A Theoretically Incoherent Critique of the Free Market

As a libertarian masochist who keeps up with the regular by-the-numbers attacks on libertarianism at Alternet and Salon, I almost dared to hope for something at least marginally better from Robert Kuttner at The American Prospect (“The Libertarian Delusion,” Winter 2015). I was disappointed.

“The stubborn appeal of the libertarian idea persists,” Kuttner writes, “despite mountains of evidence that the free market is neither efficient, nor fair, nor free from periodic catastrophe.”

But before you can evaluate what the “free market” can or cannot do, or how well it performs, you have to have a coherent idea of what the free market is. Kuttner never attempts an explicit definition; he just implicitly judges the free market by the performance of the capitalist system we actually live under. That’s an understandable approach, given that apologists for corporate capitalism universally couch their defense of the present system of power as a defense of “our free market system.”

The problem is that free market thought is potentially a radical critique of the foundations of corporate capitalist power. By way of analogy, one of the most powerful weapons against the bureaucratic oligarchies that ruled the so-called “communist bloc” in the Soviet Union and Eastern Europe was genuine socialist thought. Rather than taking at face value the self-proclaimed status of the USSR and its allies as “socialist” or workers’ states, popular revolts like those in East Germany in 1953, Hungary in 1956 and Czechoslovakia in 1968 framed their movements as workers’ uprisings. They quoted Marx against the Party oligarchies, which were about as far as one could get from the nineteenth century socialist vision of direct exercise of political and economic power by the working class; they put factories under worker self-management, and created local organs of direct democracy much like the sovyets of the Russian revolution.

Capitalism is equally vulnerable to a radical critique in terms of its own official (and fake) “free market” ideology. So by taking the equation of the existing corporate economy to “the free market” at face value, the system’s critics play directly into the hands of its defenders.

On top of that, the failure to make it clear what he’s criticizing — what we’ve got now? the free market? what? — robs Kuttner’s critique of theoretical coherence. Either what we have now is a free market, or it is not — a question he studiously avoids addressing. If it is not a genuine free market, then the evils of the existing system do not constitute evidence against the free market.

Kuttner’s approach is what Auburn University professor Roderick Long calls “left-conflationism.” Right-conflationism — the standard approach we see from establishment libertarians of the Right — is defined by Long as “the error of treating the virtues of a freed market as though they constituted a justification of the evils of existing corporatist capitalism.” We hear this constantly from corporate propagandists who trumpet “the American system of free enterprise” or “our free market system.” Left-conflationism, conversely, is “treating the evils of existing corporatist capitalism as though they constituted an objection to a freed market.”

Capitalist apologists at the corporate-funded right-wing think tanks and periodicals constantly respond to attacks on the very real evils of corporate capitalism (for example the concentration of wealth, growing inequality, pollution, the exploitation of labor) by saying “But that can’t happen, because in a free market yada yada yada…” On the other hand, we see constant puff pieces in venues like Salon, Alternet — and The American Prospect — referring to (ahem) “mountains of evidence that free markets blah blah woof woof…”

The irony is that there’s so much agreement between the corporate apologist libertarian Right and what passes for the “Left” (actually center-left managerialists) in the United States. On the other hand there’s a great deal of overlap in the analysis of more radical critics, whether they be Marxists or free market anti-capitalists of the Left. Both Marxists and left-wing market anarchists are smart enough to know — unlike right-libertarians and “Progressives” — that corporate capitalism and the “free market” are not the same thing. And we’re both smart enough to know that increased government intervention does not make the system less capitalist — far from it.

Friedrich Engels saw the nationalization of industry that was just beginning in the European states of his day, not as equivalent to socialism, but rather as the final and most extreme stage of capitalism. Some aspects of capitalism had become so complex, he argued in Anti-Duhring, that the joint-stock corporation was inadequate for administering them. Rather,

the official representative of capitalist society — the state — will ultimately have to undertake the direction of production. This necessity for conversion into state property is felt first in the great institutions for intercourse and communication — the post office, the telegraphs, the railways.

As a state socialist Engels saw such nationalization as a potential step towards socialism — but only in the event the working class seized power and replaced the capitalists as the parties in control of the state. So long as the overall society remained capitalist, any increase in the power of the capitalists’ state would serve capitalist interests.

The International Socialist Review warned workers similarly, in 1912, not to be fooled into equating social insurance or the nationalization of industry with “socialism.” Social insurance (first instituted on a large scale in Europe by Bismarck, remember) was a measure to strengthen and stabilize capitalism. And nationalization simply reflected the capitalist’s realization

that he can carry on certain portions of the production process more efficiently through his government than through private corporations…. Some muddleheads find that will be Socialism, but the capitalist knows better.

Paul Baran and Paul Sweezy, in Monopoly Capitalism, explained that the state, as collective representative of the entire capitalist ruling class, sometimes acted in ways detrimental to the immediate interests of some capitalists. It intervened in cases where the gouging of monopoly profits by some centrally important infrastructure like railroads or the telegraph, or raw materials like fossil fuels, might hamper the development of the overall system.

It’s interesting in this regard that the most important anti-trust actions in American history — Standard Oil, AT&T, and perhaps the recent FCC ruling on net neutrality — are exactly the same types of cases in which European “social democracies” have resorted to nationalization.

It’s equally interesting that liberal “muddleheads” like the goo-goos at Alternet and Salon regularly enumerate these same cases as examples of the “progressive” state acting in the “public interest.” As vehemently as people like Kuttner denounce right-wing libertarian, they and their target essentially span the portion of the political spectrum from M to N.

Climate Change

Kuttner cites climate change as the most significant example of ways in which “markets do not produce the ‘right’ price,” and which therefore “should have discredited the libertarian premise by now.”

The price of carbon-based energy is “correct” — it reflects what consumers will pay and what producers can supply — if you leave out the fact that carbon is destroying a livable planet.

Actually, it’s only “correct” if you leave out a lot of other things, too:  namely a lot of government interventions in the economy — none of them legitimate by libertarian standards — to promote consumption of artificially cheap energy. Capitalism as a historic system (and the large-scale capitalist enterprises that have dominated the economy since the late 19th century) developed from the beginning on stolen land, with preferential access to natural resources, and with artificially cheap, subsidized resource inputs. The capitalist economy has therefore followed a growth model based on extensive additions of artificially cheap inputs rather than the more efficient use of existing inputs.

How does government intervene, in particular, to make energy and transportation artificially cheap? In countries of the Global South like the Persian Gulf, Indonesia and Nigeria, colonial regimes engrossed and enclosed fossil fuel resources on behalf of Western extractive industries. Western corporations have retained control of those resources in the postwar neo-colonial system, and a major part of Western countries’ foreign policy has been to intervene when that corporate control was threatened: for example the overthrow of Mossadegh in Iran and Sukarno in Indonesia. The largest component of US “defense” spending, the Navy, has as its main function keeping the sea lanes open for oil tankers at taxpayer expense.

In settler regimes like the United States, the state engrossed vacant land (sometimes after rendering it “vacant” by evicting First Nations or the earliest white settlers) and then gave oil and coal companies preferential access to it (the same general process applies to offshore oil reserves).

In addition the US government keeps fossil fuels artificially cheap by using eminent domain to seize land for pipelines and capping liability for oil spills — not to mention the way state courts had already rewritten the common law of torts in the 19th century to exempt a great deal of destructive activity on the grounds that it was “standard business practice.” The EPA permit process, by preempting civil tort law, also serves as a regulatory safe harbor against liability for things like the normal toxic emissions from fracking and mountaintop removal, or earthquakes from land subsidence.

Government — starting with the railroad land grants, continuing with the creation of civil aviation infrastructure entirely at taxpayer expense, and finishing with the Interstate Highway System — has systematically subsidized long-distance shipping, and thereby rendered both average firm size and average market area artificially large.

Government-subsidized freeways have been an integral part of the “automobile-highway complex.” Local government has promoted sprawl and car-centered development through zoning laws that criminalize mixed commercial-residential development, minimum building lot sizes, minimum parking requirements, and subsidies to utility hookups for new outlying developments. Building codes written by the construction industry criminalize new, energy-efficient building techniques and the use of locally abundant vernacular materials.

Absent all this government intervention, energy would be more expensive, long-distance transportation networks would be lower in capacity and more expensive to use, manufacturing would be mostly small-scale for local markets, and communities would be built around travel by foot, bicycle and streetcar.

In short, the current global climate change crisis is entirely a creation of the capitalist state in collusion with corporate interests — not the free market.

Despite all the above, Kuttner manages to come up with this howler: “Markets are not competent to price this problem. Only governments can do that.” Ladies and gentlemen, governments have been doing that for the past five hundred years. They’ve been handing resources to privileged capitalist interests for free, and setting prices to protect those capitalist interests from the market.

Financial Collapse and Income Distribution

Kuttner’s second and third examples of “free market” failures are the financial collapse and income inequality.

Supposedly self-regulating markets could not discern that the securities created by financial engineers were toxic. Markets were not competent to adjust prices accordingly.

And the drastic rise in income inequality in recent decades, since the collapse of the New Deal consensus, is likewise an indictment of the market.

Kuttner’s account of the financial collapse should induce utter hilarity in anyone familiar with the history of the state’s role in the development of finance capitalism. He starts with a state of affairs brought about by active involvement of the state at every step of the way for the past 150 years and more, and then takes the state’s failure to stabilize the resulting system adequately as an indictment of free markets. At the same time, the state’s historic role in enforcing economic privilege was a fundamental factor in the evolution of finance capitalism.

From the very beginning of capitalism, the state’s main role has been to enforce the artificial property rights, monopolies and entry barriers from which privileged landlords and capitalists extract artificial scarcity rents. The effect, as J.A. Hobson described it in Imperialism, has been the upward transfer of wealth from producing classes with a high propensity to consume, to propertied classes with a high propensity to save and invest.

Because of that government-enabled upward shift of income, capitalism has been increasingly prone to chronic crises of surplus investment capital, surplus production capacity, and surplus output for which there is no market. These crisis tendencies very nearly destroyed corporate capitalism in the Great Depression. WWII saved the system and postponed the crises of over-accumulation and over-production for a generation, by blowing up most of the world’s plant and equipment outside the United States and creating a permanent war economy — the Military-Industrial Complex — to soak up surplus capital and employ idle production capacity.

The crisis resumed around 1970, after the industrial capacity of Europe and the Pacific Rim had been fully rebuilt. Since then, capital has resorted to one bubble economy after another to soak up surplus capital for which there is no productive outlet. The FIRE — Finance, Insurance, and Real Estate — Economy mushroomed in the ’80s and ’90s as a share of total wealth.

So the failure of the “free market” in 2008 was in fact the failure of the state to adequately stabilize a system it had itself created — and a system that had come into being, in large part, because of the economic inequalities created by the state.


Kuttner takes these three cases together as proof that libertarianism doesn’t describe the way the “real world works” because it fails to account for externalities and inequalities of power.

But we have already seen that there are, to borrow a phrase, “great mountains of evidence” that government’s main function is to create externalities and inequalities of power — on behalf of business interests and the rich.

Kuttner views regulatory capture — the control of  government by big business and the plutocracy — as an anomaly rather than a reflection on the true nature of government. He laments that, given the corruption of government policy under corporate influence in recent decades, it’s a lot harder to convince young people today that government can intervene to restrain big business and benefit ordinary people than it was in their grandparents’ day back in — say — 1965. Nevertheless, he says, it’s necessary to restore both the public faith in democratic government and the actual role of the democratic state in the economy.

It’s interesting that Kuttner chose the year 1965, because that’s roughly the time-frame that New Left historian Gabriel Kolko wrote The Triumph of Conservatism. In that book, he argued that the main purpose of all the regulatory legislation passed in the Progressive Era, enshrined in liberal memory as examples of the righteous democratic state restraining corporate power, was actually to serve the interests of the regulated industries themselves. Attempts to establish business cartels by purely private means, Kolko argued, had failed; immediately upon being formed, the great Trusts began losing market share to smaller, more efficient and less leveraged competitors. And without any outside enforcement mechanism to prevent “prisoner’s dilemma” problems, private cartels were vulnerable to defections and occasional price wars.

The main effect of legislation like the Meat Inspection Act — which was actually agitated for by the big meatpackers — was to create a government-enforced cartel in regard to quality and safety standards. All meatpackers engaged in the export trade — which included all the big players — had already been under a federal inspection regime since the 1890s. The Meat Inspection Act was passed to bring the small packers under the same regime, and thereby remove the competitive disadvantage from the large firms.

The Federal Trade Commission Act’s “unfair competition” provisions made stable oligopoly markets possible for the first time by making price wars, predatory pricing and dumping illegal; among other things, as implemented in FTC regulations it prohibited selling goods for less than production cost.

The regulatory state, Kolko argued, existed to create the conditions of long-term stability and predictability big business needed to maximize sustainable profits in the long run.

Not long after Kolko’s book, G. William Domhoff (in The Power Elite and the State) made a series of similar policy analyses of the New Deal legislative agenda. The main business support for the New Deal, and particularly its labor agenda, came from large, capital-intensive, export-oriented industry. Because such industry had long planning horizons (also described by Galbraith in The New Industrial State) it required long-term predictability without disruptions like strikes. At the same time, because labor was a comparatively small part of the total cost package of such capital-intensive industry, management was willing to offer things like higher wages, benefits, seniority and a grievance process in return for industrial peace. The labor model created under the Wagner Act prohibited the most effective labor direct action tactics and enlisted union leadership in enforcing contracts against wildcat strikes by their own rank-and-file — basically the same thing done by Gerard Swope’s company union under the American Plan at General Electric.

It was that same New Deal business coalition, by the way, that was behind the global corporate economic order — centered on the Bretton Woods agencies, and enforced by the US armed forces and CIA — engineered by the US after WWII.

Even when the state intervenes to mitigate negative side-effects of capitalism or make it more bearable for the working class, as in the New Deal, it is still functioning (in Marx’s words) as “executive committee of the ruling class.” Marx described the Ten Hour Act passed in Great Britain as the big employers, acting in common through their state, to limit the exploitation of the working class to sustainable levels and guarantee the minimum conditions needed for the long-term reproduction of labor-power. By acting through the state, they avoided the destabilizing threat of defection by rogue employers out to maximize short-term profit at the cost of the system’s long-term sustainability.

The amount of money spent even on the most “progressive” welfare state amounts to the downward redistribution of only a small fraction of the money previously distributed upwards to the plutocracy in the form of state-enforced rents. The state’s primary function is to enforce those rents on artificial scarcity and artificial property rights, which comprise the great majority of the plutocracy’s income, and to protect big business from competition. The state then takes a small fraction of those rents and give them back to the most destitute segment of the population, in order 1) to prevent outright starvation and homelessness from reaching politically destabilizing levels and 2) partially remedy the deficit in purchasing power that leads to business crises.

So all the examples of “freedom” against employers that Kuttner lists (in contrast to the “negative liberty” touted by advocates of the free market), like Social Security, subsidized college tuition, and the like, are actually just partial compensations for our much larger loss of freedom to our employers that the state brought about in the first place. They amount to the capitalists acting through their state to clean up their own mess.

In American politics the Democratic and Republican parties, liberals and conservatives, do not represent a Party of the People and a Party of Big Business. Rather they represent two rival factions of big business. Liberal Democrats and the corporate coalition they represent are like a wise farmer who thinks it will be more profitable in the long run to work his draft animals in moderation and give them adequate food and rest. The Republican coalition, in contrast, is like a farmer who thinks he’ll come out ahead by working the animals to death and then replacing them. But in both cases the farmer’s role, and our role, are basically the same.

Ultimately liberals and corporate-funded “libertarians” of the right have a common interest in maintaining the myth that the present system of corporate and plutocratic power is the natural outgrowth of a free market, and that only government intervention can prevent it. For the right, that myth justifies the present power of big business as the legitimate outgrowth of superior performance in the “free market.” For liberals, it reinforces the need to grant power to a regulatory state staffed by upper-middle class professionals like themselves as the only solution to out-of-control corporate power.

Arthur Schlesinger, Jr., in The Age of Jackson, claimed that American liberalism was “the movement on the part of the other sections of society to restrain the power of the business community.” But it has far more often been the case that idealistic liberals have traditionally been the unwitting vehicle by which big business sells its legislative agenda to the public (as was the case with the role of Upton Sinclair in promoting the Meat Inspection Act). As Roy Childs put it, liberal intellectuals have been the running dogs of big business.

The conflict between capital and the state is illusory. They’re basically on the same side. Since the first states arose, government has been the instrument by which one ruling class or another extracts rent from the laboring classes of society.

The power of the rich cannot be destroyed by strengthening their most important weapon.

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