The Myth of the Free Market: You Can’t Have a Middle Class Without a Democracy

A government of, by, and for the people

Published on Friday, March 12, 2004 by CommonDreams.org
Democracy--Not The Free Market--Will Save America's Middle Class
by Thom Hartmann

Here are a couple of headlines for those who haven't had the time to study both economics and history:

1. There is no such thing as a free market.

2. The middle class is the creation of government intervention in the marketplace and won't exist without it (as millions of Americans and Europeans are discovering).

The conservative belief in free markets is a bit like the Catholic Church's insistence that the Earth was at the center of the Solar System in the Twelfth Century. It's widely believed by those in power; those who challenge it are branded heretics and ridiculed; and it is wrong.

In actual fact, there is no such thing as a free market. Markets are the creation of government.

Governments provide a stable currency to make markets possible. They provide a legal infrastructure and court systems to enforce the contracts that make markets possible. They provide educated workforces through public education, and those workers show up at their places of business after traveling on public roads, rails, or airways provided by government. Businesses that use the free market are protected by police and fire departments provided by government, and send their communications--from phone to fax to internet--over lines that follow public rights-of-way maintained and protected by government.

And, most important, the rules of the game of business are defined by government. Any sports fan can tell you that football, baseball, or hockey without rules and referees would be a mess. Similarly, business without rules won't work.

This explains why conservative economics wiped out the middle class during the period from 1880 to 1932, and why, when Reagan again began applying conservative economics, the middle class again began to vanish in America in the 1980s--a process that has dramatically picked up steam under George W. Bush.

The conservative mantra is let the market decide. But there is no market independent of government; what they're really saying is, Stop corporations from defending workers and building a middle class, and let the corporations decide how much to pay for labor and how to trade. This is, at best, destructive to national and international economies, and, at worst, destructive to democracy itself.

Markets are a creation of government, just as corporations exist only by authorization of government. Governments set the rules of the market. And, since our government is of, by, and for We The People, those rules have historically been set to first maximize the public good resulting from people doing business.

If you want to play the game of business, we've said in the US since 1784 (when Tench Coxe got the first tariffs passed to protect domestic industries) then you have to play in a way that both makes you money and serves the public interest.

This requires us to puncture the second balloon of popular belief. The middle class is not the natural result of freeing business to do whatever it wants, of free and open markets, or of free trade. The middle class is not a normal result of free markets. Those policies will produce a small but powerful wealthy class, a small middle mercantilist class, and a huge and terrified worker class which have traditionally been called serfs.

The middle class is a new invention of liberal democracies, the direct result of governments defining the rules of the game of business. It is, quite simply, an artifact of government regulation of markets and tax laws.

When government sets the rules of the game of business in such a way that working people must receive a living wage, labor has the power to organize into unions just as capital can organize into corporations, and domestic industries are protected from overseas competition, a middle class will emerge. When government gives up these functions, the middle class vanishes and we return to the Dickens-era normal form of totally free market conservative economics where the rich get richer while the working poor are kept in a constant state of fear and anxiety so the cost of their labor will always be cheap.

When conservatives rail in the media of the dangers of returning to Smoot-Hawley, which created the Great Depression, all they do is reveal their ignorance of economics and history. The Smoot-Hawley tariff legislation, which increased taxes on some imported goods by a third to two-thirds to protect American industries, was signed into law on June 17, 1930, well into the Great Depression. In the following two years, international trade dropped from 6 percent of GNP to roughly 2 percent of GNP (between 1930 and 1932), but most of that was the result of the depression going worldwide, not Smoot-Hawley. The main result of Smoot-Hawley was that American businesses now had strong financial incentives to do business with other American companies, rather than bring in products made with cheaper foreign labor: Americans started trading with other Americans.

Smoot-Hawley protectionist legislation did not cause the Great Depression, and while it may have had a slight short-term negative effect on the economy (1.4 percent at most according to many historians), its long-term effect was to bring American jobs back to America.

The fact that the marketplace was an artifact of government activity was well known to our Founders. As Thomas Jefferson said in an 1803 letter to David Williams, "The greatest evils of populous society have ever appeared to me to spring from the vicious distribution of its members among the occupations... But when, by a blind concourse, particular occupations are ruinously overcharged and others left in want of hands, the national authorities can do much towards restoring the equilibrium."

And the national authorities, in Jefferson's mind, should be the Congress, as he wrote in a series of answers to the French politician de Meusnier in 1786: "The commerce of the States cannot be regulated to the best advantage but by a single body, and no body so proper as Congress."

Of course, there were conservatives (like Hamilton and Adams) in Jefferson's time, too, who took exception, thinking that the trickle-down theory that had dominated feudal Europe for ten centuries was a stable and healthy form of governance. Jefferson took exception, in an 1809 letter to members of his Democratic Republican Party (now called the Democratic Party): "The care of human life and happiness, and not their destruction, is the first and only legitimate object of good government."

But, conservatives say, government is the problem, not the solution.

Of course, they can't explain how it was that the repeated series of huge tax cuts for the wealthy by the Herbert Hoover administration brought us the Great Depression, while raising taxes to provide for an active and interventionist government to protect the rights of labor to organize throughout the 1930s, 1940s, and 1950s led us to the Golden Age of the American Middle Class. (The top tax rate in 1930 under Hoover was 25 percent, and even that was only paid by about a fifth of wealthy Americans. Thirty years later, the top tax rate was 91 percent, and held at 70 percent until Reagan began dismantling the middle class. As the top rate dropped, so did the middle class it helped create.)

Thomas Jefferson pointed out, in an 1816 letter to William H. Crawford, Every society has a right to fix the fundamental principles of its association. He also pointed out in that letter that some people--and businesses--would prefer that government not play referee to the game of business, not fix rules that protect labor or provide for the protection of the commons and the public good.

"We must," Jefferson wrote to Crawford, "...say to all such individuals, that if they contemplate pursuits beyond the limits of these principles and involving dangers which the society chooses to avoid, they must go somewhere else for their exercise; that we want no citizens, and still less ephemeral and pseudo-citizens like corporations, on such terms. We may exclude them from our territory, as we do persons infected with disease."

Most of the Founders advocated--and all ultimately passed--tariffs to protect domestic industries and workers. Seventy years later, Abraham Lincoln actively stood up for the right for labor to organize, intervening in several strikes to stop corporations and local governments from using hired goon squads to beat and murder strikers.

But conservative economics--the return of ancient feudalism--rose up after Lincoln's death and reigned through the Gilded Age, creating both great wealth and a huge population of what today we call the working poor. American reaction to these disparities gave birth to the Populist, Progressive, and modern Labor movements. Two generations later, Franklin Roosevelt brought us out of Herbert Hoover's conservative-economics-produced Great Depression and bequeathed us with more than a half-century of prosperity.

But now the conservatives are back in the driver's seat, and heading us back toward feudalism and serfdom (and possibly another Great Depression).

Only a return to liberal economic policies--a return to We The People again setting and enforcing the rules of the game of business--will reverse this dangerous trend. We've done it before, with tariffs, anti-trust legislation, and worker protections ranging from enforcing the rights of organized labor to restricting American companies' access to cheap foreign labor through visas and tariffs. The result was the production of something never before seen in history: a strong and vibrant middle class.

If the remnants of that modern middle class are to survive--and grow--we must learn the lessons of the past and return to the policies that in the 1780s and the late 1930s brought this nation back from the brink of economic disaster.

Thom Hartmann (thom at thomhartmann.com) is an award-winning, best-selling author and nationally syndicated daily talk show host (www.thomhartmann.com). His newest book is "We The People: A Call To Take Back America," an illustrated and edited collection of his columns first published by CommonDreams.org.

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