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Free Markets and Their Critics

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Free Markets and Their Critics

An intellectual history of Chicago School economics November 7, 2019
Economy, finance, and budgets

The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society, by Binyamin Applebaum (Little Brown, 448 pp., $30.00)

In my twenties, I nearly succeeded in exiting the professional class into which I was born, through a trapdoor marked “Failed Artistic Ambitions.” Despite a series of unwise decisions, I couldn’t quite manage my own impoverishment. Even while accumulating these follies, I gathered, less through intention than through a kind of intergenerational habit, the right to practice law in the State of New York—what a cynical friend called “a license to steal.” In my thirties and forties, that license almost lifted my status into that of the urban rich, as I climbed the staircase marked “Callow Ambition.” Working punishing hours in corporate law firms, I hoped to build what economists call social capital. It turns out, however, that class status is sticky. As I reach 50, I’m almost exactly where I started.

At present, two warring claims are heard about American life. The first is that when we work harder and make better choices, we see better results. America rewards merit and those who possess it; thrift and industry triumph over prodigality and sloth. But a rising counternarrative holds that our apparent control of our destinies is merely a pleasant illusion. We are moved, regardless of circumstance, by the vast hydraulic forces of modern capitalism. The region we live in thrives or declines; our profession rises or falls in prestige and demand; the large institution to which we have tied our fate flourishes or fails. The market economy reminds us that we’re not special or unique—the jargon term being “commoditization.” Woe betide those swept up in its current.

In The Economist’s Hour, Binyamin Applebaum argues that those forces are not impersonal but instead the byproducts of the work of a relatively small number of economists, who, across roughly a half century, reshaped U.S. public policy. Applebaum has written the story of that momentous but largely undetected shift—or as he puts it, “a biography of the revolution.” Little Brown’s breathless marketing (“a compelling call for people to retake control of markets”) and Applebaum’s provocative subtitle (“False Prophets, Free Markets, and the Fracture of Society”) misleadingly suggest a polemic. Applebaum, the lead business and economics writer for the New York Times editorial board, presents a strong thesis, but he’s not anti-capitalist or anti-free market. I disagree with his conclusions but admire his book for its evenhandedness and deft handling of technical subjects.  

Applebaum acknowledges that free-market policies “lifted billions of people around the world from abject poverty . . . and most of the world’s 7.7 billion people live wealthier, healthier, and happier lives as a consequence.” The case he wants to make, however, is that “the market revolution went too far. In the United States and in other developed nations, it has come at the expense of economic equality, of the health of liberal democracy, and of future generations.” He wants to put government back in the saddle.

In Applebaum’s view, the state plays several important economic roles. The first is structural: government should work to counter the kinds of system-wide risk that led to the 2008 financial crisis. The second is regulatory: to provide labor and environmental protections that the market does not, and in some cases cannot, guarantee. And the third is meliorist: to reduce the suffering endemic to a market economy that inevitably creates winners and losers. His narrative sometimes blends these distinct arguments to get past the technocratic details of underlying belief systems. But he weakens his case by assuming that readers automatically accept his premises.

For Applebaum, it’s self-evident that income inequality is unacceptably high and that, if left unaddressed, it will undermine the democratic process and lead to tyranny. Income inequality, no doubt, has grown in the U.S. since 1980. The rich are once again—as F. Scott Fitzgerald observed in an earlier era of private splendor and public squalor—different from you and me. But historically it’s been runaway inflation, more than underemployment, that fuels this income gap, breaches a social compact with pensioners, and weakens public faith in currency values and the efficacy of government itself. The Weimar Republic collapsed—leading to the twentieth century’s most infamous tyranny—not because of underemployment but because runaway prices for ordinary goods destroyed the country’s robust prewar middle class. For Applebaum, however, inflation hawks are part of the problem, because their tight-money policies slow aggregate demand and retard economic growth, resulting in unnecessary immiseration.

As a young reporter, Applebaum covered the subprime mortgage crisis extensively for the Charlotte Observer, and he made his name with a series on dubious sales practices at Beazer Homes USA. Perhaps understandably, then, Applebaum has a strong mental model of how markets work or fail to work—but it’s just that, a model, and an incomplete one. Over a decade after Lehman Brothers’ bankruptcy, after all, we are deluged by fact but still don’t have a convincing narrative for what caused the financial crisis. Whenever that narrative emerges, government will be seen to have played roles both in unwittingly engineering the crisis and, more rousingly, in cabining its effects. Afterward, the most important step regulators took was requiring banks to reduce their leverage. The financial system now has less systemic risk. Of course, another crisis will come, but we can’t know now what it will look like. This “tombstone mentality”—to borrow a term from aviation, where a crash investigation leads to a safer system—may not look like a satisfying way to pursue public policy. But an economy cannot be made recession-proof, any more than commercial aviation can be made 100 percent safe.

Over time, some supply-side economics premises have been plausibly criticized. Even so, the current spasm of hostility to capitalism on segments of the left and right is ahistorical, and therefore childish. Broadly speaking, free-market policies are wealth-creating—full stop. As Applebaum rightly observes, however, wealth creation is a means and not an end in itself. Indeed, the prevailing disenchantment with laissez faire economics may have less to do with the policies themselves than with a general sense that money is a societal force no longer adequately counterbalanced by religious, communitarian, or aesthetic principles. As architect Louis Sullivan wrote during the Gilded Age: “There is a general sense . . . that there are certain values which money cannot and does not measure; certain services rendered, of which money is not the mechanism of exchange, or the standard of estimate.” And yet wealth creation—more fundamentally, the maintenance of incentives that reward innovation and industry—is what economics is all about. If our society has become coarser and less generous, the fault lies not in our economists but in ourselves.

Photo: John Moore/Getty Images

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