not seek to influence it and then one would not
have to worry about government money granted to corpora-
tions. The problem is government, its spending and its power
to coerce, not corporations. Additionally, people and cor-
porations should be free to advocate as they please otherwise
they are being denied their right to free speech. They should
also be allowed to spend their money any way they see fit,
including on political campaigns. Interference with either free
speech or freedom to spend is contrary to democratic
principles.

2 DEMOCRACY
Milton Friedman (1962) is worried about democracy’s coer-
cive powers3 but not about coercion coming from private
sector firms possessing both economic and political power.
The anticompetitive doings of giant monopoly-like firms and
highly concentrated oligopolies do not overly concern him
and neither does their political influence. Therefore Friedman
has no hesitation in doing away with government protections
in the economic arena. Unfortunately, increased economic
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 151

power invariably is transformed into political power. So by

advocating for laissez faire he is essentially permitting the
influence of money to be the determining factor in politics,
not quite in conformity with genuine political democracy.
The implicit message from laissez faire proponents is a
preference for corporate rule over elected government. Of
course, it is never expressed as such but rather as a preference
for the rule of markets. Democracy is not assigned a high
priority, to put it mildly. Milton Friedman and his disciples
might argue that large corporations are representative of the
free market as much as small firms and that the market is the
most democratic of institutions. Yet large corporations came
about mostly because of power over government, including
over legislators and the judiciary at both state and federal
level. Over the past three decades there has been a determined
effort to weaken democracy. When freedom to profit over-
powers all other freedoms it is alarming but the loss of democ-
racy and with it political freedom is perhaps the most
dangerous outcome.
One might ask whether the US can be called legitimately a
democracy. Many, both in the US and overseas, consider it to
be a democratic nation because people can choose their gov-
ernment. However, as we shall see below, the label “democ-
racy” is debatable not unlike the “free market” label. In the
US, as in most places, when it comes to the formulation and
presentation of political ideas, the source is usually politicians
or lobbyists working on behalf of corporations, not the public
at large. An even more disturbing feature, possibly fatal to
democracy is that many people are represented by politicians
who hide their true interests and allegiance. The role of
money in the political system is pervasive and basically
money can buy votes and candidates. Therefore it is question-
able whether such a system qualifies as a democracy.
152 J. SHAANAN

In the context of the relationship between a free market and

democracy, the role of the media is important. A troublesome
issue is the conflict between the media’s pursuit of profits and
democracy’s need for information. For democracy to function
properly it requires well-informed voters on political, eco-
nomic and social issues. Unfortunately, market incentives are
insufficient to assure widespread dissemination of quality
news. The media outlets, mostly corporate owned, take care
not to offend their most important clients – advertisers – most
of whom are, once again, corporations. So the information
provided is controlled by economic interests. Consequently
there has been less ideological diversity in the mainstream
news media than in other democracies. When the economic
sector exerts leverage to the extent that it influences the
selection of candidates, their election, the issues debated,
and the information presented, one has to wonder again
how appropriate is the label – democracy.

3 FROM ECONOMIC TO POLITICAL POWER

Government has considerable impact on the economy
through laws, regulations and policies not the least of which
is in deciding how government money will be spent (which
sector and firms will benefit and what products and services
will be purchased?) who will pay taxes and how much. As a
result big corporations and very wealthy individuals are keen
to gain influence over such decisions. One group in particular
has attained an inordinate amount of influence over govern-
ment. These are giant firms that are deemed so crucial to the
economy that the title of “too big to fail” has been bestowed
upon them. Such firms have turned economic power into
political influence which in turn helps them amass even
more economic power.
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 153

Corporate power and influence are acceptable not only in

economic matters but also in politics. Contrary to oft repeated
claims about increasing government encroachment in the
economic sphere, it is the economic sector that has effectively
taken over the political system. Corporate dominance over the
political sector is acceptable to politicians of both major par-
ties. As will be explained below, it did not happen by accident
and was not brought about by the invisible hand of the
market. Unfortunately, it does not bode well for democracy
and its institutions.
If in the nineteenth century Alexis de Tocqueville was of
the opinion that the real power lay in the hands of the
people,4 significant economic events since his time, including
the unleashing of the profit motive and the rise of massive
economic organizations, have altered the balance of political
power. For over a century, giant corporations brought about
political, legal and judicial changes that allowed them to gain
control over both the economic and political spheres. The
supremacy of the economic over the political sector has been
obtained through the use of money and a careful public
relations campaign based on disingenuous appeals to free
markets, freedom from government and the preservation of
traditional cultural values.5
It is not as though there were no constitutional protections
already in existence to protect wealth and economic power.
The famed separation of powers between the different
branches of government and the checks and balances by
which each branch keeps an eye on the other branches are
seen as pro-democratic features of the US system of govern-
ment. However, their original purpose probably was to pro-
tect property from government and majority rule not to
protect democracy.6 Economic considerations were present
at the nation’s founding and influenced the organization of
154 J. SHAANAN

government including the Constitution. Nowhere was the

separation of economics from the rest of society crafted into
law as in the US writes Polyani (2001): “the American
Constitution . . . isolated the economic sphere entirely from
the jurisdiction of the constitution . . . and created the only
legally grounded market society in the world”.
With the ascent of large corporations their political influ-
ence increased (except for a brief period in the 1930s).
Politicians need money to win elections and the corporations
possess both money and willingness to donate. The latter
practice was sanctioned by a 2010 Supreme Court ruling –
Citizens United. This arrangement between business and
politics has its defenders. Some claim that it is a sign of
efficiency which, in their opinion, trumps fairness and democ-
racy because it resembles market behavior where people
choose freely how to spend their money. The spending in
turn is said to indicate the strength of their preferences.7 It is,
according to this view, also in conformity with individual
economic freedom where one has the absolute right to
spend one’s money as one sees fit, including the buying of
elections.8
However, such spending is not democratic because it
enhances the power of economic interest groups. It is also
not efficient because the loss to the nation often exceeds the
gains to interest groups. It is also not compatible with free
market principles. In the 2008 bailouts America witnessed a
transfer of money from taxpayers to politically influential
financial corporations. People (or firms) pursuing their self-
interest does not lead to the best possible economic outcome
when government influence can be bought.
Thomas Frank (2005) argues that the Democratic Party main-
tained its focus on social issues while forsaking the economic
interests of the poor and middle class. With no party championing
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 155

populist economic positions, large corporations are left without

any meaningful opposition. In the context of current political-
economic discourse and its convoluted logic, this has been con-
sidered as a triumph for free markets.9 What then is left for voters
to decide on Election Day? Which candidate shares their religious
and cultural values and whose personality do they find most
appealing?
The removal of an economic populist plank from the
Democratic Party agenda started several decades ago.10 The
Carter administration called for deregulation and criticized
government thereby adopting key features of the corporate
platform which blamed government and its programs for a
variety of ills afflicting America. It accepted conventional but
unproven wisdom that self-regulating markets would solve all
problems. The lure of campaign donations and the increasing
popularity of antigovernment sentiments had made Democrats
amenable to the laissez faire message that social programs had
to be reduced or eliminated11 and tax hikes, especially on the
rich, were unacceptable. Both parties drummed home the
message that government was useless and could not provide
solutions. Kuttner (2007) suggests that this ideological
change, where economics had essentially become depoliticized,
left Democrats without a distinct economic message which in
turn helped explain how they lost two close presidential races in
2000 and 2004 (and possibly in 2016). A strong pro-big
business (Wall Street) faction emerged in the Democratic
Party. In fact on key economic and financial issues it was
difficult to distinguish between Democrats and Republicans,
much to the delight of corporate lobbies that support them.12
The Democratic Party has renounced its legacy – it is no longer
the party of the New Deal. The result is that the less fortunate in
society are left increasingly to the mercy of the market. President
Clinton adopted the conservative call for ending
156 J. SHAANAN

big government. He brought Robert Rubin from Wall Street

into the cabinet and later nominated Alan Greenspan for a
third term at the Fed.13 The nation was left with the politically
unappetizing choice of selecting either candidate A financed
by and representing large corporations and Wall Street or
candidate B financed by and representing the same.
The decline in voter turnout was not surprising because one
needed a powerful magnifying glass to detect differences
between rival candidates’ economic positions. Voters per-
ceived the futility of politics as a means of bettering their
economic circumstances. By the time George W. Bush came
into office the ground work was laid for an all-out corporate
grab without any pretence of fairness.14 In the 2000s the
media dwelled on the political problem of deadlock in
Washington either oblivious or unwilling to acknowledge
the fact that one party had embraced extremist laissez faire
views while the other party had steadily adopted many of its
rival’s ideas.15 The media mostly misinformed by suggesting
that a lack of compromise and goodwill were the main issues
rather than political extremism, greed, gross unfairness and,
essentially, a move to weaken democracy.
Unlike many twentieth-century democratic nations with a
wide range of political parties representing a broad spectrum
of political-economic positions, the US offerings are consid-
erably narrower. The limited choice has been further reduced
when the Republican and Democratic parties both champion
corporate positions and privileges. On most major political-
economic issues little separates the two parties. One party’s
platform favors treating consumers and employees less harshly
but not in a way that would jeopardize the dominant position
of their corporate patrons.16 In 2014 President Obama called
for more equality. Unfortunately, the call was not backed by
any specific policy proposals, certainly nothing that would
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 157

reduce corporate wealth and power or weaken Wall Street’s

unique hold on the American economy. The status quo
would be maintained.
Charles Lindblom (1977) writes that Western nations
adopted “democracy” because it enables business to control
government and politics. It ensures an economic system
favorable to business. The political power and privileges
granted corporations over the years are unencumbered by
any additional responsibilities. Their internal decision making
process is not open to public scrutiny despite its impact on the
nation. The situation favors neither democracy nor the
economy.17
To gain control over the political process large corpora-
tions, and especially financial corporations, also set about to
convince politicians that their demands were, in fact, good for
America. Given the large sums of money donated it may not
have been too difficult to persuade politicians that corpora-
tions are worthy of special privileges and access unavailable to
their smaller competitors and the average citizen. The ideo-
logical campaign did not stop with politicians. The nation,
with the help of the media and academics, adopted the idea
that giant corporations represented the best in free enterprise
and their managers deserved the acclaim and financial rewards
accorded great entrepreneurs and innovators. The acceptance
of this ideology facilitated granting even more power and
privilege to those already possessing substantial wealth and
influence.18
Globalization has helped increase the power and leverage of
giant US multinational firms. The importance of opening over-
seas markets to foreign capital, in particular, has received the
US government’s seal of approval. US officials went about their
business persuading other nations to grant American financial
firms access to their markets. The US, of course, had to
158 J. SHAANAN

reciprocate, usually, by opening its markets to imported man-

ufactured goods often resulting in layoffs for domestic workers.
The financial industry’s political donations in effect helped
steer the course of US international trade and financial policies.

4 THE ACQUISITION OF POWER

The increase in power of giant corporations did not come
about by accident and neither did it evolve through the work-
ing of the free market. Instead a carefully organized and
determined campaign began in the early 1970s for the pur-
pose of persuading America to adopt large corporations’ view-
point. This included establishing the Business Roundtable
with CEOs from major firms developing organized lobbying
to advance the corporate viewpoint and established think
tanks to promote laissez faire ideology, especially the need
for lower taxes.19 The media, academia, political and legal
institutions, were pressured to adopt corporate positions or
at least not oppose them.
An interesting insight into the nature of these activities
comes from a memo written by, soon to become Supreme
Court Justice, Lewis Powell in 1971. It was addressed to the
US Chamber of Commerce which in turn passed it on to
influential and wealthy individuals with whom it struck a
chord.20 The memo calls for organization, long range plan-
ning, joint financing and concerted action. It proposes the use
of political power and the judiciary in order to effect social,
economic and political change. Within a few years after
Powell’s memo important changes began to take place. New
layers of protection in the form of both laws and ideology
were added to an already well-fortified US economic system.
The social safety net set up in the New Deal era was weakened
and protective regulations were eliminated.
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 159

It is debatable whether Powell’s memo was the catalyst that

precipitated the changes,21 yet, it is difficult not to be
impressed by how closely the memo’s recommendations
appeared to have been followed. As proposed in the memo,
a good deal of money and effort were invested to protect the
existing economic order. It proved to be an assault not only
on ideological opponents of corporate capitalism but also a
powerful attack on democracy. In the years following Powell’s
call to action, ideological centers were established to influence
the judiciary. There was greater scrutiny in judicial nomina-
tions. Enforcement of antitrust laws was sharply weakened.
Radio and TV shows, stations, networks, institutes and jour-
nals were established to promote laissez faire. Deregulation
was promoted in the name of greater economic efficiency.
Large tax cuts were granted to corporations and wealthy
individuals.
The economics profession also experienced the kind of
changes recommended in the memo. Chairs were established
to spread the corporate version of free markets; research
centers were founded, new journals established; editorial
appointments made; economic research “guided” to accepta-
ble topics; economic theories and policies compatible with
preservation of the status quo disseminated22 and economic
fields unfavorable to the cause eliminated.23 Recently the
movement has become more emboldened taking steps to
control faculty appointments even at publicly funded univer-
sities.24 Many assumed that these developments were simply
the work of the invisible hand operating in the marketplace of
ideas unaware that substantial sums of money had been
invested to bring about the outcome.25
Reduced economic freedom argues Powell will lead to a
loss of other freedoms. He cites Milton Friedman in arguing
that the foundations of our free society are under attack. Yet,
160 J. SHAANAN

Powell’s proposal in itself is worrisome because in seeking to

solidify and entrench corporate capitalism it denies individual
freedoms and proposes measures more appropriate for totali-
tarian regimes. Notwithstanding claims to the contrary,
Powell’s objective is to protect the privileged economic and
political position of large corporations.
There are arguments that lobbying and political donations
merely represent the introduction of market elements into
politics. If you can buy your favorite tie why should you not
be able to buy your favorite politician? Critics, though, argue
that what is involved here is legal bribery inconsistent with
democracy. Yet laissez faire writers, as well as the Supreme
Court, regard this type of gift giving as legal and in fact have
defined it as a form of free speech protected by the
Constitution – a rather odd interpretation. There are also
indirect ways to get around charges of bribery such as hiring
a politician’s relatives or paying excessive fees for their
speeches.26 Even worse, for the nation’s economic welfare,
is the legislation that follows donations. Politicians while
claiming to look after the interests of the middle class accept
gladly donations from large corporations and wealthy families
and then vote consistently for the interests of their donors.
Due to the need for advertising, substantial sums of money
are required for a successful election campaign. In 2008, $1.76
billion, $0.94 billion and $0.43 billion were spent on the
Presidential, Congressional and Senate races respectively.27
Studies show that campaign donations are intended to influ-
ence incumbent politicians; and that there is a relationship
between donors’ interests and the committee membership of
the recipient politician.28 No industry is as active and effective
in lobbying as is the financial industry. In 2009 the industry
had 1537 lobbyists and in the first nine months of that year
spent over a third of a billion dollars on lobbying.29 When
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 161

Congress debated financial regulations to prevent a repeat of

the devastating Crash, the financial industry’s lobbyists vastly
outnumbered their counterparts representing consumer
groups, unions and other pro-regulation groups.
Both parties seek campaign donations and therefore cater
to corporate interests. The result is that politicians protect
corporate donors from economic and legal challenges to their
status. They also reward their donors with tax breaks, sub-
sidies, protection from competition, and exemptions from
labor and environmental laws.30 Confessore et al. (2015)
have found that half of all the money ($178 million) donated
to the 2016 presidential primary candidates (as of late 2015)
came from just 158 families, most residing in nine cities. The
bulk of the money went to Republican candidates supportive
of conservative causes such as reduced taxes; reduced regula-
tion; and reduced entitlements. Most of these wealthy families
made their money in either finance or energy. The authors
note that not since before Watergate have early presidential
campaign donations come from so few people and businesses
and mostly in ways legalized by the Citizens United case.31

5 POLITICAL POWER AND GOVERNMENT HELP

As discussed in Myth 2, government at all levels provides varied
and substantial help to large corporations. The help consists of
protection from foreign and domestic competition; special laws
and regulations; tax exemptions, subsidies and other types of
corporate welfare; research grants; bailouts; government bear-
ing the risk; funding infrastructure and, not least, government
as a generous and forgiving customer. Most of this help is
contrary to free market principles. It rarely materializes from
national welfare considerations but more often comes about
through corporate influence and lobbying contrary to the
162 J. SHAANAN

public interest. The effective tax rate on corporate profits has

declined significantly over the past 40 years and corporations’
share of federal taxes and property taxes has also fallen.
The power of Wall Street and their leverage over govern-
ment was demonstrated vividly during the Crash of 2007–08
when both political parties accepted the idea that government
should ensure the survival of large financial organizations.
Concerns about efficiency, free market principles and govern-
ment not selecting economic winners were ignored and giants
of the financial industry received unprecedented help from
government. The use of this power was not new or unfore-
seen. President Jefferson had warned of the potential dangers
to democracy from bankers. The recent crash was not the first
(or last) time freedom for the banking industry has gone awry
and damaged the economy.32
The financial sector’s formidable political power was
acquired through political donations. Over a seven-year per-
iod from the late 1990s the financial sector gave $1.7 billion
in political donations and spent $3.4 billion on lobbying.33 It
probably helped that Wall Street investment bankers worked
in key government positions in the White House and Treasury
under different administrations. It became conventional
wisdom that Wall Street’s interests paralleled America’s
interests.34 A major reward for Wall Street came in the form
of the repeal of the Glass Steagall Act. It provided unrestricted
freedom to enter new investment areas, engage in massive
speculation and undertake much higher leverage. These
changes served to increase profits. The nation’s reward was
an unmitigated economic disaster, from which it had not fully
recovered six years after the Crash.
The media saw it differently and according to Kuttner
(2007) did not even perceive Wall Street as an interest
group. The financial sector had convinced reporters and
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 163

commentators that Wall Street represented the national inter-

est. This in turn facilitated the bailouts – perhaps the biggest
trophy of all – just as it had earlier permitted the legitimiza-
tion of usurious interest rates and federal government inter-
vention to protect lenders by claiming pre-emption of federal
law.35 To ensure the massive bailouts, Wall Street, through
the financial media, presented an apocalyptic vision of the US
economy if government aid was not forthcoming.
The financial terms of the bailout in its various stages were
less than favorable to taxpayers. In fact taxpayers were treated
rather shabbily in stark contrast to the terms offered to cred-
itors and Wall Street giants in particular (described in more
detail in Myth 13). One plan was described aptly by commen-
tators as “cash for trash” and it summarized the essence of
tradeoff between taxpayers and Wall Street. The bailouts
highlighted the enormous power that the economic sector
has over the government and how easily it could persuade
legislators and the White House to risk trillions of dollar of
taxpayer money to protect financial executives from their own
folly and overrule the market’s decisions. The bailouts
demonstrated the horrendous cost of a rigged financial system
where rules and regulations to protect the public and the
economy were replaced with rules introduced by the firms
who stood to gain the most. This should have been the major
issue in the 2012 presidential elections and yet both sides
were careful to ignore it. After all, candidates did not wish
to alienate their financial backers.
Another example of economic power using political influ-
ence to achieve its goals is the Clinton health care bill in 1994.
The health insurance industry lobbied against and defeated
the bill. Then again, more recently, the industry invested
considerable sums to weaken significantly the original version
of ACA. They insisted that private insurance companies retain
164 J. SHAANAN

a major and lucrative role in the nation’s health care instead of

having a single payer health care system.36 They succeeded
after spending $380 million and hiring numerous lobbyists.37
Finally, it is not only the help that government can provide
directly to powerful industries. Sometimes the return on
influence comes from convincing government not to fund
goods and services that lack the support of large corporations.
Reduced funding for public education comes to mind as does
the decline in infrastructure investment. Corporations can
bypass the democratic process and dictate government spend-
ing to the detriment of millions who would have preferred
improved roads and bridges and a better education for their
children but rarely get the opportunity to vote directly for
such projects. Wealthy individuals, often major shareholders
in large corporations (with their identity usually hidden
behind progressive sounding organizational names opposite
of their real purpose) work to undermine public education,
fight for right to pollute, seek to eliminate medical care for the
poor and force cities into bankruptcy. These and many other
initiatives at the local and state level are undertaken to benefit
the few at the expense of the many.

6 THE LEGAL SYSTEM

Another aspect of democracy is the fairness of the judicial
system. Corporations are very much a legal invention having
starting out as public entities with a limited life before becom-
ing the all-powerful economic organizations of today. In the
1880s, federal and state courts became increasingly pro-busi-
ness with many rulings favoring corporations following years
of selective appointment of judges.38 The right of states
to appropriate private property on behalf of commercial inter-
ests was strengthened.39 The Supreme Court granted
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 165

corporations the rights and protection of a legal person. Some

scholars see the changes to the legal system in those years
resulting from cooperation between judges and corporations
as amounting to a legal revolution.40
In the past 35 years we have seen a staunch pro-corporate
legal shift as laws have been introduced or modified to favor
large corporations. The judiciary has been increasingly scruti-
nized and modified since the 1980s to ensure an even more
favorable disposition toward large corporations. Corporate
induced legal changes led to a weakening of consumer and
individual protections and increased economic inequality.41
Perelman (2007) cites the tort reform movement as an exam-
ple of how corporations’ rising political and media clout
allows them to change laws to their advantage and to the
disadvantage of consumers. A key outcome has been the
diminished rights of individuals to sue corporations and
when they do, the low probability of success. An even lower
probability of success characterizes the arbitration process.
Consumers and employees find increasingly that arbitration
is their only recourse as they have forfeited their right to use
the legal system upon signing a contract.42 Some legal experts
suggest that what is involved is nothing less than a privatiza-
tion of the legal system on behalf of businesses with arbitra-
tors who often regard them as clients.43
A similar objective involved the passage of federal legisla-
tion restricting class action suits and moving them from state
courts to the federal courts where individuals have less chance
of success. Still another avenue to ensure that judges conform
to the corporate view is to oppose judges up for re-election
who are willing to take the side of consumers or the public.44
These developments weaken the standard laissez faire argu-
ment that the little guy has legal recourse against large cor-
porations and therefore corporations will be reluctant to treat
166 J. SHAANAN

customers badly.45 The availability of that remedy seems to

have been reduced substantially.46
To gain more sympathy for their cause, especially from
judges and academics, conservative foundations promoted
seminars on the topic of law and economics. The guiding
principle of the law and economics field is that legal issues,
especially in matters of regulation, be examined in light of
costs and benefits. However, allowing economic efficiency to
be the overriding factor in legal cases goes against commonly
accepted notions of fairness and justice.47
The financial industry made use of its access and influence in
Washington to pass laws and rewrite regulations to augment its
profits. In the mid-1990s Congress passed a law that limited
the ability of clients to sue investment firms which in turn
increased dishonesty.48 A 1994 Supreme Court ruling regard-
ing the lack of responsibility of accountants, lawyers and invest-
ment banks for fraud committed by clients also weakened
investor protection.49 The subprime mortgage industry’s
donations and lobbying efforts allowed financial abuses to
continue in several states including the frequent refinancing
of mortgage loans.50 In 2003, the Office of the Comptroller
of the Currency intervened to prevent states from applying
their own consumer protection laws against national banks51
to prevent predatory financial practices.52 Nominal enforce-
ment is carried out by the SEC in dealing with major banks.
Fearing lengthy law suits the SEC essentially yields by not
requiring the companies to plead guilty to fraud and instead
insists on a fine and the promise not to do it again. However
under the incentive structure created by the SEC, the rewards
from violating the law are too great to allow the companies to
keep their promise.53
In another area of law – antitrust – the past 35 years have
seen an increasing acceptance by judges of Chicago School’s
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 167

pro-corporate and (debatable) efficiency arguments which has

led to a rejection of laws protecting competition54 (discussed
in Myths 1 and 4). Powerful economic interests advocate the
new antitrust creed.55 Crouch (2011) notes that given the
link between economic and political power, antitrust laws
(when enforced properly) serve to protect democratic plural-
ism as much as economic competition.

7 THE FED AND DEMOCRACY

We discussed previously the Federal Reserve’s economic poli-
cies, including its steadfast focus in recent decades on infla-
tion. Here we examine the implications for democracy of its
highly touted independence. It should be noted that given its
duties it has substantial economic and political power.56
However, its lack of accountability to democracy raises trou-
bling questions. The Fed’s precise role in a free market econ-
omy is debatable. It is seen primarily as providing protection
to the economy from inflation and instability. However, its
creative and energetic interventions during the Crash of
2007–08 (discussed in Myth 13) shed more light on its true
role. Fed leaders for decades preached the virtues of laissez
faire. All should submit to the market’s verdict, for good or
for bad. However it turned out that the Fed is willing to
exempts certain businesses, banks and individuals from that
doctrine.
It would appear that some of the institutions provided with
an infusion of funds by the Fed had considerable say in the
operations and the policies of the influential New York Fed
branch.57 When the market was about to weed out the ineffi-
cient, the incompetent and speculators who had made erro-
neous bets, the Fed stepped in and declared that all those who
were sufficiently big and powerful (except Lehman Brothers)
168 J. SHAANAN

would be spared the market’s verdict. Additionally they would

be compensated generously for their troubles and embarrass-
ment. The fact that the democratic process (i.e., Congress)
was bypassed when it came to spending unfathomable sums to
save giant banks, investment houses, their managers and cred-
itors is disconcerting.58 Stiglitz (2010) is of the opinion that
both the Bush and Obama administrations had involved the
Fed in the rescue in order to bypass Congress and lengthy
public debates. They knew that the rescue was unpopular and
the Fed could accomplish this goal with little or no political
accountability.
Did we witness an abrogation of the Federal Reserve Act in
order to preserve the economic status quo and protect finan-
cial elites or was this the purpose of the central bank all along,
as prescient nineteenth-century politicians had warned?
Interestingly the outrage over these events was limited.
There were no serious efforts to reform the Fed and restrain
its power to bypass Congressional approval for spending. The
Fed had departed previously from its role as an independent
and above the fray institution to intervene on behalf of high
income earners but those incidents pale in significance com-
pared to the bailouts. A lack of accountability to democratic
institutions does not guarantee the central bank’s indepen-
dence. However, it does weaken democracy and, based on
the evidence, is not helpful in upholding claims about the
existence of a competitive free market.

8 CONCLUSION
The US economic system is dominated by large corporations
with considerable economic power that has been turned into
political power. Therefore, the contemporary economic sys-
tem labeled misleadingly “free market” is far from protective
 MYTH 8: FREE MARKETS PROTECT DEMOCRACY 169

of democracy. Political power is attained through the buying

of elections, politicians and parties and the result is significant
damage to democracy. The counterargument offered “that
everyone’s dollar has equal say” hardly represents the spirit of
democracy. One result of this situation is the large amounts of
government help granted to giant corporations contrary to
free market principles and economic theory. Corporations’
freedom to profit has gained the upper hand over democratic
principles. Additionally, the conflicting requirements to pro-
tect corporate interests on the one hand and popular rule on
the other, not to mention principles of justice and freedom,
undermine government’s position and democracy.
Large US corporations, for all practical purposes, dominate
government and the political process. Many Americans lack
meaningful political representation as their elected politicians
accept corporate control over both the economy and politics.
Populist economic and social positions, until very recently,
were almost nonexistent. Political power has been used to
change the legal system to the benefit of large corporations
and the wealthy resulting in a steady rise in economic and
legal inequality. A corporate owned media disseminates warn-
ings about the dangers of big government, especially as it
pertains to individual freedom. However, it ignores or con-
ceals a far more immediate and harmful danger.
When the popular refrain “let’s get rid of big government” is
uttered, what is ignored is who would fill the gap. More speci-
fically, who would benefit if we got rid of or weakened big
government? According to the prevailing version of laissez
faire, a weakening of governmental powers would enhance all
Americans’ economic and political freedom. But nature abhors a
vacuum so the relevant question is who or what would fill the
void? It certainly would not be “we the people” or individual
freedom. Most likely it would be big business as the most
170 J. SHAANAN

powerful of nongovernment organizations. Giant corporations

with immense resources are the most likely candidate to benefit
from the situation. So is this something that Americans should
wish for? “Let’s get rid of big government” in the American
context simply means let’s get rid of what remains of democracy
and let the giant corporations and billionaires rule entirely; a sort
of corporate feudalism. It would probably result in the elimina-
tion of public education, Medicare, Social Security, investment
in public infrastructure and welfare programs for the poor.
Giant corporations acquiring even more power than they
already have is a scary scenario more so than the power of a
big, yet, elected government (even taking into account cor-
porate political influence). Why would the nation be better off
granting corporations even more power? The reply is that
corporations originate from and embody the most democratic
institution of them all – the free market. Unfortunately, the
answer is wrong. We have seen throughout the past decade
how government acts when controlled by the dominant mem-
bers of the “free market”, and it has not been in the best
interest of the majority.
 Myth 9: Corporations Represent
Economic Freedom

1 MYTH
Corporations are an integral part of the free market and embody
the ideals of the successful entrepreneur. Corporations repre-
sent all the admirable traits that enabled the free market to
flourish in America. Through their foresight and perseverance
these organizations became the engines of America’s global
economic success and universally acclaimed models of business
efficiency. Notwithstanding criticisms about market power
and/or absolute size, large corporations are exemplary mem-
bers of the free market worthy of protection from critics. When
we defend corporations’ freedom, we are protecting the free
market, the right to succeed and keep the fruits of one’s labor
and, most importantly, individual freedom.
Any encroachment by the state upon the economic sphere
and interference with the way a company sees fit to run its
business poses a danger to freedom. Defending large corpora-
tions from the meddlesome hand of government and the self-
interest of its bureaucrats is the same as defending the brilliant

© The Author(s) 2017 171

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_10
172 J. SHAANAN

young inventor and the budding entrepreneur. By so doing

we ensure that the nation reaps the benefit of their endeavors.
It is certainly important for economic efficiency but also for
individual political freedom. The repressive tendencies of
government must not be allowed to destroy individual liberty
in the market place. Failure to do would endanger free mar-
kets and capitalism.
We know that the people vote for large corporations with
their money and purchase their goods and services otherwise
those companies would not survive. It should be noted that
the nation votes daily in the marketplace, not every two or
four years, and thereby affirms its approval. To restrict the
freedom of these magnificent organizations amounts to deny-
ing people their freedom of choice, both as consumers and
producers, and restricting the working of the free market. We
do not have to fear corporations because the force of compe-
tition ensures that they operate in the consumer’s interest.
Consumers have the choice of buying from a competitor and,
by the same token, mistreated employees can seek employ-
ment elsewhere. There is no need for government regulation
of corporations. The market’s wisdom exceeds that of bureau-
crats and academics. Government should eliminate the heavy
tax burden on corporations and stop shielding Americans
from their most productive organizations – corporations.

2 DEFINING ECONOMIC FREEDOM

Economic freedom may be the defining characteristic of the
US but it does not have a unique meaning. To some 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. Others associate eco-
nomic freedom with the morality inherent in concerns about
 MYTH 9: CORPORATIONS REPRESENT ECONOMIC FREEDOM 173

the well-being of one’s fellow citizens; therefore, freedom

without such concerns is seen as devoid of morality.1 Others
take an opposite view and classify economic freedom as the
liberty to enrich oneself without any social concerns or
responsibilities. It is also regarded by many as the freedom
to engage in speculation and, more generally, in any business
transaction including those involving deception.
Definitions of economic freedom have also focused on the
freedom to enter into contracts. That concept is rooted in
self-interest and has been used by social Darwinians such as
Herbert Spencer to argue for reduced government influence
and coercion. They call for the elimination of social institu-
tions seen as interfering with freedom of contract.2
Philosopher David Hume argues against this notion of free-
dom and points out that allegiance to a state and the obliga-
tion to perform contracts are based on self-interest but neither
is derived from the other.3 Property owners found it advanta-
geous to refer to a supposed social contract rather than
socially defined moral obligations. Consequently the former
concept took hold and replaced custom as the origin of law
and social obligations. To fortify the contractual concept of
society it was associated with the idea of free choice; implying
that contracts are voluntary arrangements based on free
choice and therefore fair, especially as pertaining to price.4
In a similar vein is Milton Friedman’s aforementioned claim
that households have the option of producing for themselves.
Therefore exchanges are voluntary, beneficial and attained
without coercion otherwise households would not enter into
such contracts.
In the US probably the most widely accepted definition of
economic freedom is the freedom to profit. The definition is
so deeply ingrained that corporations have little hesitation in
demanding that it prevail, even in situations when it is clearly
174 J. SHAANAN

contrary to the public interest. The inference being that

enrichment of the few should have precedence over the wel-
fare of the many, even if the profits gained by the few are
smaller than the losses inflicted on the many. In such situa-
tions large firms’ profit maximization conflicts with the public
interest. However, considerations of this kind have not been
an obstacle to corporations accumulating rights and privileges
under the pretext of economic freedom.

3 ECONOMIC FREEDOM AND LARGE CORPORATIONS

Over the past 35 years one and only one economic freedom
has stood out – corporations’ freedom to profit. All other
freedoms, including individual economic freedom, pale in
significance. Giant corporations possess considerable eco-
nomic and political power. The power has been used effec-
tively to gain unrestricted economic freedom which, in a
never-ending cycle, further increases their power and influ-
ence. Government will readily intervene at their behest to
alter an undesired market outcome as was demonstrated in
2007–08. Yet, advocates of the system ignore the danger to
many others’ freedom from corporations’ unrestricted free-
dom. The threat of tyranny is portrayed as unidirectional
coming only from (a democratically elected) government
not from large corporations’ dominance.5 Friedrich Hayek’s
(1994) views may be an exception. He envisioned totalitar-
ianism emerging from organized capital and organized labor’s
myopic attempts, sometimes jointly, to monopolize industry.6
As noted in Myth 3 Adam Smith, who is associated indel-
ibly with free markets and (somewhat mistakenly) with laissez
faire, warns much earlier of the danger coming from private
economic power (monopolies, guilds and mercantilist poli-
cies) similar to the threat from government’s power.7 In the
 MYTH 9: CORPORATIONS REPRESENT ECONOMIC FREEDOM 175

“Wealth of Nations” (1995) Smith expresses anger at the

powerful commercial interests of his time and describes their
economic activities and political ties as inimical to the public
interest. He criticizes their attempts to deceive the public into
believing that their goals are compatible with the public’s
welfare and freedom. That welfare, he believes, is sacrificed
for the benefit of politically influential commercial interests
that control government. Smith calls for an end to business
political influence, such as was wielded by the East India
Company.8
The defense of private economic power, with freedom to
profit from government influence, has come to characterize
contemporary laissez faire. This rather unusual version of
laissez faire, misleadingly labeled “free market”, does little to
enhance personal freedom or even economic freedom. It
certainly does not promote or nurture a free market economic
system. Instead, it has a single purpose which is to enrich giant
economic organizations and billionaires but not the vast
majority of Americans. The consequences of unrestricted free-
dom for giant corporations, as noted in Myth 1, can be the
destruction of markets if that is a profitable course of action.9
Yet there are strong objections to placing restrictions on
corporations’ activities even when their actions eliminate
markets.10
The benefits of economic freedom surface when private and
public interests are in conformity, not when private parties
seek to circumvent or destroy the market. Once it is realized
that the activities of giant corporations can preclude a free
market then the prevailing concept of economic freedom loses
much of its normative content. In the context of the
American economy, the term serves as a synonym for corpo-
rate capitalism where companies have almost unlimited rights
to engage in profit making activities. In fact to some the
176 J. SHAANAN

morality or ethical justification of the system comes from the

fact that profits are gained in which case all other concerns
become trivial.11
The common viewpoint tolerant of corporate economic
freedom appears to rationalize corporate power not only in
the economic sphere but, as discussed in Myth 8, also in
the political realm. A Darwinian “anything goes” position
justifies the purchase of political influence as an unavoid-
able cost of doing business, consistent with economic free-
dom. Such a position obviously parallels the interests of
large economic organizations but is inconsistent with
Adam Smith’s views on competition and with economic
efficiency. Corporate freedom and individual economic
freedom are far from being the same and indeed the two
frequently clash. As corporations acquire more rights and
shed restrictions all too often it means less opportunity and
diminished freedom for individuals. Government’s growing
generosity to the corporate sector has led to demands to
curtail help to needy families to pay for reverse Robin
Hood policies.
Corporations’ enhanced economic freedom resulted in
major social and cultural changes in the twentieth century.
Among the changes was a reversal of the importance and
respect attached to saving and consumption. The link
between indebtedness and loss of freedom was conveniently
ignored, after all, substantial profits to producers, retailers
and banks were now tied with a disdain for savings and in
an all-out pursuit of purchases through credit. In fact it
became necessary to hide the loss of freedom inherent
in debt by shifting the public’s focus to the supposedly
newly found freedom associated with shopping through
credit. Interestingly the loss of freedom through debt is still
downplayed if not ignored.
 MYTH 9: CORPORATIONS REPRESENT ECONOMIC FREEDOM 177

Great efforts and considerable sums of money have been

invested in convincing Americans that more freedom for cor-
porations is somehow synonymous with individual economic
freedom, free markets12 and even democracy. Corporations
for decades have disseminated misinformation to ensure that
their image is associated strongly with individual economic
freedom. The sought after image is that of the corporation as
a courageous individual, a risk taking entrepreneur who, in
the finest Ayn Rand manner, defies tradition and convention
and thinks outside the box. Few corporations actually encou-
rage their employees to adopt this kind of behavior. Usually
there is little room for truly independent thinking or differ-
ences of opinion in hierarchical organizations. They are
mostly run not by entrepreneurs but by managers who have
little tolerance for mavericks or independent workers let alone
for dissent. They expect adherence to a conformist culture
which is more likely to suppress than promote individual
thinking or action.13
Economic freedom is the most fiercely defended liberty;
unfortunately, it is exercised primarily by large corporations
often at the expense of both individual and market freedom. If
economic freedom defines America, as many suggest it does,
it is certainly not distributed equally. Yet, a system designed
primarily to grant corporate managers and billionaires a free
hand in their business activities, regardless of damage to the
economy and people, can hardly be considered the hallmark
of economic freedom.

4 CORPORATE FREEDOM AND POLITICS

Notwithstanding the evidence, economists and business wri-
ters often associate corporate activities with ideals that, in
actuality, large corporations frequently oppose, including
178 J. SHAANAN

free markets, individual economic freedom and democracy.

The corporate campaign started in the early 1970s (discussed
in Myth 8), to protect corporate profits and more generally
corporate capitalism, has been successful in changing the
intellectual climate. Academics and media members were
recruited to praise laissez faire, economic elites, corporate
takeovers, and the freedom to spend one’s money, including
for political donations, while disparaging government eco-
nomic intervention. Sympathy for society’s less fortunate
declined and “I am not my brother’s keeper” type sentiments
became acceptable. At the same time large corporations
acquired a more positive image and unlimited greed was
looked upon with less hostility.
The desired result has been attained. Social safety nets have
been shrunk and people are left with less protection from eco-
nomic shocks. The other side of the coin is that taxes, especially
for corporations and those in the top income brackets have been
reduced and the decades old trend toward greater equality has
been reversed. Financial deregulation and pro-corporate laws
and rules were passed placing consumers and employees at a
greater disadvantage in relation to corporations.
The proliferation of modern laissez faire ideas strengthened
corporate power and consequently weakened the remaining
elements of a free market economy. The story does not end
there. As mentioned above, with the acquisition of political
power the newly attained influence was put to profitable use
to gain even greater economic power. Corporations attained
more protection from rivals; tax exemptions; subsidies; and
less vigilance from the antitrust authorities in matters of mar-
ket power, mergers and patent protection. Influence was
carried to an extreme when corporations that failed the test
of the market and were on the verge of bankruptcy could
demand to be bailed out. Such protections are blatantly
 MYTH 9: CORPORATIONS REPRESENT ECONOMIC FREEDOM 179

unfair, but the greater concern is that they lead to a misalloca-

tion of the nation’s resources, distort incentives and are in
conflict with the notion of a free market.
The nexus between private economic power and the acquisi-
tion of political power is mostly ignored although Galbraith
(1985) focused on the issue in the mid-twentieth century.
Galbraith notes how corporations convinced America that their
objectives coincided with those of the nation and represent pro-
gress and the path to prosperity. Dangers to the economy from
political power are dismissed with appeals to a specious argument
that the market effectively restrains such influence. A crucial out-
come is that the public interest is determined all too often by giant
oligopolistic firms and not through a genuine democratic forum.
As noted by Crouch (2011), there is no political or economic
theory to support the claim that giant corporations should be
allowed to determine society’s collective goals.
If there were any doubts about which of the two sectors –
the economic or political – is dominant, it became clear during
the financial crisis of 2007–08. The economic sector, more
specifically, large financial corporations, exerted substantial
influence over the executive and legislative branches, not to
mention the supposedly independent central bank. The most
striking result of that influence has been the aforementioned
bailouts of corporations that would have gone bankrupt if
America had adhered to free market principles during the
financial crisis. Instead, giant financial corporations were able
to empty the Treasury with the nation’s elected and appointed
guardians handing them the key and cheering them on. The
Fed became their unofficial piggybank and each “withdrawal”
was deceptively camouflaged under an ambiguous title. Public
officials then explained to an incredulous public that the rescue
of giant companies together with their managers and creditors
was in the national interest.
180 J. SHAANAN

The notion that the economic system has a built-in

mechanism to enhance the common good was no longer
persuasive. The hour of truth had arrived and corporate
(financial) capitalism stomped on its own free market myth.
The myth had been used to mask unrestricted (and socialized)
speculation, and greed with little redeeming value. The pre-
vailing version of laissez faire has an escape clause. It requires
all to meet the test of the market except those with sufficient
power, including giant corporations and their managers who
lost vast fortunes through speculation. They were exempted
from the market’s decree. Corporations’ economic freedom
turned out to be an exorbitantly expensive proposition. It cost
millions their jobs and consequently their economic freedom.
The lesson learned was that when the beneficiaries of this
skewed version of laissez faire, i.e., giant corporations, are under
threat from the economic forces that they glorify publicly, they
tend to put away their ideological scruples. With little hesitation
they demanded successfully government intervention and the
commandeering of the nation’s resources to rescue them. Such
intervention did not come about in response to popular
demand for rescuing banks with taxpayer money. It was, of
course, done at the banks’ behest not the public’s choice.
Government responded by marshaling its financial, legal and
public relations resources, displaying at times great creativity in
its explanations for the bailouts, the amounts given, the quality
of the collateral received and repayment of the debts.

5 INDIVIDUAL AND CORPORATE FREEDOM

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. This
subterfuge is promoted aggressively, regardless of economic
 MYTH 9: CORPORATIONS REPRESENT ECONOMIC FREEDOM 181

circumstances. Even when the economic damage inflicted on

millions makes a mockery of the claim that this ideology’s
purpose is to protect individual liberty. Despite evidence of
economic inefficiency, declining competition and a lessening
of individual freedom and opportunities, its proponents can-
not be dissuaded from the argument that their battle is on
behalf of individual freedom. With far more faith than con-
crete evidence the delights of minimal government interven-
tion for all, except, of course, giant corporations, is heralded
as a panacea for America’s economic ills. Freedom, both
economic and political, is equated with this type of biased
laissez faire and with its billionaire supporters. Tyranny is
associated with elected government and policies beneficial to
the majority of Americans.14
Giant corporations’ dominant role in America and the fact
that their freedom to profit is quite different from and often
clashes with individual liberty is difficult for some to accept.
Nonetheless, unrestricted corporate freedom often destroys
the very liberty it is hailed as protecting – individual liberty –
never mind the liberty of markets. The aforementioned myth,
taught to generations of students, is also linked with our
freedom to choose as consumers, employees and citizens.
Yet, the choices available are frequently restricted to options
that promise or even guarantee corporate profitability. Other
choices often are branded as un-American or socialist.
There is freedom to consume but does this reflect indivi-
dual economic freedom or corporations’ freedom to sell? Do
people buy what they desire or buy what they are persuaded
to buy as a result of advertising and peer pressure. Galbraith
(1985) argues that it is the latter and therefore consumption
is more in the nature of a corporate liberty. One might also
ask a more fundamental question: does the freedom to pursue
materialistic dreams enhance our well-being as is often
182 J. SHAANAN

assumed? As discussed in Myth 1, Frank (1999) suggests that

moving away from an obsession with conspicuous consump-
tion, such as attaining bigger houses and fancier cars, toward
inconspicuous consumption (such as shorter commute time,
less pollution, more leisure time) would probably provide
greater and longer lasting improvements in our well-being.
Yet we are not moving in that direction for several reasons
including the fact that such a move clashes with corporate
profitability and hence would encounter considerable
opposition.

6 THE OTHER SIDE OF CORPORATE ECONOMIC FREEDOM

There is another dimension to the fight for “economic free-
dom”, one that belies the finer philosophical and theoretical
arguments claimed on behalf of corporate freedom. Under
the pretext of economic freedom are permitted a variety of
questionable activities that in many other nations are consid-
ered fraudulent. The lofty ideals associated with economic
freedom all too often are used to shield companies engaged
in deceiving and ensnaring the gullible, the uneducated, the
elderly, those lacking transportation and those suffering from
dementia. Devious commercial schemes, legal and illegal, are
common, often based on asymmetry of information between
seller and buyer. The seller profits but, unfairness aside, there
is an economic waste involving resource misallocation. The
waste is shrugged off by laissez faire proponents as an una-
voidable cost of economic freedom. Government has no
right to interfere with the free flow of commerce and caveat
emptor – people are not entitled to protection from their own
foolishness. There is a long list of questionable dealings
including real estate, stocks, bonds, mortgages, precious
metals, foreign currency, phone service, insurance contracts,
 MYTH 9: CORPORATIONS REPRESENT ECONOMIC FREEDOM 183

sale and financing of used cars, home repairs, car repairs,

health supplements and many more. The lexicon of deception
keeps increasing with terms such as scamming, cramming,
phishing, fake collect calls and so on. Outrageously compli-
cated small print in contracts is never for the consumer’s
benefit. Companies may sell consumers’ private financial
information and yet the onus is on the consumer to correct
matters when identity theft takes place. These occurrences
and many others take place when business has the power
(freedom) and consumers have next to none.
Jessica Silver-Greenberg (2013) details mass market fraud
involving reputable banks, dubious internet merchants and
their targets. The banks originated transactions on behalf of
businesses that made unauthorized withdrawals. The banks
earn fees for essentially facilitating fraud that often ends up
emptying the victims’ bank account. To heap injury upon
injury the banks in question charged the victims whose bank
account had been wiped out an “insufficient funds” fee. Older
people in particular are targets for this type of deception. One
bank is alleged to have allowed money to be withdrawn from
hundreds of thousands of accounts. The Department of
Justice was investigating these cases and in 2013 had reached
a settlement with one bank.15
Consumer protection often has been more symbolic than
real.16 A corporate lobby makes use of the free market
mythology to defend its actions and prevent meaningful con-
sumer protection. They claim that the free market or, more
specifically, the fear of losing customers works well as a deter-
rent and obviates the need for government intervention. And
they can refer to an economic literature declaring (wrongly)
that reputable companies will not deceive or cheat consumers
because it is an unprofitable course of action and therefore
does not happen. Ignored are transaction costs and the vast
184 J. SHAANAN

difference in resources between aggrieved consumers and the

corporation. Consequently when individuals have dealings
with a large corporation they are usually at a big disadvantage
whether as employees, suppliers and consumers.
Laws, legal proceedings and contracts only exacerbate the
bargaining gap between the two already unequal parties and
tend to further diminish individuals’ economic freedom.
There is a legal framework designed to protect deception. It
is strengthened by ill-defined jurisdiction between state and
federal government. Should a state government seek to pro-
tect consumers it will often face attacks, including possibly
from the federal government and corporations, as did states
seeking to stop financial predation in the 2000s. Then the
public, courtesy of the media, is informed that their state is
governed by an administration that is “unfriendly” to business
and people risk losing jobs as a result of misguided and overly
protective policies. Other corporations are cautioned about
doing business in that state. A race to the bottom, in terms of
weakening consumer protections, is taking place among states
each trying to make it easier to defraud their citizens. A key
lesson from the public choice literature is that the rules of the
game affect the outcome of the game.17 It is evident that
powerful corporations and individuals have benefitted sub-
stantially from commercial laws, many of which they them-
selves introduced, while tens of millions of households have
been placed at a disadvantage.
In many states the ease with which individuals can be
dispossessed of property by government acting on behalf of
corporations also clashes with individual economic freedom.18
The mythical freedoms possessed by consumers include the
right to lose their freedom to credit card, payday loan, and
subprime mortgage companies, as discussed in Myth 6.
Consumers have the freedom to be left unprotected from
 MYTH 9: CORPORATIONS REPRESENT ECONOMIC FREEDOM 185

abusive financial practices, chicanery, newly legalized usurious

interest rates and the perpetual debt trap where consumers’
debt is extended indefinitely. The consumer is given the free-
dom to forfeit his or her legal rights when buying a product
and leave their financial fate in the hands of industry selected
arbitrators.
Jessica Silver-Greenberg and Robert Gebeloff (2015)
describe how corporations have become shielded from the
legal system through mandatory arbitration clauses. Such
clauses have become increasingly popular for credit card,
cellphone and car rental companies and also for cable and
internet service providers. Many corporations also require
employees to agree to arbitration in case of disputes. The
arbitration clauses are designed especially to prevent class
action law suits to fight practices such as predatory business
lending, wage theft and discrimination. Because of the rela-
tively small amounts involved it is impractical for individuals
to sue independently. Essentially in these cases business has
found a way to bypass the legal system. Additionally, consu-
mers and employees rarely go to arbitration because it is not
practical and when they do they are unlikely to win.19
With “veggie laws” and their ilk20 consumers lose their
right to complain or criticize a harmful or faulty product.
One of the more egregious laws to tilt an already skewed
law book further against individuals was the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005.
The new law not only made bankruptcy more difficult for
people who default, and mostly because of illness or unem-
ployment, but required them to obtain “counseling” con-
trolled by the financial industry; another victory for
consumer freedom.
Legal protections for consumers exist albeit in diluted form
and with little money to enforce them properly. So inured is
186 J. SHAANAN

the public to commercial deception that it is almost taken for

granted. As discussed previously, the poor, the elderly, the
uneducated and members of minority groups21 are far more
likely to be targeted for deceitful and predatory practices.
Such practices cover a whole range of products and services
ranging from low quality food to medicine and health care,
with prices charged unrelated to cost. The freedom granted
here is not for the benefit of consumers. It is the freedom to
engage in dubious business practices. Many of the above
anticonsumer practices are based on either lack of information
or market power and, therefore, are inefficient economic out-
comes suggesting that government intervention could
improve matters, fairness aside. Once again, the purchase of
political influence ensures that individuals remain unprotected
and the outcome is hailed as a free market solution.22
Another dimension of rising corporate freedom and the
corresponding decline in individual freedom are harsh
changes in the workplace. Despite the loss of job stability,
health benefits, possibly a pension, and steady income,
employees are told that they now have the freedom to bargain
from a position of strength. They are no longer tied to a rigid
workplace; they have become full-fledged members of the free
market; free agents supposedly, on equal footing with the
giant corporation. However, it is only fair that their employer
also be entitled to some freedoms including the freedom to
ship jobs overseas then get together with competitors and
persuade government, through a perfectly legal campaign
donation, to be granted a tax deduction for the transaction.
They may also request a tax exemption for their overseas
profits. Should they bring back some of the money to the
US they demand a well-deserved reward.
Corporations with a focus on short-term performance to
please Wall Street have abandoned previously respected
 MYTH 9: CORPORATIONS REPRESENT ECONOMIC FREEDOM 187

paternal obligations toward employees and their families. At

the same time they have intensified market pressures on
employees, small suppliers and customers. This has led to
stagnant or declining living standards for many and the reali-
zation that joining the middle class and fulfilling the American
dream has become far more difficult. The greater economic
freedom afforded to corporations comes at the expense of
reduced freedom for many individuals.

7 CONCLUSION
Large corporations’ economic freedom is the prevailing lib-
erty in the US. Its striking feature is the right to profit
regardless of the economic damage inflicted on people and
the economy. In many cases large corporations have done
away with competitive markets and any semblance of a free
market. In the above situations large firms’ activities often
conflict with the public interest and do not lead to an efficient
allocation of resources. Yet, increasingly it is large corpora-
tions that are allowed to define the public interest and in ways
that augment their profitability.
The most notable triumph emerging from corporations’
unrestricted economic freedom has been access to and influence
over the political system. Their influence comes mostly from
political donations but also due to their success in associating
their many activities with uplifting themes which, in practice,
they often oppose. Political influence led to government rescue
of large corporations that failed the test of the market, contrary to
free market principles and resulted in a misallocation of resources
and distorted incentives. Corporate economic freedom here
turned out to be very costly to millions who lost their jobs and
homes; their individual freedom was not enhanced. The broad
framework of laws and rules that permit questionable business
188 J. SHAANAN

activities also reduces individual economic freedom as does

the harsh new reality in the workplace. More generally,
ignoring rising corporate power and its fusion with gov-
ernment power23 while praising its alleged positive impact
on individual freedom represents Orwellian doublespeak.
The freedom to usurp democracy and distort its true
meaning cannot be considered as enhancing either indivi-
dual political freedom or economic freedom.
 Myth 10: Free Market and Laissez
Faire Are the Same

1 MYTH
Anyone who advocates or tolerates government economic
intervention cannot be considered a true supporter of free
markets. The essence of a free market is a private enterprise
economy free of government intervention. Calling for gov-
ernment involvement in the economy is the surest way to
destroy a free market and also demonstrates a lack of a genu-
ine belief in the powers of the market. Government’s market
substitution policies are notorious for misallocating resources
as are its ill-conceived attempts to protect the market and
redistribute income. As noted previously, the free market
has a built-in mechanism to protect consumers and employ-
ees, therefore, government intervention is unnecessary. The
market performs this function impersonally thereby doing
away with the need for centralized authority.1 A good exam-
ple of harmful meddling is the minimum wage law. Without
such a law, most likely, unemployment would be much lower.
It is true that there are cases of market failure. Private forces
such as unions may combine in the market and lessen

© The Author(s) 2017 189

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_11
190 J. SHAANAN

competition suggesting the need for external intervention.

Yet such cases are the exception and, all too often, are used
as an excuse for broad government interference that weakens
and even overwhelms the free market. Price regulation and
bans on various type of economic behavior, labeled mislead-
ingly as anticompetitive, go against the spirit of the free
market. Taking into consideration that government is easily
corrupted and works on behalf of powerful interest groups it
is not the most suitable institution to safeguard competition.2
In fact, government often gives rise to market power. The
laissez faire position, above all, seeks to prevent privileges
from being granted to select groups3 – a position that epito-
mizes free markets.
Government laws, rules and direct intervention to protect
competition are unnecessary. The same holds for the safety of
the environment, health care, health insurance, retirement
benefits and economic stability. There is no need for govern-
ment because, in most cases, the market can resolve matters
effectively without creating massive bureaucracies and
enabling politicians to give jobs to family and friends. The
government needs only to enforce contracts and protect prop-
erty rights and otherwise let markets do their work and the
nation, including the poor, will be better off. To sum, the
distinguishing characteristic of a free market which also allows
it to flourish is the lack of government intervention.

2 LAISSEZ FAIRE AS FREE MARKET

In the US over the past 40 years or so, the concepts of laissez
faire and free market have been fused skillfully to such an
extent that they are regarded as interchangeable. Yet, as
argued below, these two ideas are in conflict. From Myth 1
we know that the term “free market” has different meanings.
 MYTH 10: FREE MARKET AND LAISSEZ FAIRE ARE THE SAME 191

Economists generally accept a definition based on a market or

decentralized economic system wherein market forces,
through the interplay of supply and demand, establish prices
and quantities for products and services without coercion.
Yet, in common usage the definition has acquired a rigid
laissez faire connotation.
Proponents of the laissez faire version of free markets
oppose government intervention even for the purpose of
protecting a market. Therefore, their top priority is not the
preservation of a market as the most efficient economic system
but the prevention of government involvement; two different
concepts. It would also appear that it is not coercion that
concerns them because they have no objection to coercion
imposed by private parties, even though the outcome may be
the destruction of a market. So the laissez faire definition of a
free market ignores private sector coercion that can be just as
harmful to a free market, if not more so, than government
coercion.
The reader may have noticed that the myth section contains
no mention of the word corporation. The omission is significant
because without it the logic of “free markets as laissez faire”
collapses. A free market defined exclusively by the absence of
government intervention, especially regulation, requires an
economy consisting only of households and tiny firms.
Milton Friedman though is suggesting that an economy domi-
nated by a few hundred giant corporations, often with market
power, political influence and a national impact, is indistin-
guishable from one consisting only of entrepreneurs and tiny
firms on the supply side. He believes that government inter-
vention is unnecessary for either type of economy and if that
condition is fulfilled we have, in both cases, a free market.
Corporations are portrayed as passive intermediaries filling
only a technical economic role and with no influence over
192 J. SHAANAN

politics.4 Consequently, one of the most crucial and proble-

matic relationships in the American economy and political
economy – that between the state and giant corporations –
is mostly ignored (except for concerns expressed about gov-
ernment’s harmful impact on corporations but never vice
versa).5 The explanation for this omission is that, supposedly,
the presence of giant corporations has no bearing on the
existence of a free market.
Notwithstanding popular depictions, the contemporary
version of laissez faire represents a departure from free mar-
kets. While purporting to safeguard people’s freedom it actu-
ally protects a different kind of freedom. As argued in Myth 9,
it defends large corporations’ right to profit regardless of the
economic damage inflicted on the nation. Friedman’s fight is
not on behalf of individual freedom, competitive free markets
or even economic efficiency. Instead, he is taking up the cause
of a philosophy heavily biased in favor of giant corporations
whose activities, power and influence diminish individual
freedom.

3 LAISSEZ FAIRE AND COMPETITION

From the laissez faire perspective the argument that economic
decisions should be left to the market, usually, is not based on
an economically defined competitive market. Instead what is
envisioned is a situation closer to a Darwinian jungle where
might is right. In such an environment the economy’s welfare
and the well-being of the majority of citizens become second-
ary to the interests of its most powerful economic players. So
again, the purpose of promoting laissez faire in the guise of
free markets is to allow more power and profits for giant
corporations. To achieve this goal laissez faire proponents
seek to keep at bay (or capture) the only entity powerful
 MYTH 10: FREE MARKET AND LAISSEZ FAIRE ARE THE SAME 193

enough potentially to curb corporate profit seeking activities

harmful to the nation’s economy and people.
Laissez faire economists usually oppose government anti-
trust intervention, even when used to stop anticompetitive
practices6 and strengthen markets and competition.
Notwithstanding the willingness to imperil markets, they
insist that their philosophy is quite compatible with the
notion of a free market. They justify their opposition to anti-
trust laws with the argument that such government actions
violate the requirement that no coercion be involved in a free
market. Yet, as noted above, it is not coercion that bothers
them but government or, more likely, democratically elected
government.
Proponents of laissez faire, generally, claim that as long
as corporations face some degree of competition or market
discipline there should be no concern about their market
power and absolute size. They see private monopoly power
as a lesser evil to government. Sometimes it may be even
beneficial due to the potential for innovation and even
efficiency. To them government intervention is bound to
damage the economy. Government is easily corrupted and
works on behalf of mighty interest groups (rarely named
and, of course, the most powerful of interest groups – large
corporations – is ignored) and therefore is not the ideal
platform to protect competition.7 Consequently anticom-
petitive behavior such as price gouging by cartel-like oligo-
polies, predatory pricing by airlines, usurious interest
rates set by financial firms and many other forms of eco-
nomic behavior harmful to consumers and the economy
are accepted as compatible with a free market. It is difficult
to understand how harmful economic behavior that
diminishes the market’s benefits can be considered as
consistent with a free market.
194 J. SHAANAN

Friedrich Hayek, a prominent advocate of laissez faire,

actually defends the competitive free market position rather
than the doctrinaire laissez faire position. He defends the
protection of competition by government on grounds that
otherwise there is interference with the flow of information
and its coordinating function in which case “price changes do
not register all the relevant changes in circumstances”.8
Therefore Hayek supports laws to protect competition and
entry into an industry and finds fault with (European and UK)
laws on corporations and patents suggesting that they can
result in the destruction of competition. Unlike contemporary
American laissez faire advocates, Hayek is willing to accept
pro-competition policies and have the economy benefit from
competition and the unimpeded flow of information.9
Economist Henry Simons also is strongly in favor of market
solutions and against government economic intervention, espe-
cially in the form of price and quantity controls. However, again,
unlike modern day advocates of laissez faire, he recognizes the
need for government protection of competition.10 Simons rea-
lizes that private economic power, not just government, can
coerce, and a free market requires the protection of competition.
Classical liberals such as Simons opted for protecting the market
with government’s help over rigid adherence to laissez faire
principles when the latter were incompatible with preservation
of a free market.11 Staunch supporters of classical liberalism
such as Theodore Roosevelt in the US and Lloyd George in
the UK were willing to protect free competitive markets through
government intervention in the form of laws and regulations
(and coercion) contrary to laissez faire principles. They took such
actions when they believed that either corporations or trade
unions were abusing freedom of contract.12
A strict laissez faire environment would never permit the
development of free markets. Under laissez faire there is every
 MYTH 10: FREE MARKET AND LAISSEZ FAIRE ARE THE SAME 195

reason to assume that firms will suppress competition for the

simple reason that such action increases profits. Therefore, those
whose objective is a free market would not be averse to govern-
ment intervention to protect competition. However, those
favoring laissez faire would object to government intervention,
oblivious to the fact or unwilling to acknowledge that Adam
Smith himself stressed that self-interest had to be checked by
competition. Joseph Schumpeter’s (1962) argument that
monopolies eventually will disappear is of little comfort, espe-
cially when the time frame involved is unknown.
Anything resembling a competitive free market requires con-
tinuous government vigilance if not outright intervention, more
so than before. Throughout the twentieth century, frequently,
a choice had to be made between preserving competitive markets
through government’s regulatory or judicial framework or else
permitting laissez faire followed by the demise of the free
market.13 When the free market aspects of some industry were
in danger, free market proponents demanded government inter-
vention in the form of regulations or restrictions; methods con-
trary to laissez faire. If for example a business cartel or a labor
union is formed this violates the idea of a free market but is
compatible with laissez faire. Stiglitz (2010) finds it ironic that
the so-called left in America had to fight to ensure that markets
work properly through the enforcement of laws to protect com-
petition, by providing consumers with information, by limiting
pollution and regulating the financial sector.

4 LAISSEZ FAIRE AND GOVERNMENT

A market without government intervention is a utopian con-
cept because people will usually try to protect themselves and
their livelihood from the harm inflicted by the market.
Therefore, a tug of war between those seeking to impose
196 J. SHAANAN

laissez faire and those damaged by such a system is bound to

take place.14 Polyani notes that with the move to laissez faire,
government’s role did not decrease but in fact increased
enormously to protect supposedly self-regulating markets.
Polyani also points to the fact that when attempts were
made in Europe to leave workers to the mercy of the market
a counterforce usually sprung up demanding legislation to
protect workers and when successful it negated the self-reg-
ulating aspects of the market. More fundamentally, the asser-
tion that markets alone should dictate our economic lives is
based in part on a misunderstanding about the origins of
markets and the efforts required in preserving them. The
argument also rests on the exaggerated claim that markets
(regardless of the level of competition) determine income
distribution questions efficiently, impersonally and even fairly
if not always humanely.
Taken at face value, the laissez faire quest for a government-
free economy has a strong degree of wishful thinking. More
likely it represents a subterfuge for bringing about greater
income and wealth inequality. Furthermore, as noted by
Polyani, laissez faire’s connotation with freedom is an illusion
because a laissez faire economic system, for the most part, has
to be imposed on people by government itself. It requires the
might (coercion) of the nation for its survival because of the
strong opposition it creates from those whose existence it
threatens15; not exactly a laissez faire outcome.
The market in most cases needs government’s protection.
While Friedman is concerned about the danger inherent in
the political sector unduly controlling the economic sector he
cannot bring himself to conceive of the reverse. Yet it is the
reverse situation that typifies contemporary America because
the economic sector controls the political sector as demon-
strated by the massive bailouts of 2007–08. Economic power
 MYTH 10: FREE MARKET AND LAISSEZ FAIRE ARE THE SAME 197

is not a check on political power; instead, it has comman-

deered political authority. Contemporary laissez faire is at
odds with democracy and its institutions.
Laissez faire advocates hail the freedom inherent in their
philosophy and criticize the loss of liberty arising from gov-
ernment economic intervention even when it is meant to
protect basic human needs. The logic here is that the loss of
freedom to taxpayers saddled with paying for such govern-
ment programs (and perhaps even to the recipients) is an
egregious affront to individual liberty. However such a loss
of freedom must be weighed against the loss of freedom
experienced by those suffering from malnutrition or illness
because they cannot afford food or health care. It is true that
when government intervenes, e.g., to protect competition,
some people’s freedom may be restricted or diminished but
at the same time the freedom of many others is enhanced. It is
a political decision either way. Opposition here usually has
little to do with principle but more to do with protection of
the status quo.16
The term “free market” (or market) is also used sometimes
to mask corporate demands and dominance. When there is a
conflict between corporations and government it is often
described as a clash between the free market and coercive
government. Instead, it is rarely about the free market.
More often it is about accommodating large corporations’
intent on increasing their profits at the expense of some
other party, usually the public. Similarly, when we are told
that government should adjust to the market and adopt mar-
ket methods what is meant is that government should help
very large firms make more money at taxpayer expense. Few
organizations and not many economists take up the fight on
behalf of genuinely competitive markets. The most vocal
advocacy and sharpest rhetoric is launched on behalf of
198 J. SHAANAN

well-paying giant corporations; after all such support is con-

sistent with profit maximization and therefore is considered
rational and acceptable.
At times contemporary laissez faire proponents are mired
in mid-twentieth-century-type rhetoric which envisioned only
two alternatives: free markets or tyrannical socialism. However,
as noted by Robert Solow (2012), the choice we face today is
more likely to be a choice between an extreme version of free
markets (market fundamentalism) and effective regulation of
the shadow banking system or the progressivity of personal
income tax, not exactly radical socialism. Nonetheless, by
deceptively positioning laissez faire as the only viable alternative
to communism it has won its share of adherents.
Finally, there is an important modern development that
should be addressed which suggests an even greater gulf
between competitive free markets and contemporary laissez
faire. It also raises questions about the latter philosophy’s
objectives. Contemporary laissez faire (or neoliberalism)
does not really seek to block government economic interven-
tion, at least not completely. Their goal is not to end govern-
ment intervention but rather to redirect it away from more
commonly accepted routes (to which both traditional and
contemporary laissez faire object). It definitely should not
be used to help society’s less fortunate, to provide health
care, to reduce risk for the majority, to protect competition,
to lessen macro-instability and so on. Instead, intervention
should be used to help the upper echelons of society17 and
large corporations. Such an objective is clearly inconsistent
with traditional laissez faire and, above all, contradicts free
market principles. It reinforces the point that the ultimate
objective is corporate profitability and if profits can be raised
through government intervention then so be it – a rather
unusual form of laissez faire.
 MYTH 10: FREE MARKET AND LAISSEZ FAIRE ARE THE SAME 199

5 THE LAISSEZ FAIRE EXPERIENCE

Laissez faire in the US may have begun with Thomas Jefferson’s
presidency and his dislike of a large central government18 and
admiration for farmers’ self-sufficiency. Perhaps it began during
the Jacksonian movement that was based on aggressive economic
individualism.19 However, in both the US and the UK the advent
of industrialization changed the equation. For many industrial
workers there was no farm to return to when recessions and
unemployment struck. Therefore, they did not have the political
independence of the farmer. The new industrial cities offered
factory workers wretched living conditions and harsh social con-
ditions. Given their inferior bargaining position and greater eco-
nomic uncertainty they needed protection.20,21 The laissez faire
objective amounted to denying them minimal protections upon
loss of a job and income.
A key lesson of the Great Depression and its devastation was
that contrary to classical economists’ predictions, markets did
not self-correct. Afterwards not surprisingly opinions changed
including views on laissez faire solutions, threats to individual
freedom from private coercion and the role of government.22
With the acceptance of a new mindset, laws, regulations and
policies were adopted that would prevail for the next two gen-
erations.23 However, (as explained in Myth 5) in the 1980s the
lessons of the Great Depression were cast aside. Laws and
regulations created to protect the stability of economy and
people’s jobs and incomes from market volatility, were phased
out. Yet, little had changed to justify thinking that markets have
become more self-regulating since the Great Depression; in fact
developments in technology, globalization and finance prob-
ably increased the risks of an unregulated economy.24
One aspect of the modern laissez faire campaign in America
has been the reversion to social Darwinism with a fervor not
seen since the end of the nineteenth century. The old doctrine
200 J. SHAANAN

denying the need to protect the unemployed, retirement

funds and the health care of tens of millions has been revived.
It has been accompanied by a sophisticated public relations
campaign. Its common message is that one should not worry
about an economic safety net because the market, in its infi-
nite wisdom, will sort things out efficiently and beneficially
and without the sticky hands of politicians. As a result the
average person should end up richer, at least so goes the
myth. Those arguing in this vein see government as the root
of all evil, notwithstanding its democratic roots, and in laissez
faire vernacular, an enemy of choice. To them freedom of
markets means only freedom from direct government inter-
vention unless the beneficiaries are large corporations or
billionaires.
Rather than embracing genuine competitive free markets,
starting in the 1980s, the nation was indoctrinated into
accepting an inferior economic system made palatable
through the use of an attractive but false label “free market”.
However, as explained above, this was an adulterated version
of traditional laissez faire and far removed from competitive
free markets. Its promoters, with substantial resources at their
command, devoted considerable efforts to spreading the myth
that their version of laissez faire embodies free markets.
As discussed elsewhere in the book, during and after the
Crash of 2007–08 America witnessed unprecedented govern-
ment economic intervention; perhaps the defining political
economic event of the past 20 years. Vast sums of money
were granted to large failing financial firms and the Federal
Reserve Bank undertook a massive interventionist role. The
main purpose of the interventions was to change a market
outcome unacceptable to America’s financial elite; although,
of course, it was rarely presented as such. Notwithstanding
decades of professed support for laissez faire the power elite
 MYTH 10: FREE MARKET AND LAISSEZ FAIRE ARE THE SAME 201

campaigned aggressively for protecting the status quo from

market forces. For years they had funded research institutes
and universities to promote laissez faire in academia25 and the
role, or rather lack thereof, of government in the economy.
Yet when a crisis occurred and their wealth and position were
in jeopardy, they demanded to be rescued immediately
through policies that were neither free market nor traditional
laissez faire.
At this stage it might be worthwhile to turn back and
examine what happened in the US during the post-World
War II era that Friedman and his followers found to be so
intolerable. He describes this period as characterized by shar-
ply diminished personal freedoms caused by big government’s
heavy handed intervention. Yet, the evidence does not sup-
port Friedman’s assertions.26 During those years progress was
made in civil rights; economic conditions of the elderly were
noticeably improved; both the elderly and the poor had better
access to medical care; poverty rates in general dropped; the
percentage of Americans attending academic institutions rose;
and funding for all levels of education increased. It takes a
good deal of imagination to describe this period as a descent
into slavery. It would seem that the situation was contrary to
Friedman’s claims and for millions of Americans freedom
increased.
It is also illuminating to see what happened once laissez
faire proposals were put into effect starting with the Reagan
Administration’s policies in the 1980s. It is hardly a success
story. As discussed in Myth 5 the US experienced slower
productivity and slower economic growth; stagnant wages
and living standards; deteriorating working conditions; disap-
pearance of pensions; declines in health benefits; increased job
instability and declining job opportunities for those without a
college education. At the same time the gap between the very
202 J. SHAANAN

rich and the rest of the nation widened along several dimen-
sions. Therefore, the question that comes to mind is: whose
freedom was increased by the adoption of laissez faire policies?

6 CONCLUSION
Contemporary laissez faire is incompatible with a free market.
Claims to the contrary are meant to mask its true intention
which is to increase corporate profits and protect the status
quo, not ideological purity and certainly not individual free-
dom. A Darwinian jungle is not the same as a free market.
Markets need protection. A school of thought that accepts the
elimination of competition and even markets can hardly be
said to be a champion of free markets. The actual experience
in the US with laissez faire type policies has been dismal with
results mostly contrary to the promises made.
The laissez faire idea of freedom is not what the public has
in mind or, more importantly, would choose if given the
option. A laissez faire system usually has to be imposed on
people – so much for the claim of fighting for individual
choice and democracy. It is also strange to equate freedom
with contractual economic relationships and claim that it is
the greatest freedom of all. The prevailing philosophy that
everyone should submit to the market’s rule except those
with power and influence27 represents a distorted version of
laissez faire and certainly contrary to free market principles.
Finally, when the actions of the private sector are praised as
being voluntary and those of government as being coercive a
question arises, particularly relevant in twenty-first-century
America. When does economic power (or for that matter any
power) become influential enough to constitute, de facto,
government?
 Myth 11: A Free Market Nation
Does Not Need a Society

1 MYTH
It is individuals who are responsible for the nation and civiliza-
tion’s magnificent achievements and not society.1 The term
society is all too often an excuse to deprive Americans of their
inalienable right to individual freedom. The concept of society
is used to empower government to enforce elitist rules that
shackle people and restrict them from fulfilling their true
potential while picking their pockets through confiscatory
taxes. Behind the grand excuse of promoting “society” and
supposedly improving the lives of the poor and middle class,
there is an agenda that inevitably favors liberal elitists who want
to use other people’s money for their “do good” projects that
always fail miserably. There are plenty of private charities that
receive generous funding and there is no need for government
to get involved in redistribution. If someone has a strong desire
to help the needy that is admirable but let them donate their
own money, not other people’s money.
Most social programs and policies are useless or worse.
People who want a job can find one so there is no need for

© The Author(s) 2017 203

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4_12
204 J. SHAANAN

unemployment compensation, especially, because there is

no such thing as long-term voluntary unemployment.
Unemployment compensation and the lengthy list of wel-
fare programs only encourage idleness and pampering at
the expense of hard working citizens and weaken the
nation’s moral fiber. We do not need social institutions.
Social action is in conflict with individualism. Social deci-
sions should be based on the will of un-coerced individuals,
not government.2
A century ago the intellectual climate in America changed.
We switched from a belief in individual responsibility and
market outcomes to a belief in social responsibility and depen-
dence on government.3 This is regrettable because the market
is a miraculous institution and by allowing it to prevail in
more areas we would be far better off as a nation. Without
the misguided notion of society we could be richer with a
higher standard of living for all except perhaps for those who
make their living designing social programs. People do not
need protection from the market instead they have to learn to
adapt to it, accept its dictates and enjoy its true freedom.

2 THE FIGHT AGAINST SOCIETY AND PROTECTION

Hayek proposes that the free market through individuals’
actions can produce unintended social institutions more
socially beneficial and consistent with individual liberty than
anything emerging from government.4 Unfortunately, for
this viewpoint, individual rationality is insufficient to obtain
optimal or even satisfactory results. A shared ethic or norm is
required. Kenneth Arrow (1963) finds that there is no con-
sistent voting mechanism that can turn individual preferences
into social preference thereby raising doubts about the ration-
ality of social decisions based only on individual preferences.5
 MYTH 11: A FREE MARKET NATION DOES NOT NEED A SOCIETY 205

We need a society and social protection to maintain our way

of life and standard of living while upholding common values.
A basic institution such as property ownership is a social
construct and even markets themselves require considerable
government protection and agreed upon social conventions.6
The fight against society is in part a fight against the legiti-
macy of institutions, traditions, conventions and moral forces
that may limit profit making activities but are the hallmark of
an enlightened nation. The desire for unrestricted economic
freedom usually is sought on behalf of the few while the
maligned socio-economic protections serve to maintain the
standards of living and quality of life of many.
The fight against society has several dimensions: (1) to
get rid of laws and regulations that protect people from
market forces and help them maintain a minimal living stan-
dard (e.g., Social Security) and also preserve some degree of
equality (e.g., progressive taxation) and economic stability
(macroeconomic policies); (2) to reduce spending for social
programs under a variety of excuses from “starve the beast” to
deficit concerns; (3) to fight public education not only to
reduce social spending and taxes but also to control educa-
tion’s content and produce more compliant employees and
voters receptive to the corporate message; (4) to fight
“forced” social values based on the Hayekian principle that
markets know best, much more than so-called social experts
who have a limited and narrow understanding of people’s
needs7; (5) to get rid of communal identities, especially
unions, which helps eliminate class solidarity and facilitates
the widening of income inequality.8
A concerted effort to protect the status quo and the existing
economic order was undertaken in the 1970s by bringing
about changes to the educational, political and the legal sys-
tems. Those systems were accused of having failed to protect
206 J. SHAANAN

adequately corporate interests. As discussed in Myth 8, busi-

ness learned to act jointly in order to defeat consumer protec-
tion and labor laws and pass favorable tax, deregulation and
antitrust legislation. Wealthy individuals combined with giant
corporations embarked on a campaign to restructure
American society. Among the steps taken were the establish-
ment of law centers on behalf of business interests such as the
National Chamber Litigation Center which defeated many
environmental and labor regulations; and the National Legal
Center for the Public Interest, whose goal, it was claimed, was
to ensure a more impartial use of the law in attaining eco-
nomic and social progress. The federal government accepted
the idea that these law firms met the criterion of public inter-
est organizations despite working on behalf of corporate
interests.9
Over the past 30 years many publications and centers
emerged devoted to the cause of laissez faire and opposed to
government economic intervention. Their policy proposals
are fairly uniform: reduce taxes for the rich and minimize or
eliminate government programs for the needy. In the 1980s
President Reagan proposed to cut aid to the less fortunate and
to that end he adopted a seemingly attractive narrative. If
Americans stop living off government handouts and return
to a tradition of self-reliance and personal responsibility,
America would become a stronger and wealthier nation.10
Reduced income and benefits and greater economic uncer-
tainty were heaped on millions. Parts of the New Deal and its
safety net were dismantled. Many in America were persuaded
that was the proper thing to do. America’s problems and lack of
competitiveness were blamed on social programs such as unem-
ployment insurance, Medicare and Medicaid, food stamps and
Social Security. The above programs, as well as minimum wages,
progressive income tax, and public education, were deemed an
 MYTH 11: A FREE MARKET NATION DOES NOT NEED A SOCIETY 207

unnecessary burden. They were described as distorting the

economy and impeding it from attaining its full potential. A
popular slogan was that if one does not benefit directly from a
government program one should not have to pay for it.11
It was claimed that America had been misled and now was
the time to change that. The strengthened links between
economic and political power enabled the weakening of the
New Deal social safety net. A new belief took hold; the com-
munity at large has no responsibility for its members’ well-
being. It is perfectly fine to leave people’s fate to the vagaries
of markets and the profit motive. All kinds of imaginary
efficiencies were claimed in support of the elimination of
programs that benefited the poor and the middle class.
Compassion was to be restricted to private charity and there
was no need for social cohesiveness or community building at
least not with public funds. America’s elite could move for-
ward and change American capitalism by shrinking its already
small social safety net; notwithstanding the fact that the sys-
tem seemed to work reasonably well and the American dream
was attainable to large numbers of people.12
Accompanying the cuts in social programs and leading to a
further reduction in living standards was the abandonment
by large corporations of previously professed paternalistic
obligations to employees. No more pampering, workers
would now be exposed to market pressures just like any
other input, especially with the weakening of unions. The
justification was in the same vein as Reagan’s argument. By
“freeing” employees from the protection of job security,
health benefits and a safe pension they were somehow gain-
ing a new freedom.13
As discussed in Myth 8, the Democratic Party came under the
influence of Wall Street. Its funding allowed the Democrats to
pursue a liberal agenda on values. However, in return big
208 J. SHAANAN

business, and especially financial giants, were granted financial

deregulation, preference in international trade agreements and,
even reduced social spending. Kuttner writes that many
Congressional Democrats were now willing to vote to the
detriment of ordinary people. In the first decade of the New
Millennium, politicians voted to allow stock promoters to
deceive small investors and made bankruptcy declaration more
difficult regardless of circumstances, at the request of credit card
companies. As noted previously, they also voted to make it more
difficult for injured people to sue corporations for negligence; to
restrict class action law suits14; to allow corporations to take
away employees’ pensions; and for good measure also supported
tax cuts for America’s wealthy. Glenn Simpson (2007) describes
how the subprime mortgage industry used political donations
and lobbying efforts to forestall attempts to reduce abuses such
as the frequent refinancing of mortgage loans.
Politicians could vote against social spending, writes
Thomas Frank (2000), because many Americans were willing
to vote for candidates who support big corporations and the
wealthy. At the same time they were rejecting politicians more
attuned to their economic circumstances and willing to pre-
serve a social safety net and public education. Those voters,
apparently, were placing greater importance on values and
cultural issues than on pocketbook or economic fairness
issues. They were willing to ignore the latter to focus on
abortion, busing, elitism, objectionable Hollywood movies,
religious symbols in public places and the teaching of evolu-
tion in public schools.15 The outcome was reduced taxes for
the rich and for corporations.
Paradoxically, many voters were either unaware or else
refused to make the connection between offensive movies,
music, and television shows and the fact that they are pro-
duced by large corporations.16 Thomas Frank suggests that
 MYTH 11: A FREE MARKET NATION DOES NOT NEED A SOCIETY 209

this was not accidental but the result of large sums of money
invested to muddle the link between economic interests and
the disliked cultural change. In turn, this allowed laissez faire
interests to triumph and further reduce social spending while
popularizing their ideology and linking it with traditional
values. Several writers have pointed to the alliance between
large corporations and cultural conservatives as crucial in the
laissez faire victory.
Another irony was that as a result of that victory market
values became paramount and were placed above all other
values including traditional, religious and social values. The
profit motive had won out, a relatively few gained handsomely
but for large numbers of Americans it meant reduced living
standards. The decline of unions and union membership, in
part because of import competition in autos, steel and textiles,
and business efforts to keep them out of growing service
sectors, meant fewer supporters of social legislation.17
Different excuses were given to Americans as programs vital
to their standard of living were either eliminated or reduced.
A favorite of laissez faire advocates was “starve the beast”.
As mentioned in Myth 3, this involved tax cuts that would
force government to reduce its programs, especially the
detested social programs. Personal income taxes were cut by
25 percent over three years. A similar tax cut strategy was
followed by George W. Bush 20 years later with the intent of
creating a fiscal crisis followed by calls for reductions in social
spending to solve the “crisis”.18 The drive for global com-
merce, argues Kuttner (2007), undermined national eco-
nomic and social safety programs and the nation’s equalizing
mechanisms.
In the past decade, especially after the Crash of 2007–08,
conventional wisdom in the US and Europe was that deficits
were a recipe for disaster and strong austerity measures were
210 J. SHAANAN

needed urgently notwithstanding severe recessions. Balancing

the budget acquired mythical properties about its effect on
economic growth (somehow ignored during the Reagan and
George W. Bush deficit years). Economists came up with a
critical deficit number beyond which nations supposedly risk
stepping into the abyss. The result was a tightening of bud-
gets in defiance of all that had been learned since the Great
Depression. Students were taught to abhor Keynesian ideas.
High unemployment became secondary to concerns about
fiscal prudence. The focus shifted to reducing social pro-
grams, ranging from education to bridge repairs. They were
treated as culprits in the weakening of the economy, not the
tax cuts. The Obama administration acquiesced to the new
fiscal prudence. It obliged by repeating laissez faire platitudes
that cutting government programs was the right thing to do.
Yet, contrary to popular opinion, discretionary Federal spend-
ing for social programs had not been increasing at an alarming
rate but rather declining relative to the GDP since the Carter
Administration.19 Deficits usually increased due to tax cuts or
increased military spending, not increased social spending.
The “starve the beast” crowd won the battle and millions of
Americans and their families were the losers.
Another dimension of the fight to minimize societal ele-
ments is the aggressive fight waged against public education.
Hefty donations have been given for privatizing education.
Laissez faire economists rail against the evils of public educa-
tion while newspapers persuade their readers that greedy
teachers and their unions are responsible for local fiscal crises.
Perelman (2007) points out that, once again, even
Democratic politicians refused to come out in defense of
public education. The trend in recent years has been to
spend large sums of money on testing. Constant and frequent
testing will supposedly improve educational standards.
 MYTH 11: A FREE MARKET NATION DOES NOT NEED A SOCIETY 211

However, critics question the effectiveness of testing espe-

cially with teachers having incentive to “teach to test”.
Perhaps more importantly, money is being drained away
from teaching to pay for the testing. Adopting new technol-
ogies is promoted as another “sure” way to improve the
quality of education despite the lack of concrete evidence on
the subject; technology promoters’ profit motive is rarely
questioned. Perelman points to the fact that in both public
education and transportation a lack of resources mars opera-
tions and reduces quality thereby further strengthening the
argument for privatization; a laissez faire version of “having
your cake and eating it too”.

3 DO WE NEED SOCIETY WHEN WE HAVE THE MARKET?

Friedman’s attack against almost any notion of society on
grounds of individual freedom is suspiciously akin to a tailor
made argument to protect the incomes of very wealthy indi-
viduals and giant corporations. It ignores the fact that we live
in a society where we depend extensively on others. Crouch
(2011) writes that we cannot own property or engage in
market activities without depending on others to accept our
ownership claims and defend them. We also require public
goods. Democracies are founded on trust and require a bind-
ing social agreement with clearly understood rights and
responsibilities for individuals in order to function properly.
The political turmoil in Washington DC over the past decade
bordering on dysfunction illustrates the need for a sense of
community that is currently lacking.20
The broad middle-class society of mid-twentieth-century
US that was admired globally was aided by the establishment
of institutions that brought about greater equality.21 Growth
and labor scarcity helped but equalizing institutions that
212 J. SHAANAN

lessened income distribution extremes played an important

role.22 There was a sharp reduction in poverty rates; the welfare
of the elderly saw marked improvement; and a larger percentage
of young Americans entered universities. Throughout the nine-
teenth and early twentieth centuries average wages grew in part
because of productivity increases but also because of significant
regulation in matters such as minimum wages, maximum hours
worked and worker safety laws. Living standards rose because of
an increase in public goods ranging from vaccines and sanitation
systems to highways and good public schools.23
As argued in Myth 10, a complete reliance on market forces
to determine economic outcomes leads to unbearable human
costs that in turn endanger political institutions. To ensure
the acceptance and success of a market economy requires
constant government vigilance to correct not only economic
wrongs (e.g., market failures) but also to correct social wrongs
without which the market and the changes it brings about
become a nightmare for large numbers of people. To protect
the market and society government has to intervene. The
economic concept of market failure serves to justify public
action that can improve allocative efficiency and benefit both
the economy and society. However, even efficient markets can
produce socially unacceptable outcomes.24
Polyani saw dangers to both humans and the environment
from being subjected to the dictates of market forces without
any special protection. After all, humans and the environment
for centuries had a special or sacred status but with the permea-
tion of market rules were being turned into commodities endan-
gering both society and the environment.25 With the push for
self-regulating markets the economy was no longer secondary to
the dictates of society, politics and religion. It was now in
control and all other social institutions had to cede to the
market26 thereby weakening the notion of society.27
 MYTH 11: A FREE MARKET NATION DOES NOT NEED A SOCIETY 213

There is the common argument, referred to previously, that

protecting society or legislating to help the poor is a denial of
freedom to others, mainly to those who have to foot the bill and
suffer a small decline in income. In Milton Friedman’s utopia
there would be no compulsion and those on the verge of extinc-
tion because of unemployment or sickness would just stay out of
sight, to refrain from upsetting the ideal. The rest of us need not
worry about their plight because we have been given a moral
escape route. We can shrug our shoulders and, in true laissez faire
fashion, blame it on the inevitable, impartial and invisible forces
of the market, not on greed or callous indifference. We can be
absolved from any personal responsibility.28 As Stiglitz (2012)
points out, the freedom denial argument is one-sided in that the
lessening of some people’s freedom is usually more than offset by
increased freedom for others. And if someone’s freedom to
speculate has been restricted while another’s freedom from
hunger is protected, are the two really comparable? Stiglitz points
to the success of several East Asian market economies where
government provides economic security that in turn safeguards
social cohesion and political stability and protects social and
human capital.

4 SOCIETY VERSUS MARKET

It is increasingly argued that we should apply market rules to as
many institutions as possible and this will improve economic
efficiency and bring a “natural order” to otherwise man made
and therefore defective institutions. If someone should happen
to profit from this change then so be it. Yet, Crouch (2011)
points out that the push for market solutions, often, is an
attempt to circumvent moral judgment by an appeal to a
standard currently beyond dispute – that of money making.
Somehow if a practice is profitable it is beyond reproach
214 J. SHAANAN

regardless of any damage caused. This argues Crouch, leads to

amorality at all levels of social life and, as Kuttner (2007) notes,
threatens the essential public mindedness of scientists, doctors
and educators. Can we really leave everything to the rule of the
market? Should there not be areas that can be declared as
noncommercial zones where principles other than profit max-
imization apply? Can we not be more quizzical about the
market and its impact on different spheres in our lives or is
the debate over and we have to accept that the profit motive
has the final say in all matters?
Polyani suggests that separating labor from other activities of
life and consigning workers to the vagaries of the market
amounted to destroying the essence of society and with it care-
fully crafted relationships and traditions. In its place came a
harsh individualistic outlook, a new organization based on the
aforementioned principle of freedom of contract. The latter
would replace “freedom restricting” noncontractual organiza-
tion including those of kinship, neighborhood, profession and
creed. Supporters of this trend describe the unshackling from
social obligations and responsibilities as a new found freedom.
Yet the newly created divisions of political and economic spheres
combined with greater individual economic freedom for a few
not only threatened society but came at the cost of justice and
security to many others. To Polyani the market is part of the
economy which in turn is part of broader society. Importantly
the market economy is not meant to be the ultimate objective
only a means to a better life.29
The above distinction, according to Stiglitz (2012), has
been lost in recent times. Privatization and liberalization are
seen as the ultimate goal instead of improvements in standards
of living and quality of life. Privatization and liberalization are
hardly guaranteed to improve people’s lives and cannot be
automatically equated with bettering the human condition.
 MYTH 11: A FREE MARKET NATION DOES NOT NEED A SOCIETY 215

Crouch also questions the approach which takes the market as

the natural starting point given that a good deal of human life
exists outside the market. He questions the economic
assumption that humans are driven by an aggressive concept
of self-interest and the idea that market rules and prices can be
applied to nearly every aspect of life.
Another dimension of the fight to protect the profits of the
few at the expense of the quality of life of the many has been
the ongoing campaign to discredit science and consequently
weaken environmental regulations. Perelman (2007) writes
that giant corporations have little trouble finding people
with the proper credentials willing to back corporate positions
on environmental matters. These include protection of pol-
luting activities by creating confusion over the validity of
scientific claims on the damaging effects of heavy metals,
toxic chemicals and global warming. Such campaigns harm
not only the environment but also objective scientists and the
integrity of society’s scientific and scholarly output. It can also
deter promising new research given the hostile reception
anticipated.30
Another negative aspect, notes Perelman, is the impact of
corporate funding on academic institutions, including the
nation’s top universities. Universities are in the process of
being corporatized. In fact some argue that they should be
subservient to industry with no special status or ethical dimen-
sion.31 Scientific inquiry is steered away from basic research
that may lead to new technologies. Instead it is directed to
areas offering more immediate financial gain. Perhaps an even
more pernicious effect is the impact on the structure of aca-
demia. Profit pressures have driven universities to minimize or
even eliminate academic departments lacking a financial
potential while strengthening their profit yielding counter-
parts. Doing so represents a break from centuries old
216 J. SHAANAN

tradition. Perelman also points out that some universities

engage in screening academic job candidates to ensure no
antagonism to corporate sponsors, hardly a desirable trend
for academic freedom. Needless to say those touting the great
new freedoms emerging from ruins of society rarely complain
about the loss of freedom in academia.32

5 MARKETS AND CONSENSUS

There are instances where the principle of leaving matters to
the market does not work. The reader might point out that
such cases are well known and come under the heading of
“market failure” – a category of resource misallocation dis-
cussed above and throughout the book. But here we refer to
something else. The inability of markets to provide a desirable
solution holds in circumstances where the choices to be made
are more political in nature than economic. In such cases
individual self-interested choices may be inferior to public
(collective) decisions based on a shared consensus about the
nature of society.33
Kay (2007) writes that in areas where markets often do
not yield satisfactory outcomes such as in education, trans-
portation and health, it is not so much an issue of technical
market failure. Instead, and more fundamentally, problems
arise because in those areas there is a need to make poli-
tical choices based on a consensus involving shared social
institutions. Those institutions include, among others, fair-
ness, compassion, trust, social cohesion, cooperative rela-
tionships, equal access to a service and conscientious care.
Usually they cannot be attained through individual choice
in the marketplace (notwithstanding Hayek’s argument
about individuals knowing more than social planners). In
such cases the market’s incentive system may not help in
 MYTH 11: A FREE MARKET NATION DOES NOT NEED A SOCIETY 217

achieving the desired outcome or else is only part of the

solution. Kay suggests that in many industrialized nations
health care is public but not because of market failure
concerns. Instead it is public because of widely shared
views on the importance of equality of provision and the
nature of society which cannot be satisfied by individual
choices in the marketplace. Patients, e.g., want caring pro-
viders something that goes beyond market incentives and
requires nonmaterialistic motives on the part of the
providers.34
Ivory et al. (2016) provide examples of such concerns
involving private equity firms taking over ambulance services
and fire brigades and applying a strategy of cost cuts, price
increases, lobbying and litigation. The authors note that this
unusual approach creates a fundamental tension between
profit considerations and caring for people in distress. In
some towns ambulance response time slowed down and
sometimes no ambulances were available for emergencies. In
other instances the companies engaged in aggressive billing
practices including obtaining signatures from ambulance
patients (a practice that employees criticized) and filing claims
against the families of deceased patients. In another case
employees were instructed to cut costs to the point where
ambulances and equipment were not well maintained and
medical supplies were missing.35
Kay also points out that property rights are not given by
nature as implied in economic theory but created through a
social process. Both the nature and distribution of property
rights come about through social construction and political
debate; property rights could be determined in alternative
ways. Examples of issues that arise because property rights
are socially constructed and cannot be solved by either the
market or the remedies prescribed for market failure include:
218 J. SHAANAN

corporate executive pay; the balance of rights and responsi-

bilities between managers and other parties in a large corpora-
tion; rights of individuals to higher education; and the
funding of long-term care for the elderly.36
Kay notes that the social and political aspects of life are
essential to an understanding of how markets work rather than
representing competing explanations (and it should not be
forgotten that the market is embedded in the framework of
society). Individual choice is important to a well-functioning
economy but so is collective choice. Many important areas of life
require a complex combination of markets and social decisions
to arrive at the most desirable solution. The latter do not
necessarily have to be hierarchical decisions but could be more
in the nature of team work. There are important social and
socio-economic problems that require political decision making
and upholding the primacy of social institutions over profit
maximization principles.37

6 CONCLUSION
While the market is a very important economic institution, it
cannot and should not be conflated with people’s ultimate
objective. It is not the be all and end all of modern civilization.
It is a means to a better economic life but not necessarily super-
ior to other institutions be they moral, religious or traditional
and certainly not a substitute for society. The market is only part
of society it cannot and should not replace it. A society and
social protections are necessary to maintain a desired way of life
and quality of life. Fundamental economic concepts such as
property rights are social constructs and markets themselves
are based on social conventions.
Arguments against a society on grounds of individual free-
dom often seem designed to protect the incomes of the wealthy
 MYTH 11: A FREE MARKET NATION DOES NOT NEED A SOCIETY 219

and giant corporations. Frequently the freedom sought by a

handful of extremely wealthy individuals comes at the expense
of many others’ freedom. The campaign waged to substitute
society and its priorities with strictly market relationships is
essentially an attempt to curb competing institutions that
limit profit making activities. It is intended to eliminate laws,
regulations and policies that shield people from market forces
and ensure them a minimal living. The idea that the nation has
no communal responsibility for its citizens’ well-being is based
on questionable moral justification. Critics of society resort to a
variety of claims such as economic inefficiency, the perils of
deficits and the adverse personal effects on the recipients of
government help. They also seek to eliminate public education
so as to reduce taxes, give more profit opportunities to the
private sector, and to change the content of education and
ensure it facilitates corporate rule.
There are important cases where leaving matters to the
market does not work, especially, where the choices to be
made are more political than economic. Such cases require
decisions based on a shared consensus about the nature of
society and key issues have to be resolved by combining
market solutions with public agreement. For example, equal-
izing institutions played an important role in mid-twentieth-
century US when the nation’s social, in addition to, economic
progress was globally admired.
Finally, do we really want the market to control society
rather than the other way around? Can everything be left to
the rule of the market, keeping in mind that the quest for
market solutions, sometimes, is an attempt to evade moral
judgment to justify all manner of profit making? Even efficient
markets produce unacceptable social outcomes. Additionally
should there not be areas where principles other than profit
maximization apply?
 PART IV

The Crash and Bailouts

 Myth 12: The Government Caused
the Crash of 2007–08

1 MYTH
There are many explanations for the Crash of 2007–08 that
led to chaos in financial markets and resulted in a lengthy
recession in the US. However, the most likely reason for this
Crash and previous ones are the misguided actions of the US
government. It is imperative to emphasize that one institu-
tion, criticized extensively and unfairly, is not to blame and
that is the financial industry itself. Quite the contrary, we are
fortunate to have a unique and sophisticated financial market
that is the envy of the world. Markets and financial markets in
particular are complex mechanisms. They cannot always be
understood, let alone analyzed, by so-called experts1 who are
all too eager to impose burdensome regulations and engage in
fine tuning of markets to enhance bureaucracy’s power.
Notwithstanding torrents of criticism it is not clear that
there was anything wrong with the mortgage or even deriva-
tives market and it is also unclear whether the so-called sha-
dow banking sector actually exists. If anything government
meddling, social engineering and excessive scrutiny, more

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224 J. SHAANAN

likely than not, triggered the Crash.2 It is also puzzling why

the blame for bad investment decisions by home owners
should be placed on the banking sector; everyone has to
take responsibility for their own actions. People were not
coerced into taking out loans be they subprime mortgages
or any other kind. If the rates charged were exorbitant they
should have refused the loans. Instead, through their own free
will they entered into contractual obligations seeking, like all
investors, maximum return. Unfortunately, their investment
decision was not too smart. The financial industry should not
be blamed. Liberal economists rushed to blame Wall Street
and its hard won freedoms, for the crisis. For good measure
they also find fault with monetary policies pursued insightfully
by Alan Greenspan a champion of free markets.
The criticisms lack validity and ignore the real problem,
which incidentally never changes, when it comes to the
cause of economic disasters. If one were able to read the
Crash’s metaphorical label of origin one would see clearly
printed: “made by the US government”. 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 they 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.
In addition to Fannie Mae and Freddie Mac there are
other government agencies that share the blame for the
Crash albeit in a more indirect way. Casey Mulligan
(2009) demonstrates the possibility that following the
2008 election, the anticipation of government intervention
and distortions in the labor market, especially on behalf of
unions, led to the Crash, as did expectations of higher
 MYTH 12: THE GOVERNMENT CAUSED THE CRASH OF 2007–08 225

marginal income tax rates.3 Therefore, it is clear that there

are credible explanations that point to government’s culp-
ability. Another explanation is the hypothesis that any sys-
tem of financial regulation will eventually result in systemic
financial crisis.4

2 GOVERNMENT’S ROLE
In 2007 a housing bubble, driven by low interest rates, “Alice
in Wonderland” mortgage lending practices and the prolifera-
tion of derivatives, began to burst. Many mortgage banks and
real estate firms would fail, credit markets would come to a
halt and millions of people would lose their jobs and homes.
When examining the causes of the 2007–08 Crash one might
argue that government had been captured by financial inter-
ests. Those interests succeeded in getting rid of regulations
and laws designed to ensure the safety and soundness of the
financial system.
One could blame politicians for refusing to regulate finan-
cial derivatives and for insisting on the appointment of a
laissez faire ideologue to head the Federal Reserve Bank.
Additionally one could point to selective changes in the laws
governing the Federal Reserve Bank itself that could have
convinced some financial firms that they were gambling with
house money for some of their more questionable operations.
In a similar vein, one could add the Fed’s refusal to intervene
in cases of usurious or deceptive lending, its refusal to limit
leverage, and its reluctance to acknowledge a housing bubble,
much less intervene to stop it. In that sense the blame for the
Crash can be placed on the US government and its agencies.
Of course, this implies that not only had government been
captured by the financial industry but that the latter decided
on policies, laws and the extent of regulatory enforcement in
226 J. SHAANAN

the industry. The best example of the industry receiving

favorable legislation is the repeal of the Glass Steagall Act.
Acceptance of the above explanation though raises grave
doubts about the presence of the invisible hand in financial
markets and suggests the hand of political influence. It also
requires an acknowledgment that government serves as a
facilitator for financial interests and is not the principal in
this relationship. If true, and we believe that for the most
part that it is, then the root of the problem lies with the
powerful firms that pushed for those policies and whose
undue influence had a debilitating effect on government,
and the economy, let alone the financial sector.
Defenders of the financial industry wishing to exempt it and
its products, such as subprime mortgages and derivatives,
from blame for the Crash, did not wait for the inevitable
criticisms. They went into action immediately placing the
blame on government. The objective of their pre-emptive
attack was to spare their patrons and fellow believers in free
market fundamentalism from culpability for the Crash and the
ensuing economic disaster. Blame had to be assigned to gov-
ernment, an always easy and popular target. One could almost
guarantee a receptive and approving audience for any criticism
aimed at government. So out went the message; the US
government with its perpetually mistaken social and economic
policies had encouraged people of modest means to become
home owners, via loans from Fannie Mae and Freddie Mac,
and therein lay the cause of the crash.
Unfortunately, as many analysts pointed out, this is a weak
defense, easily refuted.5 It is a rather baseless accusation to
claim that excessive government spending brought about the
financial crisis. The explanation was rejected by Alan
Greenspan and SEC chairman Christopher Cox neither of
whom has been accused of harboring antimarket sentiments
 MYTH 12: THE GOVERNMENT CAUSED THE CRASH OF 2007–08 227

or sympathy for government economic intervention. Joe

Nocera (2011a, 2011b) and Philip Mirowski (2013) trace
the origins of the attempts to muddy the waters with the
above explanation to neoliberal think tanks including Cato,
Hoover and AEI. So here was a reflexive and rather desperate
line of reasoning shifting blame to government and specifi-
cally to the Community Reinvestment Act (CRA) of 1977 as
the cause of the crash. (There is also the small technical point
that Fannie Mae and Freddie Mac actually were not govern-
ment agencies and were turned into or returned to such by
the Bush administration in September 2008.6)
As Paul Krugman (2008) notes, Fannie and Freddie’s role
had shrunk noticeably by the early 2000s because of restric-
tions placed on their lending activities. Perhaps most impor-
tantly, they were not involved in subprime lending – a major
factor in the crash7 – until late in the game (2005) at which
point they were followers rather than leaders.8 Instead, it was
private mortgage companies and other financial firms not
subject to CRA rules that sold large quantities of subprime
mortgages throughout the nation.9 Housing bubbles also
occurred in several other nations at roughly the same time
and those nations do not have CRA rules. Most independent
analysts attribute the housing bubble to the private sector; to
firms offering subprime mortgages loans that later would be
sold to Wall Street and securitized into bonds.10 Others point
to the emergence of the shadow banking system.

3 THE EFFECTS OF FINANCIAL DEREGULATION

Beginning in the 1980s the financial industry began a process
of deregulation. Laissez faire regulators, as discussed in Myths
4 and 5, were increasingly reluctant to enforce the remaining
regulations. Abiding by the wishes of their politically
228 J. SHAANAN

influential charges that often had a say in their appointment,

regulators sent signals that the “speed laws” had been abol-
ished. The sky was the limit now and everyone could look out
for themselves. More generally, and not only in the financial
industry, the profit motive was unleashed to an extent not
seen since the 1920s. The promised result was a booming
economy with widespread affluence. Yet an unrestrained
economy free of responsibility and duty and designed for
short-term profit maximization for a small number of people
turned out to be disastrous for millions of Americans and
paved the way for the Crash.
A significant body of economic literature supported the
position that government intervention in financial markets
was unnecessary. The main argument was (and still is) that
the market would self-adjust and sort out everything far more
efficiently than government ever could. Its theoretical under-
pinning was the Efficient Market Hypothesis.11 The hypoth-
esis also serves to support the belief that capital investment
needs no guidance other than that of the invisible hand of the
market.
Economists and financial academicians advanced question-
able efficiency claims for financial markets while arguing in
favor of deregulation. Yet there is little empirical support for
their position. Praise for financial deregulation ignored the
presence of market failures not the least of which is wide-
spread imperfect information. The counterargument was that
market failures are an exception to an otherwise robust com-
petitive financial sector. The newly introduced innovations,
they argued, would cement Wall Street’s place as the world’s
premier financial capital.
Most damaging though was the profitable link between
economic power and the political sector facilitated through
corporate donations and lobbying. It was this link which set in
 MYTH 12: THE GOVERNMENT CAUSED THE CRASH OF 2007–08 229

motion the events that led to the Crash followed by contro-

versial and costly bailouts to protect the existing financial
order. The financial industry from its own perspective and
by standard financial criteria had been very successful. In fact
it was so successful that it was steadily taking over the econ-
omy.12 It had convinced politicians and the media that strong
financial markets would give the nation all sorts of advantages
over more tightly regulated systems that supposedly shackled
other economies.
Deregulated financial markets led to excessive risk taking,
underestimation of the degree to which different markets
were connected, a misallocation of capital, an encourage-
ment of indebtedness and rising transaction costs.
Deregulation also led to banks abandoning their primary
task of lending to small and medium sized businesses.
Instead they opted to sell bonds based on questionable
mortgages and to lend money to private equity in order
to acquire and resell companies.13 It was after all a more
lucrative business. Their new profitable activities ended up
rebalancing the economy in an unsound way as well as
contributing to the Crash.
Despite the presence of several different regulators with
jurisdiction over the mortgage industry, none could or would
stop abuses in the home loan market. In fact lenders took
advantage of split regulatory jurisdiction. Regulation of the
stock market by the SEC was no better. In 2004 regulations
requiring a certain ratio of brokers’ capital to assets had
been almost eliminated with hardly any ceiling on leverage.
This, of course, came about in response to brokers’ requests.
SEC regulators, like their colleagues at the Fed and
with the support of financial-economic theories, were of the
opinion that markets were perfectly capable of handling risk,14
unfortunately, they were not.
230 J. SHAANAN

The financial sector had incentives to make risky bets figur-

ing that the likely above normal returns more than compen-
sated for the small chance of a catastrophic ending. Even if
their calculations proved wrong, some may have anticipated
that the Fed, and maybe even the Treasury, would bail them
out.15 Bankers’ incentives also added risk to financial markets.
The buying of questionable assets could be quite rewarding.
If the assets gained in value the CEO was generously
rewarded but no penalty was assessed when the assets lost
value. It made sense for the individual CEO to engage in
behavior that was individually rewarding but risky for the
nation as a whole. Deposit insurance may have compounded
matters in that bank executives know that the majority of their
customers are protected from personal loss. Politicians and
regulators showed little inclination to tackle the problem. As
late as 2006, Congress passed the Financial Services
Regulatory Relief Act which further reduced the amount of
reserve capital banks were required to hold.16

4 FINANCIAL INNOVATIONS
For years Wall Street, with the backing of the Fed, heralded its
new innovations as a boon to mankind and to home owner-
ship. Derivatives were complicated financial instruments that
many buyers did not fully understand. Johnson and Kwak
(2010) write that their complexity was presented as innova-
tion. Derivatives, we were told solemnly, would reduce risk
and enhance the safety of the financial system.17 It was an
audacious statement to claim that financial risk was now
diminished, and it was not true. Instead derivatives appeared
mostly to boost Wall Street profits at the expense of lesser
informed investors. There were economists who expressed
strong reservations about the ultimate purpose of these
 MYTH 12: THE GOVERNMENT CAUSED THE CRASH OF 2007–08 231

financial innovations. Some suggested that their objective was

more along the lines of wealth redistribution (upwardly)
rather than wealth creation.18
To add further confusion to an already murky situation
(and of course boost profits), Wall Street was able to con-
vince the rating agencies to give mortgage backed securities
their highest rating despite many being based on subprime
mortgages of doubtful quality. The rating agencies were
Wall Street’s accommodating alternative to government
oversight. The fact that these mortgages came from differ-
ent parts of the country provided illusory protection against
risk, because when the Crash came they all lost value.19
The deregulated financial sector had shown little interest
and adopted few safeguards regarding the quality of the
mortgages they were purchasing. Their concern was to
obtain sufficient quantity to satisfy the demand for mort-
gage backed bonds.20
Other “innovative” products included collateralized debt
obligations21 (CDOs) and credit default swaps22 (CDSs) that
were used to hide loans off the banks’ balance sheet in the
new shadow banking system. In so doing they were conceal-
ing risk and reducing the need for reserves. CDSs in particular
helped fuel the crisis in part because insurance buyers had
little idea whether the seller (the counterparty) could or
could not pay. Therefore, the threat of failure of insurance
company AIG was viewed with great alarm on Wall Street23
(except for those who had bet against AIG). CDOs helped
intensify the housing bubble through more exotic mortgages
designed specifically with the CDO market in mind.24
Synthetic CDOs allowed Wall Street to profit without produ-
cing any actual mortgages while ratcheting up risk even
further.25 In the end Wall Street’s complex, ill understood
and highly risky new innovations increased debt enormously,
232 J. SHAANAN

enlarged the housing bubble and nearly brought down the

global financial system when the bubble burst.26
The complexity and opaqueness of these innovations were
not accidental; in fact, it may have been their primary attrac-
tion to Wall Street.27 A fundamental problem was external-
ities. Each bank gave some thought to the risks they were
incurring with derivatives but had no incentive to think about
the risks imposed on the financial system as a whole, which is
why there is a need for regulation.28 Unfortunately, the banks
were allowed to move in the opposite direction toward
greater risk. Consequently the banking industry returned to
the freewheeling era of the 1920s except this time it was
playing with what Warren Buffet called “financial weapons
of mass destruction”.

5 THE FED
Fed Chairman Greenspan believed in the self-correcting
powers of a market economy. He saw little need for govern-
ment involvement and pushed for repeal of the Glass Steagall
Act.29 Relying on the Efficiency Market Hypothesis he
refused to accept the possibility of an asset bubble or focus
on asset prices and the correlation among different geogra-
phical real estate markets. With a low rate of inflation there
was little hesitancy in pursuing a policy that greatly increased
risk and liquidity.30
There was another aspect of Fed policy under Greenspan
which may have encouraged risk taking and leverage – the
aforementioned Greenspan Put. Financial markets were
keenly aware that in case of danger to the stock market,
Greenspan would not hesitate to lower interest rates. Critics
have questioned the asymmetric nature of such a policy
because vigilance is only applied to falling markets.31 The
 MYTH 12: THE GOVERNMENT CAUSED THE CRASH OF 2007–08 233

Fed chose to ignore international warnings about rising levels

of leverage and risk and Warren Buffet’s concerns about
derivatives. Greenspan fought against Brooksley Born’s
recommendation for regulating derivatives; after all Wall
Street and the forces of self-regulation knew best, at the very
least, more than government.32
Ben Bernanke, Greenspan’s successor at the Fed, also
claimed, until the start of the Lehman Brothers crisis, that
all was well with the mortgage market, the banks and hedge
funds.33 There was no attempt on the part of the Fed to stem
the flow of money into housing. It was skeptical about the
existence of a bubble and if one did exist the Fed preferred to
deal with its aftermath rather than impede what it believed to
be natural market forces (ignoring its own significant involve-
ment through reduced interest rates).34
The Fed was not overly concerned with a subprime mort-
gage crash or the likelihood that it would affect nonmortgage
financial institutions. It clung to this belief several months
after the rating agencies had already started to downgrade
billions of dollars of subprime mortgages.35 The Fed would
only intervene if requested to do so by the firms themselves. It
perceived its responsibility as protecting banks, including
those not really under its jurisdiction but still worthy mem-
bers of the financial community.
A popular criticism is that if only the Fed or Treasury had
prevented the collapse of Lehman Brothers all would have been
well with the world. Unfortunately, the existing problems were
far too serious and it is unlikely that they could have been
resolved by merely protecting Lehman Brothers. Stiglitz
(2010) suggests that the Lehman Brothers’ collapse was not
the cause of the Crash but rather a result. Its collapse may have
helped speed up a process that had already begun. It demon-
strated banks’ lack of knowledge about their own net worth
234 J. SHAANAN

and with it came the alarming realization they also knew very
little about the net worth and solvency of any potential debtor.

6 CONCLUSION
The political influence wielded by powerful financial corpora-
tions in the late twentieth century set in motion the events
that led to the Crash. Their influence led to laws and rules
favorable to the financial sector such as repeal of the Glass
Steagall Act and acceptance of the shadow banking system.
Their influence was even more evident when government and
the Fed engaged in a resolute defense of the status quo during
the Crash. Corporate political donations and lobbying helped
persuade politicians that Wall Street and America’s interests
coincided, especially, deregulated financial markets.
Consequently, politicians would not permit regulation of
financial derivatives.
The Federal Reserve Bank refused to limit high leverage
and to intervene in cases of usurious or deceptive lending. It
did not question mortgage lending practices, the proliferation
of derivatives and the presence of a shadow banking system.
The Fed seemed oblivious to the fact that the objective of the
financial “innovations” was wealth redistribution at the
expense of ill-informed investors, not wealth creation. The
possibility of a housing bubble, a subprime mortgage crash
and the effect on nonmortgage financial institutions appar-
ently was not a concern. One could also question the priority
assigned to the soundness and safety of financial markets
when regulators sent signals that everyone could look out
for themselves. Conventional wisdom was that the market
would sort it out and it would be for the best especially
because government’s role had been minimized. With suffi-
cient influence myths could be promoted as “scientific facts”.
 MYTH 12: THE GOVERNMENT CAUSED THE CRASH OF 2007–08 235

For their part, Fannie and Freddie were not major players in
subprime lending – a major factor in the housing bubble and the
Crash. They were more followers than leaders. Responsibility for
the Crash lay primarily with the powerful firms that pushed for
the above described financial policies that turned out to be very
profitable for a privileged few but disastrous for millions.
Forgotten was that the financial industry is different from any
other industry in terms of the damage that potentially can be
inflicted on the economy. Therefore, regulation is in the national
interest. Deregulated financial markets and tolerance for a sha-
dow banking system led to excessive risks, encouraged indebt-
edness, speculation, the proliferation of derivatives and a
housing bubble. Those financial activities combined with lack
of meaningful oversight and weak enforcement of remaining
regulations most likely led to the Crash.
 Myth 13: The Bailouts’ Purpose Was to Save
the Free Market Economy

1 MYTH
The bailouts were a justifiable response to market failure and
systemic risk. They were obviously successful because the
economy did not collapse. Additionally, the financial sector
remained viable and there was none of that dreaded solution –
government takeover with nationalization1 of private banks.
Most observers would agree that government help was neces-
sary to prevent chaos in financial markets and to save the
economy. Banks had to pay depositors, insurance companies
had to honor their commitments to protect families and
workplaces had to meet payrolls. Less clear was the need to
bail out the auto companies and their unionized workers with
taxpayers’ money.
The government could not allow credit markets to stop
functioning and bring down both the US and possibly the
global economy. Doing so would have been catastrophic for
all economies. The collapse of giant banks would have sent
reverberations throughout the economy. There was a drying

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J. Shaanan, America’s Free Market Myths,
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238 J. SHAANAN

up of liquidity that the government and the Fed had to

address promptly to restore confidence.
What occurred was a system wide failure and there is no
point in blaming any particular institution or person in the
private sector. The most likely culprit, as noted previously,
was government and its housing policies that led to the hous-
ing bubble followed by the Crash. The financial system, not-
withstanding the harsh criticism, was built on solid
foundations and deregulation has been exceptionally good
for the industry and the economy. Existing regulators, includ-
ing the Federal Reserve Bank, have also done a fine job or else
they would not have survived.
Yes, it is true that the bailouts (a misnomer) represented a
departure from conventional market practices and, normally,
are highly undesirable. However, in this case we had to sus-
pend the guiding hand of the market temporarily in order to
save the entire free market from the worse possible fate –
nationalization. Additionally it did not make sense to let
innocent shareholders and bondholders suffer; and one
could hardly blame managers of financial institutions for bad
government policies. On the positive side some of the bailouts
were subcontracted to private parties thereby ensuring that
free market elements played a role in the bailouts. In sum, the
free market economy was rescued, financial markets and their
key players survived and taxpayers did not lose a cent.

2 BACKGROUND TO THE CRASH AND BAILOUTS

The financial industry invested well when it donated money to
politicians. The capture of both parties was a major accom-
plishment. Wall Street also extended its influence to the media
and academia where to this day it is firmly embedded. Its
ideological vision is imparted to millions of students serving
 MYTH 13: THE BAILOUTS’ PURPOSE WAS TO SAVE THE FREE MARKET 239

to justify its activities, profits and bonuses. Its defense of “free

markets” has become mainstream dogma in economics and
finance. There is no need to limit artificially banks’ size and
there is no need to constrain leverage or risk. Regulating
banks’ activities is unnecessary because the market does it
naturally. No amount of deregulation or laissez faire is too
much. No share of GDP is too high for the banking sector just
as no amount of money is too high for political donations.
Acceptance of the above ideology permitted giant financial
institutions to grow and become very large. In fact they grew so
large that sympathetic (or captured) regulators and politicians
designated them as too big to fail.2 Perhaps they were too big to
collapse without harming the economy. However, their political
connections also helped their CEOs be declared as indispensa-
ble, critical to the nation’s well-being and their bonuses
untouchable. Bailing them out with taxpayer money, at out-
rageously advantageous terms, was not considered offensive or
even a major breach of contemporary laissez faire doctrine.
Johnson and Kwak (2010) write that following the 1907
Crash, bankers wanted a bailout option to protect themselves
from turmoil in financial markets but they also wanted mini-
mal government regulation. For the most part the newly
established Federal Reserve Bank satisfied those conditions,
especially the ability to bail out the banks with taxpayer
money. The consequences of this system became apparent in
the Crash of 1929 and the subsequent bailout of New York’s
top financial firms. The system, not surprisingly, led to risky
behavior on the part of bankers and, above all, failed to
protect the financial system as a whole which contributed to
the Great Depression.3
By the 1980s the lessons learned from the Great
Depression, regarding the need to regulate banks more clo-
sely than other sectors of the economy, were forgotten. The
240 J. SHAANAN

deregulation trend did not bypass the financial industry. The

Gramm-Leach-Bliley Act allowed banks to get back into secu-
rities, insurance and newly created derivatives including mort-
gage backed securities. Yet, it was impossible to separate
traditional banking activities from the new riskier activities.4
Goldman Sachs specifically demanded a change in a provi-
sion that essentially barred the Fed from bailing out invest-
ment banks. This was done through the FDIC Improvement
Act of 1991.5 Following the Gramm-Leach-Bliley Act banks
turned to riskier activities with higher leverage reasonably
assured that in the event of a financial crash the Fed had the
authority to protect them. As the risks increased so did the
taxpayers’ potential generosity.
There were additional factors involved in the Crash and the
bailouts. As noted above the market misjudged risk, especially
in purchasing subprime mortgages and in assessing bank
leverage. However, what seemed a reckless risk may have
been a shrewd calculation that government would bail them
out regardless of circumstances which indeed turned out to be
the case. Through their extraordinary political influence they
profited from deregulation and then profited once again from
public bailouts and perhaps also from not being required to
write down their principal.6 One might, debatably, add to the
above list the tame reform7 that leaves the financial system
essentially intact with somewhat less ability to defraud con-
sumers but otherwise still deregulated and with a Fed ever
ready to rush to the rescue.

3 THE BAILOUTS
Prior to the Crash the Fed turned a blind eye to mounting
evidence of massive speculation and predatory financial activ-
ities, presumably to uphold the sanctity of the free market.
 MYTH 13: THE BAILOUTS’ PURPOSE WAS TO SAVE THE FREE MARKET 241

Yet, after the Crash it showed little hesitation in pouring

billions of dollars into large banks’ coffers to save them from
the market’s decree. The 2007–08 bailouts were not the first
bailouts and most likely will not be the last. Starting in the
1970s bailouts of large private companies became acceptable
to those in power notwithstanding claims of allegiance to the
free market philosophy. Among the corporations rescued at
taxpayer risk or expense were Penn Central, Lockheed,
Chrysler, Continental Illinois, savings and loan banks and a
hedge fund – LTCM (where the Fed organized a rescue plan
for LTCM despite a private sector offer to buy the company).
Several large banks who had loaned money to Mexico were
aided by the Fed in the 1980s a pattern repeated during the
Asian financial crisis.
In 2007–08 unprecedented amounts of government
money were given to banks and their creditors including
investment banks, foreign banks and even an insurance com-
pany. According to estimates by the special inspector for
TARP8 the total government guarantees or risk to taxpayers,
i.e., the potential liabilities, may have been approximately 23
trillion dollars although this is difficult to ascertain.9 The
George W. Bush administration proposed granting financial
institutions 700 billion dollars through TARP. Congress, on a
second attempt and after much goading, financial induce-
ments and promises from the administration, passed the bill.
Unfortunately for the nation, Congress not only granted
Treasury the requested money but astonishingly gave it carte
blanche in handling this rescue operations, i.e., in doling out
the money. Plans for regulatory reform, to avoid a repeat of
such a calamity, were placed on the back burner.
In response to a run on the shadow banking system after
the demise of Lehman Brothers, government protection was
extended to large investment banks. Those banks, unlike
242 J. SHAANAN

commercial banks were not required to adhere to regulations

passed to protect the safety and stability of the system. An
investment bank – Bear Stearns – and its creditors and credit
insurers were rescued by the Federal Reserve Bank. The Fed
also loaned $30 billion to JP Morgan (with highly question-
able collateral) to help buy out Bear Stearns. An insurance
company – AIG – was given a total of $170b partly to protect
large financial institutions, including foreign banks, which
were AIG’s counterparties.10 Payments to some counterpar-
ties, on credit default swaps, have been criticized as exces-
sive.11 The special inspector general for TARP questioned the
New York Fed’s refusal to help the government obtain better
terms thereby raising the issue of whether a subsidy to the
banks was involved.12
Fannie Mae and Freddie Mac – the large quasi-government
mortgage companies – were essentially taken over by the
government, their top executives replaced and each company
was granted $100 billion. The government, at the prodding
of Wall Street, did not stop there. Another government
agency – the FDIC– was rushed to rescue large financial
institutions by agreeing to let taxpayers guarantee the debts
of these banks13 even providing GE access to this umbrella. A
new form of insurance had been created. One could apply for
insurance and be granted Fed help after a catastrophic event
had occurred! Taxpayers, unwittingly, were saddled with
huge debt and dubious collateral by government officials.
The largest banks such as Citicorp and Bank of America
were given additional protection on their “toxic assets”14
with the Fed agreeing to undertake most of the risk which
meant ultimately the public.15
Deception and subterfuge was applied in designing
numerous and confusing protection plans from different
agencies to help avoid scrutiny and perhaps
 MYTH 13: THE BAILOUTS’ PURPOSE WAS TO SAVE THE FREE MARKET 243

accountability.16 The one measure that most other democra-

cies would have taken is temporary government ownership or
conservatorship, combined with a change of management
and resale. This option, writes Cassidy (2009), was probably
cheaper than guaranteeing Citicorp’s toxic assets. Johnson
and Kwak write that the government could have chosen the
temporary takeover option or the blank check option. It
opted for the latter. Taxpayers would cover the check while
rescuing the banks’ managers and creditors with subsidies
and setting conditions that would reward shareholders rather
than taxpayers if and when recovery materialized.

4 BAILOUT OBJECTIVES
The bailout of a large corporation usually involves a dilemma
for the administration in charge. They can either bail out the
troubled firm contrary to free market principles and economic
efficiency rules or else allow the market to operate unimpeded
but witness bankruptcy, job losses and possibly harm to local
communities.17 There are no clear guidelines or principles to
establish who deserves such help. The justifications offered
have included claims of a pending global financial collapse in
the LTCM case, national security concerns in the Lockheed
bailout and in the more recent Crash one argument involved
unacceptable job losses at the auto companies requiring
bailout.
Were the bailouts a government response to market failure?
Well, the Crash involved several market failures including
externalities, imperfect information and the conflict between
the profit incentives of banking executives and society’s well-
being.18 However, the bailouts did little to correct them and,
importantly, were never intended to do so. Did the financial
sector need government intervention? Some intervention
244 J. SHAANAN

probably was necessary. Did it have to be in the form of

massive bailouts with little accountability? No, absolutely
not. It was claimed that the huge bailouts undertaken would
solve the financial crisis and its alleged problem – the lack of
credit – and prevent a severe economic downturn. However,
another objective was the rescue of large financial institutions
from failure and providing protection for their top managers
and creditors. The power elite were basically shielding fellow
club members.
During the Crash the Federal Reserve increased liquidity in
the financial system to the point that its balance sheet more
than doubled in a matter of a few months.19 More generally,
America’s government intervened massively. No amount of
money was considered too much and no bailout plan was
regarded too outrageous or too opaque. Every type of help
conceivable was used to save these companies and their man-
agers and overturn the market’s verdict. Dictionaries had to
be modified to account for the new meaning given to words
like “socialize”, “status quo protection” and “reverse Robin
Hood” actions.
Under the guise of the national interest the government
used its financial arsenal to rescue giant financial organiza-
tions. They had got into trouble by throwing caution to the
wind and engaging in large scale speculation. Yet they were
deemed too big and too powerful to be allowed to fail. The
government seemed determined to preserve the status quo.
There was little hesitation in sacrificing economic efficiency,
the usual criterion of economic activity. Free market ideology,
to which several administrations professed loyalty, was dis-
carded, and of course – so was fairness. The bailout benefici-
aries had enough supporters and retainers in the political
sector to weaken and deflect criticism (toward government
or toward uninformed but supposedly avaricious home
 MYTH 13: THE BAILOUTS’ PURPOSE WAS TO SAVE THE FREE MARKET 245

buyers) and ensure that the bailouts proceeded without inter-

ruption.20 The division between the public and private sectors
became unrecognizable.
The bailout design was grossly unfair to taxpayers, to smal-
ler banks, and to main-street in general, and it was also
inefficient. Two different administrations’ primary goal, evi-
dently, was to rescue regardless of cost large financial institu-
tions that had gambled recklessly. Not only was it viewed as
vital to preserve those companies but their management had
to be retained as well. This was contrary to any rescue plan
previously advocated for such a contingency either here or
abroad.
Some bailout programs were especially perplexing. It is well
known that GM and Chrysler received bailout money but less
well known is that BMW, Volkswagen and the major Japanese
auto makers also received US financial help. Banks in Bahrain,
Britain and South Korea, and in several other nations,
received low interest loans from the Fed. Among the many
bailout deals one, relatively small, loan caught attention. Matt
Taibbi (2011) writes about a Fed loan under TALF (Term
Asset-Backed Securities Loan Facility) that was given to the
spouses of executives at a large investment bank. The recipi-
ents had little or no financial background. They were given a
$220 million low interest loan that they used to buy commer-
cial mortgages and student loans and were virtually guaran-
teed risk free income. The loans were structured so that the
recipients would keep 100 percent of any gains while the Fed
and Treasury would be responsible for 90 percent of losses.
The Fed refused to comment on this specific loan. The stated
purpose of the loan was to boost consumer lending.21
A private bank was hired to be in charge of the Bear Stearns
bailout thereby establishing a trend of “market based” finan-
cial bailouts. The bailouts often ended up being highly
246 J. SHAANAN

advantageous to the receiving firms and far less favorable to

taxpayers who shouldered most of the risk. The Fed could
maintain a façade of ideological purity and striving for effi-
ciency by outsourcing much of the emergency lending.
Certain large banks were selected with no bid contracts.22
Ignored was the fact that potentially one of the greatest
redistributions in American history and status quo protection
were being orchestrated.
The idea of government conservatorship followed by a
restructuring was vetoed. No bailed out financial institution
was required to write down23 assets or change its top officers.24
The obvious and sensible solution of financial reorganization
would have saved the financial system without risking trillions
of government dollars and without rewarding management for
failure. However, that particular plan was depicted as radical
nationalization, not the American way, despite the fact that
conservatorship is the conventional approach in such cases. The
banks were described as being not only too big to fail but also
too big to be restructured; never mind the implications of that
statement. Massive bailouts are the extreme option25 yet that
was rarely mentioned. The media mostly went along with the
idea that no other options existed. Stiglitz raises the possibility
that claims about too big to be restructured were a ploy used by
sympathetic bureaucrats to obtain more money for the banks.
Some argue that it was fear of an economic catastrophe, per-
haps even on a global scale, that gave the banks the power to
extract such lopsided terms.
Management and shareholders were singled out for unusual
protection. It certainly was not a market outcome and it was not
even a response to a government commitment as the latter’s
obligation is to depositors. Government and quasi-government
bailout activity during those months unmasked the prevailing
political economic theory that had been carefully hidden. It is a
 MYTH 13: THE BAILOUTS’ PURPOSE WAS TO SAVE THE FREE MARKET 247

philosophy (discussed in Myth 10) that is based on applying

laissez faire principles to most people and firms but providing
unlimited government help to a privileged few. Americans were
required to subsidize the chosen financial institutions, bear the
risks of their speculation, pay their bonuses and more generally
observe the entrenchment of a powerful financial elite.
To justify its actions the Federal Reserve argued that the
financial system was about to fail.26 Some have questioned
this line of reasoning because financial markets at the time did
not show signs of an impending collapse.27 Others have ques-
tioned the legality of the Fed’s actions in rescuing an invest-
ment bank rather than an insurance paying commercial
bank.28 The Fed’s actions appeared to suggest that whatever
policy helped large banks’ (including investment banks’) sur-
vival and profitability, would be implemented. Speculation
gone awry apparently deserved to be rewarded.
Stiglitz argues that, notwithstanding the Fed’s claims of
trying to improve liquidity and boost lending, its policy of
paying the banks interest on Fed held deposits may have been
contrary to that objective. Big banks’ profits, including invest-
ment banks’, were given priority by the Fed. More generally,
the US government was now protecting very large investors
from their own speculative activities including investments in
subprime mortgages and derivatives. The protection repre-
sented a continuing pattern of negating market outcomes for
a powerful few as seen earlier with foreign currency inves-
tors.29 Because of the Fed’s quasi-independence from both
executive and legislative branches it was chosen as the ideal
office to pass on large amounts of money to financial firms
while evading democracy’s monitoring mechanisms.30 The
Fed used its much acclaimed independence to save the
nation’s large failing banks, not the free market or
capitalism.31
248 J. SHAANAN

The New York Fed played a key role in the bailouts.

Yet its intricate relationship with some of the larger banks
under its supervision raises questions about who is regu-
lating whom. Mirowski (2013) notes ironically that the
banks’ saviors and those rescued were at times essentially
the same person, with many Fed directors’ banks receiv-
ing considerable funding. Naturally, this led to skepticism
and complaints about the Fed’s ultimate objective.
Policymaker’s free market zealotry became muted when
large banks got into trouble. The Federal Reserve dis-
carded free market principles when it decided to undo
the market’s verdict. The American public discovered that
there was a class of businesses entitled to protection from
the market’s outcome. Political influence and connections
rather than economic efficiency considerations or compas-
sion appeared to be the determining factors32 with the oft
repeated excuse that it was done to save the free market.
And what about the return to the public for the enormous
risk they were taking? The taxpayer once again was cheated
with the exceptionally generous terms granted to the banks.33
The terms of one plan, PPIP, was that the government put up
92 percent of the money to buy toxic assets but would be
entitled to only half the profits. No market participant would
have been willing to accept such a deal. A Congressional
commission reviewed TARP and found that the Treasury
paid considerably more for the securities than they were
worth.34 Whatever the Treasury and the Fed’s objective was,
looking after the interest of taxpayers did not seem to be a
high priority.
In fact as the bailouts increased and the pretense of fair
value became less necessary, taxpayer returns declined.35
Sadly, the public interest had few defenders while the financial
industry’s top echelon was treated as a national treasure to be
 MYTH 13: THE BAILOUTS’ PURPOSE WAS TO SAVE THE FREE MARKET 249

preserved at all cost. Managers who would have bankrupted

their companies but for their sympathizers’ ability to grant
them immunity from the market’s discipline continued to
receive large bonuses. Such caring attitude was not bestowed
on the millions of people who would lose their jobs and
homes mostly through no fault of their own.
Was Wall Street grateful? Did they express their gratitude to
government and the public? Not at all! The money granted
(including the “trash for cash” exchanges) was their birth-
right. Not only did they believe that they were entitled to the
money but also that they should have received help with less
bad publicity and without the awful sounding term “bailout”.
They were serving the nation productively and nobly and as
such deserved to be rescued.

5 CONCLUSION
It may have been necessary for the government to rescue the
financial system. Perhaps fear of a deep economic downturn
justified intervention. Yet when examining the various options
for increasing liquidity – the avowed purpose of the bailouts – it
is hard to believe that this could not have been accomplished
without funneling vast amounts of money into the coffers of
failed banks in direct proportion to their failure. Assuming that
the liquidity argument was genuine; was success contingent on
retaining upper management of failed banks and by so doing
rewarding spectacular mismanagement? Alternative plans could
have included auctions for government funds and perhaps even
allowing entrepreneurs to create new banks. The point is that
to improve credit availability various options existed that did
not reward failed speculation and excessive risk taking.36
One argument for financial deregulation was that Wall
Street knows a lot more about the intricacies of high finance
250 J. SHAANAN

than government bureaucrats. Yet after the Crash large

amounts of taxpayer money was needed to save the existing
order presumed to be so knowledgeable. Prominent defen-
ders of the free market faith helped marshal substantial
resources to defy the market and save large financial institu-
tions. The profits made in the good years would be theirs but
the losses made in the terrible years of 2007–08 would belong
to the public. Surely that is a fair solution.
Direct political access helped by past and perhaps future
campaign contributions; key administrators with links to the
financial industry; and a commonly shared view on the merits
of financial capitalism, all tilted the argument in favor of
rescuing giant firms and their CEOs. There was to be no
undignified restructuring for the crown jewels of the
American economy. The companies and their executives
were deemed officially as irreplaceable and their proprietary
trading and speculation the essence of American entrepre-
neurship and the free market. To justify this reverse Robin
Hood redistribution the scribes and pundits were put to work
to come up with plausible excuses. The most widely used term
created was “systemic failure”. Of course that covered every-
thing and therefore nothing. It was argued that it was a
temporary and unavoidable market failure; it could not be
helped; politicians had to ensure that people’s bank deposits
would still be there in the morning. Alternative and more
realistic causes such as the abysmal failure of deregulation, a
weakening or lack of enforcements of remaining regulations,
the shadow banking system, unchecked and reckless specula-
tion were all shunted aside.
Which company got to be bailed out and which did not was
decided by those in charge, not by any laws or rules. Such a
practice is strongly at odds with the American predilection for
“the rule of law rather than the rule of men”. The bailouts
 MYTH 13: THE BAILOUTS’ PURPOSE WAS TO SAVE THE FREE MARKET 251

were not only economically inefficient but, by preserving

firms that the market had deemed redundant, represented a
departure from a market oriented economy. There was a
misallocation of resources, capital market inefficiency because
nonmarket factors affected risk and determined capital avail-
ability (those banks may be mismanaged but their bonds are
safe because we know government will bail them out), and
moral hazard (there are small or no penalties for losing huge
speculative bets but large rewards if you win). There was a
violation of standards of fairness, and a strong blow to poli-
tical accountability and the pretence of democracy.37
The nation’s leaders from both political parties did not
hesitate to bail out the banking industry. Concerns about
violating free market rules or giving an unfair advantage to
giant financial firms were quickly dismissed if even discussed.
There was little consideration, let alone mention, of the very
different treatment of bankrupt families under the 2005 bank-
ruptcy law. One group (its membership in some years in
excess of 1 million people) has to declare bankruptcy usually
because of illness or loss of employment. The other group,
deemed deserving of a bailout, was about to fail because of
excessive speculation and high leverage. Yet, in 2005, it had
been argued that households needed a lesson in fiscal
responsibility.
As the months and years went by after the Crash, free
market fundamentalism, stressing the need to let markets
rather than government dictate economic outcomes, resur-
faced. Homilies were offered to other nations about the need
to avoid crony capitalism and adhere to free market practices.
Both major parties refused to confront the underlying issues
that brought on the Crash and will most likely cause a recur-
rence. Politicians did not want to endanger campaign contri-
butions from wealthy benefactors by proposing meaningful
252 J. SHAANAN

structural reform. In fact a few years after the Crash, Congress

already was fighting to repeal the little reform that had been
enacted.38
Following the Crash, government arranged the merger of
giant firms with failing firms thereby creating even bigger firms.
Notwithstanding the provisions of Dodd-Frank there is little
reason to assume that the newly created “too big to fail” behe-
moths will receive less protection from government in the future.
In 2014 President Obama spoke out against inequality. Yet in
2009 when there was an opportunity to make structural changes
that would have reduced inequality for many years to come he
opted instead, like his predecessor, to protect and entrench, a
system resembling financial feudalism; a system that would pre-
clude any meaningful improvement in income and wealth dis-
tribution. We learned that income and wealth redistribution are
far more acceptable when they increase the shares of those at the
top of the pyramid rather than the reverse. No better evidence
exists to support this statement than the 2007–08 bailouts.
 NOTES

INTRODUCTION
1. Laissez faire refers to a school of thought that favors minimal
government intervention in the economy.
2. Schotter (1985).
3. Frank (1999).
4. Free market fundamentalism – unsubstantiated beliefs asso-
ciated 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. The myths discussed throughout
the book are examples of these beliefs.
5. Mirowski (2013).

MYTH 1: AMERICA HAS FREE MARKETS

1. Oligopoly is an industry or market where a few firms possess
large market shares.
2. See also Stiglitz (2001); Chang (2011); and Y. Smith (2010).
3. Stiglitz (2001).
4. Adams and Brock (1986).
5. Shaanan (2010).
6. See Mueller (1986).

© The Author(s) 2017 253

J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4
254 NOTES

7. Shaanan (2010).
8. Pryor (2001).
9. Hiltzik (2016).
10. Shaanan (2010).
11. Bork (1966, 1978); Shores (2001); Carlton (2007); Shaanan
(2010); and Crouch (2011).
12. Crouch (2011).
13. Elhauge (2007); Brock (2008).
14. Shaanan (2010).
15. Shaanan (2010).
16. Crouch (2011).
17. Greenwood and Stiglitz (1986); Stiglitz (2010).
18. Blumberg (1989).
19. See Colvin (2001); and Loomis (2001).
20. Vertical integration consists of one company producing at two
different stages of production (e.g., steel and autos).
21. Knowledge@Wharton (2012). See also Worthen et al. (2009).
22. Transaction costs are those costs incurred in economic
exchange.
23. Shaanan (2010).
24. Shaanan (2010).
25. Golden parachutes refer to company executives being granted
generous compensation packages if forced to leave the com-
pany in the event of a takeover.
26. Krugman (2002b)
27. Mirowski (2013).
28. Moss (2013).

MYTH 2: A GREAT WALL SEPARATES POLITICS

AND THE ECONOMY

1. Friedman (1962).
2. Friedman (1962).
3. Stiglitz (2012).
4. Lindblom (1977).
5. Morganthau (1960).
 NOTES 255

6. Shaanan (2010).
7. Also noted by Kuttner (2007).
8. See Marris and Mueller (1980).
9. Shaanan (2010).
10. Galbraith (1985)
11. Shaanan (2010).
12. Polyani (2001).
13. The issue is discussed in Myth 13 in more detail.
14. Madrick (2011).
15. See Y. Smith (2010).
16. Lynch and Bjerga (2013).
17. “Too big to fail” refers to very large banks and corporations
that have been deemed so crucial to the economy that govern-
ment cannot allow them to fail.
18. Quigley (2014).
19. Powell (2015) and Weissmann (2015).
20. Cited also in Buchheit (2013).
21. The study uses a cost of $25 per ton for carbon dioxide’s
global warming damage. The authors show that this estimate
is on the low end of the scale and such estimates range from
$12 to $85. See also Roberts (2013).
22. Stiglitz (2012).
23. Cline (1986).
24. Scherer (1996).
25. Stiglitz (2012).
26. This section draws on Buchheit (2013) and Quigley (2014).
27. Kay (2009).

MYTH 3: THE LESS GOVERNMENT, THE BETTER

1. Madrick (2009).
2. Cassidy (2009).
3. M. Friedman and R. Friedman (1980).
4. Backhouse and Medema (2009).
5. M. Friedman (1962).
6. D. Friedman (2008).
256 NOTES

7. Backhouse and Medema (2009).

8. Brennan and Buchanan (1980); D. Mueller (2003).
9. This literature is criticized for conflicting theories and weak
empirical support. See for example Green and Shapiro
(1994).
10. Backhouse and Medema (2009).
11. Mercantilism – a policy devoted to wealth accumulation
through positive trade balances.
12. Crouch (2011).
13. Madrick (2009).
14. Kay (2009).
15. Johnson and Kwak (2010).
16. Chang (2011).
17. Shaanan (2010).
18. Kuttner (2007); and Stiglitz (2012).
19. Madrick (2009).
20. Mueller (2003).
21. Chang (2011); and Stiglitz (2012).
22. Chang (2011); and Stiglitz (2012).
23. Galbraith (1985).
24. Madrick (2009).
25. Chang (2011).
26. Pearlstein (2014).
27. Crouch (2011).
28. Stiglitz (2012).
29. See Cassidy (2009); Shaanan (2010); and Stiglitz (2012).
30. Adverse selection – undesirable outcomes resulting from
imperfect information.
31. Krugman and Wells (2012).
32. Krugman and Wells (2012).
33. Elgin and Langreth (2016).
34. Roy (1997); and Perrow (2002).
35. Heilbronner (1968).
36. Milton Friedman defends laissez faire and seeks to place the
blame for the Great Depression on inaction by the Federal
Reserve Bank.
 NOTES 257

37. Stiglitz (2012).

38. Madrick (2009).
39. Kuttner (2007).
40. Shaanan (2010).
41. Nelson and Wright (1992).
42. Thurow (1999).
43. Cassidy (2009).

MYTH 4: DEREGULATION ALWAYS IMPROVES

THE ECONOMY

1. Thomas Friedman (2000).

2. Orbach (2012).
3. Orbach (2012).
4. Colin Camerer et al. (2003).
5. Polyani (2001).
6. Stiglitz (2001).
7. Backhouse and Medema (2009).
8. Shepherd (1991).
9. Perelman (2007).
10. See also Madrick (2009).
11. Kuttner (2007).
12. Madrick (2009).
13. Carlton and Perloff (2000).
14. Winston (1993).
15. Perelman (2007).
16. Johnson and Kwak (2010).
17. Greer (1993).
18. Greer (1993).
19. Kahn (1971).
20. Stiglitz (2010).
21. Johnston (2006).
22. Johnston (2006).
23. Kuttner (2007).
24. Johnson and Kwak (2010).
25. Leverage – using debt to buy assets.
258 NOTES

26. Stiglitz (2010) and Krugman (2012a).

27. Johnson and Kwak (2010).
28. Derivatives – securities or contracts that derive their value
from an underlying asset.
29. The shadow banking system – nonregulated financial inter-
mediaries involved in credit creation worldwide.
30. Johnson and Kwak (2010).
31. Cassidy (2009).
32. Madrick (2009).
33. Johnson and Kwak (2010).
34. Kuttner (2007).
35. Kuttner (2007).
36. Mortgage backed securities – bonds backed by mortgage loans.
37. Subprime mortgage – mortgage loans offered to people with
low credit rating.
38. Cassidy (2009).
39. Stiglitz (2010).
40. Mirowski (2013) offers an explanation based on the symbiotic
nature of the relationship between the Fed and economists.
41. Johnson and Kwak (2010).
42. Johnson and Kwak (2010).
43. Madrick (2009).
44. Madrick (2009).
45. Kuttner (2007.
46. Johnson and Kwak (2010).
47. Pereleman (2007).
48. Madrick (2009).
49. Akerlof and Romer (1993).
50. Dayen (2016).
51. Cohan (2013).
52. Perelman (2007).
53. Crouch (2011).
54. Crouch (2011).
55. Kuttner (2007) and Cassidy (2009).
56. Madrick (2009).
57. Kuttner (2007).
 NOTES 259

58. Madrick (2009).

59. Stiglitz (2012).
60. Kuttner (2007).

MYTH 5: THE ECONOMY HAS SUPERIOR EFFICIENCY

1. Fiscal policy is the use of government spending and taxation
to help the economy.
2. Monetary policy is conducted by the central bank (Federal
Reserve Bank) and involves changing the money supply to
influence the economy.
3. Scherer (1980).
4. Waldman and Jensen (1998).
5. Reynolds (2007) and Shane (2008).
6. Shane (2008).
7. See Nelson and Wright (1992).
8. Broadway and O’Mahony (2007) based on data from Angus
Maddison.
9. Total factor productivity – the part of total output growth not
attributable to capital and labor growth.
10. Nelson and Wright (1992).
11. Thurow (1999).
12. Chang (2011).
13. Acs and Gerlowski (1996), Kuttner (2007), and Perelman
(2007).
14. Piore and Sabel (1984).
15. Piore and Sabel (1984).
16. Thurow (1999).
17. Marris and Mueller (1980).
18. Taylorist Management – scientific management focused on
improving efficiency.
19. See Acs and Gerlowski (1996).
20. Putterman, Roemer and Silvestre (1998).
21. Leveraged buyout – buying a company with borrowed money.
22. Kuttner (2007).
23. Shaanan (2010).
260 NOTES

24. Shaanan (2010).

25. Acs and Gerlowski (1996).
26. Madrick (2011); see also Krugman (2012b).
27. Perelman (2007).
28. Madrick (2009).
29. Kuttner (2007).
30. Johnson & Kwak (2010).
31. Austerity – usually involves cuts in government spending
during an economic crisis.
32. Stiglitz (2012).
33. Phillips (2002).
34. See Brown (2005).
35. Krugman (2003).
36. Madrick (2009).
37. Trickle-down economics – the idea that tax cuts for the rich
and the resulting increases in income and wealth would even-
tually flow down the food chain.
38. Frank (1999) and Quiggin (2012).
39. Stiglitz (2012).
40. Madrick (2009).
41. Stiglitz (2012).
42. The above is based on Quiggin (2012).
43. Stiglitz (2010).
44. Externality – Side effects from an economic activity affecting
people not involved in that particular activity that markets do
not account for.
45. Stiglitz (2010).
46. Stiglitz (2010).
47. Madrick (2009).
48. Reinsdorf (2007).
49. Shaanan (2010).
50. See Brinkbaumer et al. (2010).
51. Kuttner (2007) and Stiglitz (2010).
52. Karger (2005).
53. Securitized – the practice of pooling financial assets and turn-
ing them into securities.
 NOTES 261

54. Madrick (2009).

55. Kuttner (2007).
56. Kuttner (2007).
57. Y. Smith (2010).
58. Stiglitz (2012).
59. Johnson and Kwak (2010).
60. Y. Smith (2010).
61. Stiglitz (2010).
62. Moral Hazard – people may take greater risks when they do
not suffer the consequences of their actions.

MYTH 6: EXCEPTIONAL LIVING STANDARDS

1. Some of these arguments are discussed in Cox and Alm
(1999).
2. Phillips (2002).
3. Krugman (2005).
4. Luttwak (1999).
5. The number was adjusted for purchasing power parity.
6. Chang (2011).
7. Madrick (2011).
8. Kuttner (2007) and Chang (2011).
9. Krugman (2002b).
10. Chang (2011).
11. Luttwak (1999).
12. Kuttner (2007).
13. Krugman (2002b).
14. Gottschalk and Smeeding (1997).
15. Kuttner (2007).
16. US Census Bureau (2014).
17. Madrick (2011).
18. Madrick (2011).
19. Kuttner (2007).
20. Defined benefits – a predetermined amount paid to a retired
employee (e.g., a pension) by an employer.
21. Crouch (2011).
262 NOTES

22. Madrick (2011).

23. Mirowski (2013).
24. Rhine et al. (2006).
25. Duhigg (2007).
26. Fernandez (2007) and Farmer et al. (2008).
27. See Karger (2005) and Rhine et al. (2006).
28. Shaanan (2010).
29. Mirowski (2013).
30. For example Brooks and Simons (2007).
31. Shaanan (2010).
32. Cohen (2008).
33. Cohen (2008).
34. Karger (2005).
35. Stiglitz (2012).
36. Sanger-Katz (2016).
37. Sanger-Katz (2016).
38. Perelman (2007).
39. Phillips (2002).
40. Chang (2011).
41. Smeeding (2006).
42. Madrick (2011).
43. Phillips (2002).
44. Kuttner (2007).
45. Ray et al. (2013).
46. Madrick (2011).
47. Kochan (2007).
48. Kochan (2007).
49. Acs and Gerlowski (1996).
50. Shaanan (2010).
51. Krugman (2012b).
52. Kochan (2007).
53. Hartmann (2002).
54. Although other nations are following the US practice.
55. Uchitelle (2006).
56. Acs and Gerlowski (1996).
57. Mandle (1996).
 NOTES 263

58. Boisjoly et al. (1998).

59. Thurow (1999).
60. Farber (2005).
61. Collingwood (2003).
62. Sennett (2006).
63. Stiglitz (2012).
64. Brown (2005) and Uchitelle (2006).
65. Brown (2005).
66. Whyte (2002).
67. Sennett (2006).
68. Shaanan (2010).
69. Madrick (2011).
70. Stiglitz (2012).
71. Madrick (2011).
72. Luhby (2013).
73. Mandle (1996).
74. Shaanan (2010) and Chang (2011).
75. For more details see Luttwak (1999).

MYTH 7: AN EGALITARIAN NATION

1. Friedman and Friedman (1980).
2. For a discussion see Schotter (1985).
3. Mirowski (2013).
4. See Atkinson (1995), Gottschalk (1997), and Solon (2002).
5. See Alesina and Angelotos (2002).
6. Beddoes (2012).
7. Economist (2004).
8. Madrick (2009).
9. Krugman (2002b).
10. Phillips (2002).
11. For example Perelman (2007).
12. See for example Cox and Alm (1999).
13. Stiglitz (2012) and Piketty (2014).
14. Kuttner (2007).
15. Norton and Ariely (2011).
264 NOTES

16. Shaanan (2010).

17. Madrick (2011).
18. Stiglitz (2012).
19. Scott (2005).
20. Economist (2004).
21. Mackey et al. (2015) and Noble et al. (2015).
22. Economist (2004).
23. Kuttner (2007).
24. Intergenerational mobility – social mobility between
generations.
25. Shaanan (2010).
26. Krugman (2002b).
27. Krugman (2002b).
28. Shaanan (2010).
29. Shaanan (2010).
30. Shaanan (2010).
31. Marginal product – the extra output obtained from an addi-
tional unit of an input.
32. Piketty (2014).
33. Kuttner (2007).
34. Kuttner (2007) and Stiglitz (2012).
35. Robert Lande (1982).
36. Kovacic and Shapiro (2000).
37. Scherer (2008).
38. Kovacic and Shapiro (2000) and Baker (2003).
39. Efficiency hypothesis – in concentrated industries the largest
firms attain high profits because of their superior efficiency
(and not market power).
40. Stiglitz (2012).
41. Stiglitz (2012).
42. Madrick (2011).
43. Perelman (2007).
44. New York Times Editorial Board (2013).
45. Wolff (2011).
46. Stiglitz (2012).
47. Scheiber and Cohen (2015).
 NOTES 265

48. Scheiber and Cohen (2015).

49. Shaanan (2010).
50. Krugman (2011a) and Kuttner (2011).
51. Stiglitz (2012).
52. Norton and Ariely (2011).
53. Piketty (2014) and Krugman (2015a).
54. Kuttner (2007), Perelman (2007), Krugman (2014b), and
Dabla-Norris et al. (2015).
55. Stiglitz (2012).
56. Turrow (1997) and Phillips (2002).

MYTH 8: FREE MARKETS PROTECT DEMOCRACY

1. M. Friedman (1962).
2. M. Friedman (1962).
3. Hayek (1994) shares a similar concern.
4. Shaanan (2010).
5. Shaanan (2010).
6. Beard (1986), Mcguire and Obstfeld (1984, 1989), and
Mcguire (1988).
7. Phillips (2002).
8. Shaanan (2010).
9. Lipset (2000).
10. The Democratic presidential primary of 2016, for the first
time in several decades, saw the introduction of economic
populist themes.
11. Kuttner (2007).
12. Kuttner (2007).
13. Johnson and Kwak (2010).
14. Perelman (2007).
15. Kuttner (2007).
16. Shaanan (2010).
17. Crouch (2011).
18. Crouch (2011).
19. Madrick (2011).
20. Perelman(2007).
266 NOTES

21. Schmidt (2005).

22. Perelman (2007).
23. Mirowski (2013).
24. Hundley (2011).
25. Not all would agree that there is a conflict here.
26. Perelman (2007).
27. Center for Responsive Politics (2009).
28. Mueller (2003).
29. Johnson and Kwak (2010).
30. Shaanan (2010).
31. Confessore et al. (2015).
32. See Johnson and Kwak (2010).
33. Johnson and Kwak (2010).
34. Johnson and Kwak (2010).
35. Cohen (2008) and Spitzer (2008).
36. Single payer health care system – a system where government
provides and pays for health insurance.
37. Crouch (2011).
38. Phillips (2002).
39. Perrow (2002).
40. Perrow (2002).
41. Kuttner (2007).
42. The issue is discussed in more detail in Myth 9.
43. Silver-Greenberg and Corkery (2015).
44. Perelman (2007).
45. Luttwak (1999).
46. Y. Smith (2010).
47. Y. Smith (2010).
48. Madrick (2011).
49. Y. Smith (2010) and Madrick (2011).
50. Simpson (2007).
51. Spitzer (2008).
52. See also Acohido and Swartz (2007) on how the Federal Trade
Commission (FTC) allowed credit bureaus to keep selling list-
ings with personal and financial data of prospective borrowers to
lenders who then tried to sell them subprime mortgages.
 NOTES 267

53. Stiglitz (2010).

54. Kovacic and Shapiro (2000) and Baker (2003).
55. Curran (2001).
56. Johnson and Kwak (2010).
57. Stiglitz (2010).
58. Stiglitz (2001).

MYTH 9: CORPORATIONS REPRESENT

ECONOMIC FREEDOM
1. Schwarz (2005).
2. Boldeman (2007).
3. Polyani (2001) also questions the meaning of freedom in a
society that equates economics with contractual relationships,
and contractual relationships with freedom. In such a system
nobody is accountable for the diminished freedoms of those
hurt by unemployment and poverty.
4. Boldeman (2007).
5. Friedman and Friedman (1980).
6. Hayek is referring to the UK and Europe.
7. Backhouse and Medema (2009).
8. McNally (1990).
9. Adams and Brock (1986).
10. Shaanan (2010).
11. Crouch (2011).
12. Galbraith (1985).
13. Whyte (2002).
14. Cassidy (2009).
15. Silver-Greenberg (2013).
16. Krugman (2014a, 2014b and 2015a) sees some hope for
improvement in the consumer protection provisions of
Dodd Frank.
17. Mueller (2003).
18. Shaanan (2010).
19. Silver-Greenberg and Gebeloff (2015).
20. Groves (1997).
268 NOTES

21. Rhine et al. (2006).

22. Shaanan (2010).
23. Crouch (2011).

MYTH 10: FREE MARKET AND LAISSEZ

FAIRE ARE THE SAME
1. Friedman(1962).
2. De Long (1990).
3. Hayek (1994).
4. In parallel fashion laissez faire writers see a nation of farmers
who could easily return to their land when losing a manufac-
turing, or more recently, a service job.
5. Crouch (2011).
6. Other argument against government attempts to enhance
competition include Joseph Schumpeter’s well-known thesis
on creative destruction and the primacy of innovation and
economic growth over concerns about allocation efficiency
and competition and Lipsey and Lancaster’s (1956) theory
of the Second Best.
7. De Long (1990).
8. Hayek (1994).
9. However he would also like to stave off what he sees as
eventual state monopolies taking over from syndicalist or
corporate organized monopolies.
10. The discussion is based on De Long (1990).
11. De Long (1990).
12. Polyani (2001).
13. Through the actions of either corporations or unions writes
Polyani (2001).
14. Polyani (2001).
15. Block (2001).
16. Polyani (2001) and Chang (2011).
17. Mirowski (2013).
18. Madrick (2009).
19. Perelman (2007).
 NOTES 269

20. Polyani (2001), Madrick (2009), and Crouch (2011).

21. Polyani (2001) criticizes laissez faire attempts made during
industrialization to turn labor into a commodity no different
than any other commodity and justify it by the principle of
freedom of contract.
22. Prindle (2006).
23. Shaanan (2010).
24. Kuttner (2007).
25. See Perelman (2007) on the fate of economists who did not
believe in Friedman’s ideology.
26. Madrick (2009).
27. Mirowski (2013).

MYTH 11: A FREE MARKET NATION

DOES NOT NEED A SOCIETY
1. See Madrick (2011).
2. See Schotter (1985).
3. Friedman and Friedman (1980).
4. Schotter (1985).
5. Schotter (1985).
6. Crouch (2011).
7. Hayek (1994) claims that the philosophy of individualism,
and allowing individuals to pursue their own values rather
than society’s is based on the information argument rather
than on selfishness.
8. Mirowski (2013).
9. Perelman (2007).
10. See Madrick (2009).
11. Madrick (2009).
12. Kuttner (2007).
13. Sennett (2006).
14. Perelman (2007).
15. Thomas Frank (2000).
16. Thomas Frank (2000).
17. Kuttner (2007).
270 NOTES

18. Kuttner (2007).

19. Kuttner (2007).
20. Stiglitz (2012).
21. Madrick (2009).
22. Kuttner (2007).
23. Madrick (2009).
24. Stiglitz (2001).
25. See Block (2001).
26. Block (2001).
27. Polyani (2001).
28. Polyani (2001).
29. Stiglitz (2001).
30. Perelman (2007).
31. See Mirowski (2013).
32. Hayek (1994) had been concerned about such developments
adulterating science including the influence of private
interests.
33. Kay (2007).
34. Kay (2007).
35. Ivory et al. (2016).
36. Kay (2007).
37. Kay (2007).

MYTH 12: THE GOVERNMENT CAUSED

THE CRASH OF 2007–08

1. See Mirowski (2013).

2. For a criticism of this argument see Mirowski (2013).
3. See Quiggin (2012).
4. See Norris (2011).
5. Stiglitz (2012) and Mirowski (2013).
6. Mirowski (2013).
7. Mirowski (2013). See also Johnson and Kwak (2010).
8. Madrick and Partnoy (2011) and Nocera (2011a, 2011b).
9. Nocera (2011a, 2011b).
10. Mirowski (2013).
 NOTES 271

11. Efficient Market Hypothesis – financial markets set asset prices

correctly reflecting all available information.
12. Stiglitz (2010).
13. Stiglitz (2010).
14. Madrick (2011).
15. Stiglitz (2010).
16. Cassidy (2009).
17. Cassidy (2009).
18. Cassidy (2009), Y. Smith (2010), and Chang (2011).
19. Madrick (2011).
20. Stiglitz (2010).
21. Collaterized debt obligations – a structured asset backed
security consisting of different types of loans.
22. Credit default swaps – a form of insurance against bond
default.
23. Stiglitz (2010).
24. Johnson and Kwak (2010).
25. Madrick (2011).
26. Cassidy (2009).
27. Y. Smith (2010).
28. Stiglitz (2010).
29. Cassidy (2009).
30. Stiglitz (2010).
31. Y. Smith (2010).
32. Cassidy (2009).
33. Mirowski (2013).
34. Johnson and Kwak (2010) and Stiglitz (2010).
35. Madrick (2011).

MYTH 13: THE BAILOUTS’ PURPOSE WAS TO SAVE THE FREE

MARKET ECONOMY
1. Nationalization – government takeover of a private business.
2. Brewer and Jagtiani (2013) suggest that banks may have spent
about $15 billion in added premiums in eight mergers to attain
the threshold level for the designation of “too big to fail”.
272 NOTES

3. Johnson and Kwak (2010).

4. Johnson and Kwak (2010).
5. Johnson and Kwak (2010).
6. Stiglitz (2010).
7. Krugman (2014a) writes that the Dodd-Frank reform bill,
which gives the Treasury Department resolution authority,
will permit government to place too big to fail banks in
receivership without bailing out the bankers in future crises.
8. Troubled Asset Relief Program (TARP) – a government pro-
gram to purchase “troubled assets” and equity from financial
institutions during the Crash. Congress authorized the use of
up to $700 billion.
9. Johnson and Kwak (2010).
10. Cassidy (2009).
11. Madrick (2011).
12. Johnson and Kwak (2010).
13. Cassidy (2009).
14. Johnson and Kwak (2010).
15. Cassidy (2009).
16. Y. Smith (2010).
17. Adams and Brock (1986).
18. Stiglitz (2010).
19. Stiglitz (2010).
20. Shaanan (2010).
21. Taibbi (2011).
22. Mirowski (2013).
23. Write down-reducing the book value of an asset because of a
market change.
24. Mirowski (2013).
25. Stiglitz (2010).
26. Shaanan (2010).
27. Sloan (2008).
28. Macey (2008).
29. Shaanan (2010).
30. Stiglitz (2010).
31. Mirowski (2013) makes a similar point.
 NOTES 273

32. Blau et al. (2013) find that firms that had lobbied or had other
types of political connections were more likely to receive
TARP money and earlier than politically unconnected firms
that did not engage in lobbying.
33. Stiglitz (2010).
34. Madrick (2011).
35. Stiglitz (2010).
36. Shaanan (2010).
37. Shaanan (2010).
38. Krugman (2015a).
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 INDEX
A C
Acs, Zoltan, 259, 260, 262
Adams, Walter, 39, 253, 267,
272
Alm, Richard, 261, 263
American dream, 102, 120,
121, 187, 207
Antitrust, 25, 26, 41, 47,
56, 61, 66, 73, 84, 140,
159, 166, 167, 178,
193, 206
Arbitration, 32, 165, 185
B 261–263, 268, 271
Banks, see Financial
Barriers to entry, see Market
failure, imperfect
competition
Block, Fred, 268, 270
Brock, James, 39, 253, 254,
267, 272
Brown, Richard, 260, 263
© The Author(s) 2017
J. Shaanan, America’s Free Market Myths,
DOI 10.1007/978-3-319-50636-4
Capitalism, 2, 3, 19, 30,
36, 38, 65, 90–92, 120,
150, 159, 160, 171, 172,
175, 178, 180, 207, 247,
250, 251
corporate capitalism, 90–92,
120, 159, 160,
175, 178
Cassidy, John, 243, 255–258,
267, 271, 272
Chandler, Alfred, 28, 93
Chang, Ha-Joon, 36, 37, 67,
144, 253, 256, 259,
Choice, 2, 5, 17, 30–32,
36, 53, 55, 63, 86, 102,
112, 117, 127, 149,
156, 172, 173, 180,
184, 195, 198, 200,
216, 218
Collusion, see Market failure,
imperfect competition
295
296 INDEX
Competition, 2, 13, 17, 19–26,
38, 39, 41, 42, 54, 56,
61, 69, 71, 73, 76–78,
83, 84, 86, 95, 96, 101,
104, 121, 135, 139,
140, 161, 167, 172,
176, 181, 190,
192–198, 209, 268
perfect competition, 23, 24
price competition, 12, 19, 21,
22, 24, 26, 61, 73, 121
protection of
competition, 25, 194
Concentration, 24, 55,
104, 141
Conservatorship, 243, 246
Consumers, 2, 7, 18, 19, 22,
27, 30–32, 46, 54, 56, 58,
63, 66, 71, 78, 81, 83, 86,
101, 102, 112, 116–118,
140, 149, 156, 165, 172,
178, 181, 183–186, 189,
193, 195, 240
consumer information, 132,
183
consumer sovereignty, 30, 32
Consumption, 7, 27, 31, 41,
45, 102, 111, 112, 116,
128, 131, 176, 181, 182
Corporations
economic freedom, 176, 180,
182–187
economic power, 2, 4,
38–40, 55, 139, 152,
174, 175, 178, 179,
194, 228
giant (large) corporations, 1,
2, 5, 6, 8, 9, 13, 14, 19,
21, 22, 28, 30, 32,
36–41, 43, 50, 55–57,
59, 66, 74, 86, 91–94,
96, 106, 124, 135, 137,
139, 151, 153–158, 160,
161, 164, 165, 171, 172,
174, 175, 177–180, 181,
184, 186, 191–193, 197,
198, 200, 206–209, 211,
215, 218, 219, 243
governance, 18, 94, 107, 127
managers (executives), 13,
14, 27, 29, 30, 33, 39,
45, 82, 85, 94, 95, 105,
107, 120, 123, 137, 138,
157, 163, 168, 177, 179,
180, 218, 230, 242, 243,
245, 247, 250
planning, 28, 29
political influence
(and government
help), 3, 5, 14, 37, 39,
40–43, 64, 74, 139, 152,
154, 161, 169, 176, 219
Cox, Michael W., 261, 263
Crash, 12, 14, 20, 66, 67,
79–81, 97, 101–103, 106,
136, 140, 161, 162, 167,
200, 209, 223–235,
238–241, 243, 244, 272
Crouch, Colin, 47, 60, 85,
103, 167, 179, 211,
213–215, 254, 256, 258,
261, 265–269

D Environment, 25, 36, 38, 54,
Deficits, 97–99, 205, 209,
210, 219
Democracy, see Politics
Deregulation, 12–14, 40, 51,
56, 57, 67, 71–88, 96, 100,
101, 104, 106, 140, 155,
159, 178, 206, 208,
227–230, 238–240
Derivatives, see Financial
E Executives, see Corporations,
Economic efficiency, 11, 22,
25, 30, 51, 55, 104, 125,
128, 140, 149, 159, 166,
172, 176, 192, 213, 243,
244, 248
Economic power,
see Corporations
Economic system, 1–4, 6,
8–10, 12, 18–21, 23,
29, 30, 38, 39, 105,
131, 135, 144, 145,
157, 158, 175, 180,
191, 196, 200
Economy, US, 2, 6, 13, 17,
21, 27, 90–92, 163
private sector, 11, 12, 20,
36, 37, 58, 59, 72,
89, 238
productivity, 13, 59, 68, 72,
89, 99, 107, 115
public sector, 89
Elections, see Politics
Employees, see Labor
INDEX 297
72, 75, 95, 112, 116, 124,
142, 161, 190, 192, 194,
206, 212, 215
Equality (and inequality), 6, 8,
10, 12, 13, 21, 26, 58,
60, 69, 87, 111, 113,
114, 127–146, 156,
165, 169, 178, 196,
205, 211, 217
see also Income inequality
under income
managers
F
Fairness, 5, 6, 22, 30, 38, 54,
63, 73, 128, 135, 143,
144, 145, 154, 156, 164,
166, 182, 186, 208, 216,
244, 251
Federal Reserve Bank, 12, 42,
81, 97, 100, 143, 200, 225,
238, 239, 242, 256, 259
Financial
banks, 42, 44, 66, 77–84,
101, 102, 104, 106, 139,
141, 166, 180, 225, 229,
230, 232, 233, 237,
239–242, 245–247
derivatives, 77, 80, 103, 225,
226, 230, 232
innovations, 80, 82, 101,
228, 230–232
liquidity, 244, 247
298 INDEX
Financial (cont.)
shadow banking system, 77,
80, 227, 241, 250, 258
speculation, 77, 79, 80, 82,
96, 101, 104, 139, 140,
162, 180, 240, 244, 247
subprime mortgage, 80, 104,
117, 166, 208, 224, 226,
227, 231, 233, 240, 266
system, 58, 66, 68, 79, 163,
225, 230, 232, 238, 239,
240, 244, 246, 247, 249
Frank, Robert, 31, 182,
253, 260
Frank, Thomas, 154, 208, 269
Freedom to profit,
see Economic freedom
under corporations
Free market
competitive free markets, 20,
22, 23, 28, 29, 168, 192,
194, 195, 198, 200
free market economy, 3, 10,
14, 23, 25, 35, 46, 51,
91, 167, 238
free market ideal, 2, 11, 13,
22, 26, 50, 90
free market myths, (see Myths)
free market principles, 1, 3, 8,
13, 14, 43, 71, 102, 154,
161, 162, 169, 179, 187,
198, 243, 248
free market rules, 6, 18,
106, 251
Friedman, Milton, 52, 54–56,
96, 129, 150, 151, 159,
180, 191, 196, 201,
254–256, 263, 265,
267–269
Friedman, Rose D., 129, 263,
267, 269
G
Galbraith, John Kenneth, 28,
30, 38, 179, 181,
255, 256
Gerlowski, Daniel A., 259,
260, 262
Glass-Steagall Act, 76, 104,
162, 226, 232
Gottschalk, Peter, 261, 263
Government
bailouts, 12, 14, 58, 79, 80,
102, 140, 143, 161, 163,
179, 229, 237–252
help to corporations,
(see political influence
under corporations)
policies, 43, 47, 52, 53, 56,
59, 60, 63, 84, 96, 98,
100, 102, 117, 124, 131,
136, 139, 142–144, 152,
158, 159, 167, 174, 176,
181, 184, 189, 194, 199,
201–203, 205, 219,
224–226, 235, 238
programs, 6, 35, 50, 51, 55,
56, 59, 71, 111, 119,
128, 131–134, 155,
170, 197, 203–207,
209, 210, 245
 INDEX 299

spending, 12, 31, 40, 41, ACA, 32, 57, 62, 97, 119,
56, 57, 59, 66, 69, 89, 133, 163
94, 97, 98, 115, 116,
119, 120, 143–145, 150,
I
154, 164, 168, 205,
Income, 6–8, 10, 13, 21, 26,
208–210, 226
37, 43–46, 55, 57, 59, 60,
TARP, 241, 242, 248, 272
69, 80, 87, 98, 99, 103,
taxes, 6, 40, 51, 54, 57, 59,
111–115, 118–121, 124,
80, 99, 115, 128, 130,
125, 127–145, 168, 178,
132, 139, 141, 142, 144,
186, 189, 196, 198, 199,
152, 158, 161, 162, 178,
205, 206, 209, 212, 213,
203, 205, 206, 208, 209,
225, 245, 252
219
distribution, 53, 114, 139,
Gramm-Leach-Bliley, 78, 240
196, 212
Great Depression, 50, 65, 66,
inequality, 8, 10, 21, 60, 69,
98, 102, 139, 199, 210,
111, 129–132, 136, 138,
239, 256
139, 143, 205
Greenspan, Alan, 42, 78, 82,
redistribution, 6, 8, 43, 45,
83, 100–102, 156, 224,
47, 48, 49, 54, 58, 128,
226, 232, 233
129, 131, 132, 136,
Greenspan put, 42, 102, 232
140–144, 203, 231,
234, 246, 250, 252
Individualism, 5, 11, 99,
H
204, 269
Hayek, Friedrich, 74, 94,
Information, see Consumers,
204, 205, 216, 265,
consumer information;
267–270
Market failure, imperfect
Health care, 7, 26, 54, 55,
information
58, 59, 61–63, 85, 97,
Invisible hand, see Free market
112, 114–118, 133,
134, 144, 163, 164, 172,
186, 190, 197, 198, 200, J
217, 266 Johnson, Simon, 83, 230,
Health insurance, 7, 21, 24, 26, 239, 243, 250, 256, 257,
32, 57, 60–62, 97, 118, 260, 261, 265–267, 270,
119, 122, 133, 163, 190 271, 272
300 INDEX
K 120, 121, 124, 125, 130,
Karger, Howard, 260, 262
Kay, John, 58, 63, 216–218,
255, 256, 270
Krugman, Paul, 113, 137,
138, 227, 254, 256,
258, 260–265, 267,
272, 273
Kuttner, Robert, 60, 65,
105, 115, 134, 155, 162,
208, 209, 214, 255–266,
269, 270
Kwak, James, 83, 230, 239,
243, 256–258, 260, 261,
265–267, 270–272
L 80, 81, 86, 175, 178, 192,
Labor, 33, 36, 57, 60, 84,
93, 112, 114, 120–122,
137, 142, 161, 171, 174,
195, 206, 211, 214, 224,
259, 269
employee benefits, 53, 56,
69, 95, 105, 116, 121,
122, 124, 137, 186, 207
employees, 120–122, 137
unemployment, 59, 65,
90, 92, 100, 111, 120,
122, 185, 189, 199,
204, 206, 210, 213,
267; unemployment
compensation, 65,
111, 204
wages, 6, 21, 37, 53, 57, 58,
65, 67, 93, 96, 107, 111,
136, 139, 201, 212
workplace, 107, 121–123,
125, 143, 186, 188, 237
Laissez–faire, 3, 7, 9, 11, 12,
14, 19, 22, 24, 25, 30,
38, 39, 50–53, 56, 58, 59,
64–66, 69, 72, 73, 75, 77,
80–83, 86, 96, 101, 102,
105, 118, 124, 131, 151,
155, 156, 158–160, 165,
167, 169, 174, 175, 178,
180–182, 189–202, 206,
209–211, 225, 227, 239,
247, 253, 256
contemporary (modern)
laissez faire, 11, 53, 73,
194, 197, 198, 202, 239
Layoffs, see Labor,
unemployment
Legal system (framework), 8,
37, 38, 47, 51, 68, 77, 164,
165, 169, 184, 185, 205
Lehman Brothers, 167, 233,
241
Lindblom, Charles, 157, 254
lobbying, see Politics
M
Madrick, Jeff, 94, 104, 144,
255, 257–273
Market
circumvention
(suppression), 29, 38

market-free, 8, 28
rules, 2, 18, 106, 108,
127, 212, 213,
215, 251
system, 5, 6, 17, 22, 33,
37, 43
verdict (outcome, decree), 3,
69, 73, 84, 167, 168,
244, 248
see also Free market
Market failure
externalities, 45, 101,
232, 243
imperfect competition;
barriers to entry, 18, 19,
21, 26; cartels (and
collusion), 24, 76, 193,
195; market power, 5, 17,
18, 21, 26, 29, 33, 61, 72,
74, 92, 107, 140, 171,
178, 186, 190, 191, 193,
264; monopoly, 1, 17, 40,
60, 76, 93, 150, 193;
oligopoly, 24, 76, 253
imperfect information, 26,
228, 243, 256
principal-agent problems, 27,
104, 138
public goods, 27, 56, 67,
211, 212
Marris, Robin, 255, 259
Media, 4, 10, 22, 24, 27,
31, 50, 67, 83, 102, 146,
152, 156–158, 162, 163,
165, 169, 178, 184, 229,
238, 246
INDEX 301
Mergers, (takeovers), 24, 25,
29, 30, 94, 101, 105, 107,
178, 271
Minimum wages, see Labor,
wages
Mirowski, Phillip, 86, 227,
248, 253, 254, 258, 262,
263, 266, 268–272
Mobility
economic mobility, 115, 131
intergenerational
mobility, 134, 264
social mobility, 112, 113, 264
Monopoly, see Market failure,
imperfect competition
Mueller, Dennis, 256, 259,
266, 267
Myths, 1, 4, 5, 6, 8, 9–14, 22,
26, 33, 64, 73, 81, 88, 180,
181, 200, 253
N
National Debt, see Deficits
Neo-liberalism, see
Contemporary laissez faire
New Deal, 66, 120, 155, 158,
206, 207
Nocera, Joe, 227, 270
O
Oligopoly, see Market failure,
imperfect competition
Opportunity, 5, 13, 20, 83, 84,
90, 125, 127, 129,
133–136, 144, 164, 172,
176, 252
302 INDEX

P Property rights, 67, 123, 139,

Perelman, Michael, 88, 165, 190, 217, 218
210, 211, 215, 216,
257–260, 262–270
Q
Perrow, Charles, 256, 266
Quality of life, 7, 112, 121, 125,
Phillips, Kevin, 260–262,
146, 205, 214, 215, 218
265, 266
Quiggin, John, 260, 270
Piketty, Thomas, 135, 138,
145, 263–265
Planning, see Corporations R
Politics Regulation, 8, 14, 35, 36,
democracy, 9, 12, 14, 55, 37, 43, 47, 49, 51–53,
69, 81, 91, 150–162, 57, 61, 64, 66, 67, 71–88,
168, 169, 178, 188, 96, 101, 104, 117, 139,
197, 251 140, 144, 152, 158, 161,
Democratic Party, 154, 163, 166, 172, 190, 191,
155, 207 194, 195, 198, 199, 205,
donations, 77, 84, 140, 146, 206, 212, 215, 219, 223,
158, 160, 162, 178, 187, 225, 232, 235, 242
208, 234, 239 Rent, seeking, 3, 37, 43, 47,
lobbying, 40, 77, 158, 48, 60, 74, 86, 92, 95, 99,
160–162, 166, 208, 217, 107, 108, 140, 141, 145
228, 234, 272 Representative government,
Republican Party, 45, 98, see Democracy
136, 140, 155, 156, 161
system, 6, 145, 146, 151,
187 S
voters, 135, 152, 155, 156, Saving, 3, 41, 65, 78, 85,
205, 208 86, 93, 102, 106, 116,
Powell, Lewis, 158–160, 255 176, 241
Privatization, 12, 13, 22, 51, Scherer, F.M., 255, 259, 264
56, 71, 75, 85, 86, 165, Schotter, Andrew, 253,
211, 214 263, 269
Profit motive, 8, 22, 60, 70, Schumpeter, Joseph, 30, 93,
125, 153, 207, 209, 211, 195, 268
214, 228 Sennett, Richard, 263, 269

Shaanan, Joseph, 253, 254,
256, 257, 259, 260,
262–269, 272, 273
Shadow banking system,
see Financial
Shane, Scott, 91, 259
Silver-Greenberg, Jessica, 183,
185, 266, 267
Simons, Henry, 194, 262
Smeeding, Timothy, 261, 262
Smith, Adam, 20, 29, 31, 33,
38, 53, 54, 72, 80,
174–176, 253, 271
Smith, Yves, 83, 255, 261,
266, 271, 272
Social
protection, 14, 55, 56,
59, 205, 218
responsibility, 18, 204
safety net, 4, 13, 51, 52,
98, 99, 113, 144, 178,
207, 208
Standard of living, 7, 92,
113, 114, 125, 137,
204, 205, 209
Stiglitz, Joseph, 8, 37, 56,
60, 66, 80, 81, 105, 130,
168, 195, 213, 214, 233,
246–248, 253
T Workers, see Labor, employees
Takeovers, see Mergers
TARP, see Financial, bailouts
INDEX 303
Thurow, Lester, 257, 259, 263
Too big to fail, 5, 44, 78, 152,
239, 242
Trickle-down, 99, 260
U
Uncertainty, 116, 122, 134,
199, 206
Unemployment, see under
Labor
V
Voters, see Politics
W
Wages, see Labor
Wealth, 3, 8, 25, 26, 37,
48, 55, 66, 69, 99, 106,
113, 128, 129, 132,
133, 135–137, 139–140,
145, 153, 157, 175, 196,
201, 231
Welfare
consumer, 7, 25,
31, 86
nation’s (public), 13, 50, 74,
83, 128, 160, 204
producer, 25
Wright, Gavin, 93,
257, 259