Responding To Reich, Part 5: A Free Market Is A Fair Market – OpEd
By FEE
By Patrick Carroll
Reich’s fifth economic “myth” that he sets out to debunk is the assertion that “the market is fair.” What makes this video interesting—and confusing—is that Reich is a bit slippery with his language. The result is another thoroughly debunked straw man. Reich’s argument is devastating, but not for the position that free market proponents actually hold on this topic.
Since Reich doesn’t do a great job of explaining our position, it’s worth taking a moment to briefly spell it out before diving into his analysis.
One of the arguments that is commonly advanced in favor of the free market is that it is a much fairer system than interventionism. What we mean by this is that the free market creates a level playing field, free of any special tax exemptions, subsidies, tariffs, regulations, or other legislative interferences that give some competitors an artificial advantage over others.
In a free market, you succeed as a business solely by being better able to satisfy consumers than your competitors. When there is government intervention, however, players can often outcompete their competitors, not by delivering a better product for a lower price, but by successfully lobbying the government to give them an exclusive advantage. For example, if your competition has to pay an extra 20 percent tax, perhaps because they happen to be based in a foreign country, that is clearly giving you an unfair advantage, and if you win, it’s not necessarily because you were better able to satisfy consumers. If the tax were removed—that is, if a free market were allowed to prevail—that would restore fairness, and any subsequent winner can be said to have won solely on merit.
To be honest, it’s hard to imagine how this position could possibly be wrong. Is there any situation where giving someone a head start is fairer than making everyone start at the same line? Likewise, is there any situation in which the government privileging some competitors over others is fairer than the government staying out of it? The question answers itself.
And yet, Reich is convinced that this truism is deeply flawed. Let’s see how he makes his case.
The Free Market or the Existing Market?
Reich opens the video as follows:
Here’s a real whopper: “The market doesn’t play favorites!” Bunk. Many of the most vocal proponents of the so-called “free market” have for years been actively reorganizing the market for their own benefit. They don’t want us to notice what’s happened over the last half century, as big money has corrupted our politics.
Reich goes on to list a number of examples to illustrate his point. He mentions campaign donation limits being weakened or repealed, antitrust laws being “virtually abandoned,” right-to-work laws hurting unions, bank bailouts helping the rich while encouraging risk, corporate bankruptcy allowing companies to get out of labor contracts, the carried interest “loophole” helping hedge fund and private equity managers, and lower trade barriers causing America to lose manufacturing jobs despite receiving the benefit of cheaper goods.
He concludes by stressing the positive feedback loop that he sees policies like these creating:
It’s been a vicious cycle. Each change in laws has ratcheted wealth and power upward, making it easier for the wealthy and powerful to gain further legal changes that ratchet even more wealth and power upward.
The issues with Reich’s commentary start with the very first line. He presents our position as being that “the market doesn’t play favorites,” but this is a bit imprecise. Did he mean our position is that the free market doesn’t play favorites, or that the existing market doesn’t play favorites?
His next line makes it seem like he meant the existing market. Consider the two options in context:
“The [free] market doesn’t play favorites!” Bunk. Many of the most vocal proponents of the so-called “free market” have for years been actively reorganizing the market for their own benefit.
“The [existing] market doesn’t play favorites!” Bunk. Many of the most vocal proponents of the so-called “free market” have for years been actively reorganizing the market for their own benefit.
It seems clear to me that the second one is what’s intended. “It’s a load of baloney that the existing market doesn’t play favorites,” he’s saying. “Look at all the reorganization going on for the benefit of specific groups.”
Reich is, of course, correct. It is a load of baloney to suggest that the existing market doesn’t play favorites. But the idea that the existing market is fair is not our position! Our position is that the freemarket is fair. Thus, pointing out that existing markets are being unfairly reorganized doesn’t debunk our position in the slightest. If anything, it’s making our point.
Reich is using a rhetorical sleight of hand here. No one who says that “the market doesn’t play favorites” has the current, rigged market in mind when they say that. They mean the market as opposed to the government. It is universally understood that in this context we mean that the freemarket doesn’t play favorites. Thus, for Reich to present the assertion “The market doesn’t play favorites” and immediately shoot it down with “Actually the existing market is very rigged” is simply not addressing the actual point being made.
Two Kinds of Fairness
Unfortunately, the confusing rhetoric doesn’t stop there.
So far, we’ve been working under the assumption that “actively reorganizing the market” is referring to government interference in the market. This felt intuitive, not only because “actively reorganizing” has the connotation of “interfering with an otherwise self-organizing process,” but also because Reich seems to be making a point about hypocrisy. “All these rich people are championing the free market with their words while actively reorganizing it with their actions,” Reich comes across as saying. And it’s only hypocrisy if “actively reorganizing” is the opposite of the free market.
And yet, while we are led to believe that “actively reorganizing” means “interfering with the free market,” the examples Reich lists of this “active reorganizing” somehow include both pro- and anti-free market measures! Relaxing antitrust laws and lowering trade barriers (we will concede for the sake of argument that these are happening), for instance, are examples of freeing up the market, not of “actively reorganizing” it.
So Reich is effectively saying: “These free market proponents are such hypocrites. They praise the free market with their words, but they champion government interference in practice. For example, they try to get the government out of mergers and acquisitions, and to have it play less of a role in international trade.”
What?
I suppose I shouldn’t be surprised. After all, we’ve already seen in Part 2 that Reich doesn’t have a clear understanding of the distinction between rules that obstruct the market and rules that don’t.
But maybe—for the sake of argument—maybe Reich’s list isn’t meant to provide examples of “actively reorganizing” the market. Maybe it’s just meant to provide examples of unfairness. That is the topic of the video, after all.
If so, this is still a curious list. Bank bailouts are absolutely unfair. The carried interest “loophole,” okay, maybe. But how are lower trade barriers unfair?
The key to solving this puzzle is to realize that Reich is using a completely different definition of “fairness” than free market proponents. He doesn’t have in mind whether some companies have special tax or regulatory privileges that give them an edge over their competition. His concept of fairness revolves around helping the poor by taking aim at the rich.
In Reich’s worldview, the rich already have a massive advantage over the poor in the game of life. Thus, a “fair” market is one that checks the ability of the rich to “exploit” the poor.
In other words, “fairness” is when we do left-wing politics.
His examples are all over the place from the perspective of fair competition, but they are perfectly consistent from the leftist perspective of helping David fight Goliath. Sometimes helping the little guy (in their view) means taking the free market perspective, as with eliminating bank bailouts or corporate subsidies. But other times it means taking the anti-free market perspective, such as with antitrust laws. Reich doesn’t particularly care what a free market proponent would think about these ideas. He cares whether the policy seems(!) to empower the rich or the poor.
To illustrate how these two definitions of fairness line up, we can create a 2×2 matrix and place various government interventions in the appropriate categories, as follows:
As we can see, the fair-competition concept of unfairness sometimes overlaps with the left-wing concept of unfairness (bottom left), but there are also many policies where the two diverge (top left). The right side is of course blank, because there is no such thing as a competitively fair government intervention. All interventions in the market (including both taxes and regulations) create distortions that lead to competitive advantages and disadvantages for various companies.
Exposing the Straw Man
Taking the argument as a whole, there are essentially two equivocations going on. There is the equivocation regarding “the market” (the free market or the existing market?), and there is the equivocation regarding “fairness” (fair competition or the left’s concept of fairness?).
To expose Reich’s straw man, we simply need to spell out the four distinct claims that can be attached to the phrase “The market is fair.” My opinion on the veracity of each claim is placed in parentheses:
- The free market has fair competition. (True)
- The free market exhibits the left’s concept of fairness. (Bunk)
- The existing market has fair competition. (Bunk)
- The existing market exhibits the left’s concept of fairness. (Bunk)
Reich does a brilliant job of refuting Claim 4. With example after example, he demonstrates that the existing market comes nowhere near the left’s concept of fairness.
The only problem is, that’s not the claim free market proponents are making when we say “The market is fair.” We are making Claim 1. And Reich doesn’t even address Claim 1, let alone debunk it.
Fairness Isn’t Everything
Before wrapping up, a couple of additional points are worth addressing.
First, it might seem to some that the argument here is in tension with the point made in Part 3, which defended “the unfairness of capitalism.” But there’s no contradiction here, because these are two different senses of the word fair. Capitalism is certainly unfair in the sense that people sometimes get what they haven’t earned, but it is completely fair in the sense that it is free of government interventions that cause the market to be rigged.
Another point worth touching on is how fair competition shows up in policy discussions. Often, proponents of tariffs will complain that foreign countries are subsidizing their producers, enabling them to charge extra-low prices. A tariff, it is argued, is needed to correct for this unfairness, to “level the playing field” as it were. Hence, proponents of tariffs can often be found advocating for “fair competition” or “fair trade,” terms that are basically just euphemisms for restricted trade.
Now, the people making this argument are completely correct that when a foreign company subsidizes an industry, that is not a free market and thus not an entirely fair, level playing field. But it doesn’t necessarily follow that leveling the playing field should be the most important factor in trade policy. There are things more important than fairness!
Anyways, that’s a bit of a longer discussion. All that needs to be said here is that, should the foreign subsidies ever be removed, the people making this point should then have the integrity to advocate for free trade in their respective industries, and not go looking for other excuses for protective tariffs.
The Right Way to Go After Power-Wielding Interests
His missteps aside, Reich does draw attention to an important point, namely that rich and powerful people are influencing policy for their own benefit. But the problem is not that the left’s concept of fairness is being violated. The problem is that fair competition is being violated.
What Reich misses is that antitrust laws, trade barriers, and all the other policies in that category are just as problematic as the bank bailouts and corporate subsidies that he rightly condemns. These interventions may look like the government taming powerful interests, but the reality is that they are all examples of the government protecting powerful interests from competition.
Trade barriers—lauded by Reich for preventing the outsourcing of labor—protect domestic producers from having to compete with their foreign counterparts. America’s sugar tycoons no doubt appreciate Reich’s defense of their interests!
Mandated quality and safety standards for consumer goods, which Reich would likely say are an important means of checking corporate greed, are really a way of protecting established brands from competing firms that would prefer to experiment with different standards. Big Pharma and Big Ag are not exactly complaining about these regulations.
Even antitrust laws are actually anticompetitive: they protect entrenched, inefficient firms that happen to be smaller from larger, more efficient competitors. As the economist David Friedman points out, “Laws that make life hard for new firms—or old firms entering new markets—reduce competition and encourage monopoly, even if they are called antitrust laws.”
By uncritically supporting any policy that looks like a boon for the working class, Reich is unwittingly helping the rich and powerful to “ratchet wealth and power upward.” In failing to take a consistent free market approach, he fails to fully attack the vested interests that are conspiring to rig the market in their own favor.
So what’s the path forward? The way Reich presents it, you can either defend the status quo or join him in calling for the government to impose the left’s definition of fairness, including both the pro- and anti-free market policies they recommend. But there’s a third option that most people don’t consider, and it’s the option we actually need to take.
The best way to go after the powerful interests that are rigging the economy is to insist on fair competition—which means free markets—in every sphere. Wielding the left’s definition of fairness is at best a halfway measure. The real solution is to completely strip these powerful interests of the taxes and regulations that are protecting them. By doing so, we will expose them to a far more dangerous threat than any government: market competition.
- About the author: Patrick Carroll is the Managing Editor at the Foundation for Economic Education
- Source: This article was published by FEE.
