What Is Free Market Capitalism?

I have been reading an excellent book written by Ha-Joon Chang who teaches economics at Cambridge.  Chang was awarded the Leontief Prize for Advancing the Frontiers of Economic Thought in 2005.  The book that I intend to review in this post, and in future posts, is entitled Things They Don't Tell You About Capitalism.  It was published in 2010.  It contains 23 ideas that are not very well explained in most treatments of economics.  The first idea that Chang analyzes is the concept of the free market.  I will summarize his analysis of the free market in this post.

Chang argues that there is no such thing as an objectively defined free market.  The first step in understanding capitalism is to understand that point.  For example, in 2008 President George W. Bush announced a plan to use $700 billion of taxpayer money to purchase toxic financial assets that were choking up the financial system.  Bush did not see this as a departure from the American system of free enterprise.  Nationalizing a huge part of the financial system is just something that government does when it is necessary.  In other words, one of the largest interventions in the free market economy by government is simply an extension of free market capitalism.  It is apparent that there is no scientifically defined boundary for a free market. It is simply a matter of opinion.

One of the basic ideas of free market capitalism is that labor markets should be free.  In 1819 a bill was tabled by the British Parliament that would have banned children under the age of 9 from working in cotton factories.  Older children between ages 10 and 16 would be permitted to work but their hours would be restricted to 12 per day.  The House of Lords objected to bill on the grounds that labor ought to be free.  The children want to work and factory owners want to employ them; what is the problem?

Today even ardent free market proponents would not think of bringing child labor back as part of the market liberalization program that they advocate.  They would not argue that such a law would interfere with a child's right to work.  On the other hand, they support laws which make it more difficult for workers to form labor unions.  Such laws are referred to as "right to work" laws which are essential in the operation of free labor markets.  Again the freedom of a market changes over time and, like beauty, it is in the eyes of the beholder.  There is no way of objectively defining a free market.  Today we accept many government regulations that are accepted as natural.  If markets look free, it only because we so totally accept the regulations that prop them up that they become invisible.

Wages in rich countries are determined more by immigration policies than by anything else.  If rich countries opened their doors to unrestricted immigration, a large percentage of workers would be replaced with cheaper workers.  Government policies on immigration, therefore are a major determinant of wages.  There is no free market for many forms of labor.  Licenses are required by many professions;  many countries have laws which determine the requirements for starting up a bank; the stock market regulates who can sell shares on stock exchanges, and the trading of shares can only be conducted by licensed brokers.  The price of money, which we call the interest rate, is also determined by the policies of the Federal Reserve.  If wages and the price of money are politically determined, then all the other prices are largely determined by political decisions because the cost of labor and interest rates affect most other prices.

The process of drawing the boundaries of a free market are often accompanied by conflict.  The US civil war was such a struggle.  Slaves were bought and sold in the market and they were a large component of the capital owned by cotton growers.  The decision to change that market relationship, along, with the decision to put tariffs on manufactured imports from England, in order to protect manufacturers in the North East, interfered with the free market as it was perceived in the South.  England retaliated by putting tariffs on cotton imported from the US.  Similarly, England fought a war with China in order to protect free trade in opium in the Chinese market.

Since the boundaries of a free market cannot be objectively determined, it is not possible to have a science that is based upon the assumption of free markets.  When free market economists oppose certain regulations on the grounds that they interfere in operation of a certain market, they are merely expressing a political opinion.  They use the ideological cloak of free markets to pretend that their opposition is based upon objective science, and not politically motivated.  "Stepping away from the illusion of market objectivity is the first step towards understanding capitalism"