"The American System" & the "free market"

by: Paul Rosenberg

Sun Aug 15, 2010 at 11:00


At DKos this morning, Mark Sumner (aka Devilstower) has a pretty good piece, "The free market is anti-American".  It's actually excellent in one respect--it historically corrects the notion that America was founded on free market market principles.  In fact, as Mark notes:

Those who worry that we've wandered too far from the vision of the founding fathers might want to remember that in George Washington's first term, the government was involved in:
  • selectively restricting imports
  • bailing out debts of states
  • being the majority owner of a private company
  • clamping down on fiscal speculation
  • executing a "stimulus plan" of infrastructure projects
And all of this goodness was paid for by new taxes.

The American school of economics was founded on these ideas: selective tariffs, government regulation of banks, and strong investment in infrastructure. Under later presidents a fourth plank was added to this platform -- investment in public education.

I downgrade it to "pretty good" because it oversimplifies, which we can see quite clearly in in this passage:

The American economic system -- the system defined by George Washington and Alexander Hamilton -- came directly out of the challenges faced by our nation. America, as a new country, was at a huge disadvantage to Europe when it came to the ability to produce manufactured goods. American-made goods at the time were often lesser quality, more expensive, or both when compared to products coming from European factories. Both men were well aware of free market principles (On the Wealth of Nations was published in 1776) and there were those among the founders that pushed Washington to run the country along a purely market-driven philosophy. An unregulated free market backed up by the gold standard was the basis of the "English System," and the British had enjoyed more than a little success.

There are two problems with this passage.  First is that the "English system" in 1776--or even the 1790s--was definitely not free market. When Smith wrote The Wealth of Nations he was considered a radical, and he was writing as a critic of the existing English system (as well as the rest of Europe) that was dominated by royal charters and grants of monopoly.  Remember the Boston Tea Party?  The British East India Company?  That was a royal charter company--the most important in British history, to be precise.

As explained quite wonderfully by Emma Rothschild in Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment, Smith and Condorcet were proponents of the free market as part of a broader vision of much wider human freedom.  It wasn't until 50 years later, after the Napoleonic Wars, that the British trading class--buoyed by Britain's indisputable naval superiority--emerged as politically dominant, and rediscovered Smith's work as a legitimating ideology for its trade-based ambitions.  The irony of the state power backing up this rediscovered--and reinvented--"free trade" philosophy should not be neglected.  But it was not the "English System" as it existed when the United States was being established.

The other problem with the passage above is that it described the Federalists' Northern, trade and manufacturing-based economic vision, which was generally--often bitterly--opposed by the Democratic Republicans, for reasons both good and bad.   While my own view is that the federalist policies were generally good for the country, they certainly weren't good for a lot of less prosperous folks trying to gain a foothold.  Jefferson and Jackson spoke for those folks--and, directly or indirectly, for slavery and the genocide of Native Americans as well.  Neither economic vision was anywhere near as pure as it claimed.

In short, our history is morally conflicted in a multitude of ways, and there is no single clear and shining pristine past for us to appeal to.  Our politics, economics and democratic ideals have always been deeply contested, and we cannot understands ourselves and/or our history if we do not acknowledge that contradiction and struggle have been with us from the very beginning... if not before.

Paul Rosenberg :: "The American System" & the "free market"

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Two more thoughts (3.60 / 10)
First, no country developed under "free market" principles.  Instead, countries develop their economy by refusing to follow these sorts of policy prescriptions, but once they achieved a certain level of development through protectionism and other government action, they moved to enforce those principles on those who had yet to follow that path. Ha-Joon Chang's excellent book Bad samaritans: the myth of free trade and the secret history of capitalism details this process.

Second, free market is largely a legitimating rhetoric for conservative policies, not a description of anything happening in the real world or a useful label for the policy ideas of any significant political faction.  The market analogy obscures certain government action as natural and emphasized other kinds of government action as an interference - but both types of government action include limits on freedom, and all of it ought to be recognized as such.  Markets are a product of government, which promotes them through protecting property, maintaining the courts, regulating safety (which promotes consumption), supporting the banking system, regulating financial markets (not well, mind you, but still), etc.  This was the great lesson of legal realism and the New Deal that we have since forgotten - markets always involve government limits, therefore to speak of "free" markets makes little sense.  The alleged features of markets don't exist in many areas of the economy - certainly this is true for areas where conservatives and neoliberals are working to enact market principles for public policy goals (like health care, education, and retirement security). Galbraith's The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too makes this case well.

My point is that it's makes no sense to say we're against or for free markets, as the term serves only a symbolic and not an analytic function.  We need to talk in terms of people.  Markets, like government, ought to serve the needs of people - not the other way around.

Strengthen Social Security...Don't Cut it  


precisely (4.00 / 4)
As usual David Kaib captures a, perhaps the, critical nub here and preempting my comment in the process, also common.

Nowhere has a pure free market, or anything reasonably close to one, produced rising prosperity and productivity. Only massive and sustained deviations from free market fundamentalism has resulted in development, anywhere at any point in time in the history of humanity.

However, it is a useful club to wield against others - other countries, other peoples, workers within the core, all the "enemies" of the "Master's of Mankind" (Adam Smith) - to facilitate their exploitation, prevent the rise of commercial opponents, and keep the rabble in line.

In my view nothing is so clearly demonstrated by history than the above: no free market for me, lots of free market for you.

"No, his mind is not for rent to any god or government" - Neil Peart


[ Parent ]
More To Come This Week, I Promise (4.00 / 2)
I keep promising something on Michael Perelman's Railroading Economics, and this week, I promise to deliver, even if it's only a partial taste.  

Meanwhile, I'll just say this:

    Of course it makes perfect sense to sell your economic system under false pretenses. The market demands it!


"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

[ Parent ]
I'm looking forward to that... (0.00 / 0)
and the book is on my list.

Strengthen Social Security...Don't Cut it  

[ Parent ]
Well said... (4.00 / 4)
both of you, David and T.

The proponents of "Free Markets" conveniently ignore the whole notion of "perfect competition" and why that's an utter myth - if not utterly impossible.  They also, conveniently, side-step monopolies, oligopolies, ... and the rest of the stable of market structures.  And/or how/why any of them came to be.  Can we even imagine the amount of regulation it would take to create an environment for "perfect competition" under which markets could truly be "free?"

And, David, mad props from me for plainly stating,

Markets are a product of government...

Yes, they are.  And, that product is intentional and purposeful, the inevitable "unintended consequences," notwithstanding.  Markets are both structural and structured.  They are a very human construction and prone to all the messy 'irregularities' of human beings.  


[ Parent ]
Nicely explained, everyone.. (0.00 / 0)
For those of us who can't quite put all the economic puzzle pieces together, this discussion helps immensely.

Your statement "Markets...are a very human construction and prone to all the messy 'irregularities' of human beings.." hit home, because I had just been reading a chapter on economics from Francis Wheen's book How Mumbo Jumbo Conquered The World, where I was shocked to learn how in October of 1987 Greenspan  "flooded the market with cheap credit and strong armed the big banks to do the same, thus preventing Wall Street from dragging the whole ..economy into recession."
..."Capitalism was rescued only by swift action from ...the government and the regulators." (Ha!)

What I don't understand at all is why the Obama Administration and/or Ben Bernanke in particular are having so little impact on Wall Street and the big banks in comparison to the successes of Alan Greenspan.

Is Bernanke just the wrong man at the wrong time??

I know the causes and impact of the two events are different, but with regards to the banks in particular, is this event proving to be such a continuing mess solely because of the slow and weak actions of Bernanke, Obama and Geithner??  

Nationalism is not the same thing as terrorism, and an adversary is not the same thing as an enemy.


[ Parent ]
The "messy 'irregularities' of human beings" (4.00 / 1)
include collusion - price agreements made on the sly between companies, which is illegal, but hard to prove.

Also, FWIW, while I think that Bernanke and Geithner are the wrong men for the times, I think the difference between the success of Greenspan and the Obama Admninistration is due to larger economic cycles.  Under Greenspan the U.S. was in the boom part of the current cycle, particularly housing fueled by cheap credit.  Bernanke and Geithner, despite being veterans of the boom cycle, chose to go for broke and Obama along with them.  They are going for broke, all of them, and I hope they lose.


[ Parent ]
Try these for reasons. (4.00 / 1)
What I don't understand at all is why the Obama Administration and/or Ben Bernanke in particular are having so little impact on Wall Street and the big banks in comparison to the successes of Alan Greenspan.

Personally I think it is a combination of two things. First is that Wall Street hates Democrats in office, and they think that if they can stretch out the Great Recession and prevent the government from stimulating the economy they can use that as leverage to defeat the Democrats. Remember, Greenspan was Wall Street's man. Reagan had put him into place to replace Paul Volker who was probably the most successful Fed Chairman yet. Volker had killed stagflation and nearly killed Reagan's shot at a second term. Greenspan was Wall Street and Reagan's tame Fed chief. The banks will react well to one of their own, but Bernanke is not in that category.

Second is that the stop-inflation-before-it-starts crowd is a big factor in the political arena surrounding the Fed. In the political side of banking that is still conventional wisdom - Fed action will cause inflation. The bankers hate inflation worse than they hate Recession because all their plans are made based on a constant dollar. (Dollar decline is simply viewed as impossible.)

Bernanke as a banker has never been one to step outside the conventional wisdom. He may have criticized bankers from his perch as an economist, but that is where he understood both the fact and the math. People's opinions weren't important except inside the academic economics world. That changed when he suddenly could be considered directly responsible for real banking events.

That's just my guess, of course.  


[ Parent ]
It's a good lawyers brief (0.00 / 0)
It strip mines data from the past and uses it to make an argument for the here and now. It's not history, but it's very useful, and I was pleased to read it on Kos this morning.  

Thanks for reposting it here.  It seems that the people at Kos have become a bit more skeptical of the administrations policy preferences and the way in which they do politics more broadly.  If Open Left's perspective can help inform the perspective of outlets like Kos and, less likely, TPM, it's all for the better.    


As I commented Mark's diary (4.00 / 1)
The British economic system at the time was mercantile, not free market. The latter didn't come to prominence until decades after the revolution ended, being the driving ideological force (often violated in practice, of course) of the new Liberal party (whose ideological heirs are today's left-faking, right-leaning neoliberals).

Also, if anything, it was Jefferson and later Madison who promoted the "free market"--again mostly in theory, given Jefferson's Louisiana Purchase and Madison's eventual support for the 2nd US National Bank--not Hamilton and Washington, who realized the need for government intervention in and support of thriving economies. The founders were many things, but stupid and unrealistic they were mostly not, unlike today's conservatives.

Modern conservatism and liberalism have appropriated many of their ideas and values from both founding political factions (Jeffersonian Democrats and Hamiltonian Federalists), and it's silly to try to infer a direct ideological lineage from either to either. The difference is that conservatives have taken the worst of each faction's ideas (e.g. Hamilton's militarism, imperialism and plutocratic oligarchism, and Jefferson's teabaggery and nullification), while liberals have mostly taken the best (e.g. Hamilton's economic progressivism, belief in the need for a strong central government to combat the dangers of sectionalism, and his republicanism to combat the demagogic dangers of direct democracy, and Jefferson's mistrust of centralized political and economic power).

Or, put more bluntly, modern conservatives are today's parasitic garbage collectors of history's discredited ideas and values, while liberals (when they're being true to liberalism, that is) are today's wise and benevolent students and keepers of its best and most proven ideas and values. (Evil Kirk/Spock vs. Good Kirk/Spock.)

"Those who stand for nothing fall for anything...Mankind are forever destined to be the dupes of bold & cunning imposture" -- Alexander Hamilton


Nice phrasing. (4.00 / 1)
modern conservatives are today's parasitic garbage collectors of history's discredited ideas and values

That's quite true. I'll suggest that the function of the conservative think tanks is to sift through such previously discredited ideas to find those which are most likely to be useful in making propaganda for the conservatives. Then the conservative movement uses that propaganda as political weapons against the practical and effective government that is keeping the extremely wealthy conservatives from gaining control of the government and greater control of the economy.

If the ideas were actually workable, they would be the basis for academic careers in real academia, but since they are not workable they are good for nothing other than creating propaganda for political purposes. That's why the think tanks are staffed mostly by failed academics and conservative politicians who are out of office and living on wingnut welfare.

To extend the analogy, that would make the staff members in the conservative think tanks to be the flies circling history's garbage ideas.  


[ Parent ]
A puzzle (4.00 / 4)
Where on earth did this come from:

An unregulated free market backed up by the gold standard was the basis of the "English System"

Did they actually tell that to Indian weavers or tea growers, or American carpenters looking to buy a bag of nails? Jesus, Paul, if even our defenders are this hapless, what hope have we of standing upright in the idiot hurricane now threatening to blow down all our houses at once? Did you check out the NYT article linked in Paul Goodman's QH this morning? Germany has held fast against Krugman, and been rewarded. Greece has gone into the crapper and once again the lights are winking out all over Europe, but never mind....

Anyway, thanks for going after Sumner's mellifluous nonsense with your usual thoroughness. The key to battling back is -- as always -- the division of labor. Having spent all the livelong day yesterday in a Democratic Party State Committee meeting, I'm especially grateful this morning to find you already at the forge....


You should have a macro for this phrase (4.00 / 2)
if even our defenders are this hapless,

it would be a great time-saver.

Strengthen Social Security...Don't Cut it  


[ Parent ]
Don't forget the rest (4.00 / 1)
the British trading class--buoyed by Britain's indisputable naval superiority--emerged as politically dominant

That naval superiority was the main source of the second British Empire after they lost most of the first in North America. I'm less certain but I suspect that historians would also attribute the existence of the first British Empire also to England's naval superiority.

"Free Trade" existed under the umbrella of British naval superiority together with the British pound and the Bank of England. Today the American military, supplemented by the dollar and the IMF and the World Bank, has take over from the British navy and the pound. WW I was the great announcement of that shift.  


[ Parent ]
The end of mercantilism (0.00 / 0)
I'd mark the calendar at Suez, not at the Somme, but otherwise, I'd pretty much agree. (It took Britain and the other colonial powers a lot longer than it should have to realize that raping the rest of the world had gotten beyond their means.)  

[ Parent ]
The reason for choosing the Great War (0.00 / 0)
is that it marked the shift of Great Britain to a debtor nation while it also shifted the U.S. to both a creditor nation and a clear contender as the next world military power. GB had to sell off what it owned overseas and start borrowing - essentially from the U.S. - in order to continue the fighting in WW I. The same was even more true for France since the worst battle ground was northern France.

The other thing that WW I did was to create the modern world political map. Every major international conflict since Versailles has been about adjustments to the way the Great War was ended.

Suez was in fact merely a marker showing the results of those processes.  


[ Parent ]
I'm not sure where/how Krugman enters the equation... (4.00 / 1)
held fast against Krugman isn't computing for me somehow... specifically, I can't see Krugman arguing against the creative measures Germany too to stem unemployment which was clearly a government spending program... It wasn't aimed directly at consumption but surely it had a strong indirect effect... The US might not desperately need helicopter money if the US had stemmed job losses the way Germany had... but I spend a lot of time confused and am probably overlooking a referent right under my nose.

Anyway.  I would suggest that we remember that the US was instrumental in helping Europe because of the multi-national nature of big finance.

Billions of dollars in U.S. rescue funds wound up in big banks in France, Germany and other nations. That was probably inevitable because of the structure of the Treasury Department's program, the Congressional Oversight Panel says in a new report issued Thursday.

The U.S. program aimed to stabilize the financial system by injecting money into as many banks as possible, including those with substantial operations overseas. Most other countries, by contrast, focused their efforts more narrowly on banks in their nations that usually lacked major U.S. operations.

But the report says that if the U.S. had gotten more data on which foreign banks would benefit the most, the government might have been able to ask those countries to share some of the cost. Marcy Gordon (AP)

It could be argued (I'm not sayin' it should be argued) that Germany's recovery was subsidized by the US - even though they may have told us they intended to use that "subsidy" quite differently than US officials might have preferred they use it.  I'd argue that Germany got its priorities right... but, we may have been part of the reason they could do so.


[ Parent ]
Krugman didn't sneak in, he walked right in through the front door (4.00 / 2)
The austerity measures forced on Greece and the rest of the PIIGS were largely the bastard offspring of Germany's defense of the Euro, and of its own primacy in the EU, and its own export markets. Krugman argued against these moves, just as he'd argued against the Euro in the first place. From Germany's point of view, essentially an economic one, their steadfastness has been justified. What they're ignoring, in their somewhat smug nationalism, is the possibility of dire political consequences, which they don't in any case believe that they'll have to bear. It's an awful gamble, much like the gamble that the British and French embarked on with Germany after 1918.

[ Parent ]
Okay. (0.00 / 0)
I got it.  Greece.  I agree.

[ Parent ]
The Divine Right of Capital (4.00 / 1)
Since I'm re-reading it right now, and think it has some (at least indirect) relevance to this thread, I thought I'd mention Marjorie Kelly's The Divine Right of Capital.  IMHO, it's one of the most important books published in the past ten years in that it provides a clear, compelling and very commonsensical analysis of the evolution of and current problems with the structure of our economy and the institutions that play central roles within it.
(Intro to book is here: http://www.corporation2020.org...

I'm in the process of re-reading it after giving it a quick read when it first came out, which I believe was after Enron but well before the financial meltdown and other recent "symptomatic" events.

I've done a little checking on what Kelly has been doing since then, and have added to my reading list an action-oriented paper she contributed to in 2007: A Strategic Corporate Initiative: Toward a Global Citizen's Movement to Bring Corporations Back Under Control.
http://www.corpethics.org/down...

I scanned the "Summary of Recommended Strategies" section of the document and was impressed.  I'd recommend it to other OLers and welcome your comments on it and Kelly's book.

I hope to write a diary about this if I can make the time (and welcome others to do so), but thought I'd at least mention it in this thread for now.


human constructions, indeed (4.00 / 2)
It is little recognized these days just how unnatural the nation-state system and global capitalism is when put in the context of human history.

As a joint system of plunder and control, the nation-state-capital nexus required and unleashed an unprecedented amount of violence, slaughter, death, and ecological destruction in its wake as it marched across the globe, making more and more peoples subject to its predations, the "curse of Columbus" in the apt words of historian Basil Davidson. Cortes, Pizarro, Clive, and the others, were able to conquer thriving or at least large and powerful civilizations because the scale of violence and barbarity and venality of the Europeans was unknown and unprecedented, their savagery without parallel. It was an early and effective example of "shock and awe". The "market" they created was actually the organization of plunder under grants of power to state monopolies backed by the gun.

Marx is justly criticized as better at diagnoses than prescriptions, and I think that is fair, but, oh, how telling, cutting, and prescient are some of his diagnoses:

"The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black skins, signalised the rosy dawn of the era of capitalist production. These idyllic proceedings are the chief moments of primitive accumulation

To paraphrase, the entire capitalist system owes its existence to this original blood money.

In the current period, something like 40000-50000 children under 5 die every day from poverty related or easily prevented diseases. At least 1 billion people are malnourished, a little more than 1 in every 7 people. About the same number lack access to clean water. This is modern suffering on a massive scale, and it can be laid, I think, at the feet of a global system directed from Washington and New York, London and Paris, Berlin and Rome. Now elite classes in Beijing and Mumbai, Moscow and Kuala Lumpur aim to join the Gold Circle.

So it is not just that there is no such thing as a free market but that the system that exists - actually existing capitalism - a system that is rationalized in the name of a free market, was imposed only through resort to massive violence and requires for its continuation both large measures of direct violence but, even more, enormous indirect structural violence. So part of the struggle here in the states and the rest of the core is not only about puncturing the illusions of the free market in favor of policies to improve the lives of most first-world citizens but also, as Steve Shalom has argued over the years, to reverse American foreign policy so that others elsewhere stand a chance in their struggles for freedom and to improve their lives.  

"No, his mind is not for rent to any god or government" - Neil Peart


Fix Us (0.00 / 0)
Rapidly create American jobs, reduce the National debt, increase funds flowing into Social Security, shore up Medicare and Medicaid, replenish Unemployment Insurance funds, resurrect the middle class, decrease the hysteria over illegal immigrants and save what we are meant to be "the example of hope for the rest of the worlds people". One act, only allow imports from countries that have a rational minimum wage, freely elected governments, freedom of speech, labor laws, environmental standards and are intent on creating a educated population. We have no need to do business with countries who disrespect  their own people. No need to do business with nations who's government is a archaic religion. The Cold War is over, we have no need to win friends and influence others in order to thwart the spread of something. America is losing itself by allowing our leaders to enact policies favored by big profit addicts. Thinking low cost consumer goods produced by people with few options is the way to bring the rest of the worlds people up is so dishonestly portrayed that it is criminal. We are participants in their abuse. In short we are destroying our freedom by being lulled into un-employing ourselves. If a importing company can not sell the product it produces in the country were it produces it for anywhere near what they can sell it for here, a signifigent value added tax should be imposed by our government at the port of entry in order to protect the American way of life. All this nipping and fear mongering language being flung around in America right now is the result of the economic wasteland created by profit hungry greed.  If America's forces are not being used to protect our economic structure then they are not being used to extend our existence which is the mother of all American interests. We are a long way down a road to nowhere. It is hard to admit our gullibility but it is time to turn around. We don't need less money to flow into our Federal Government we need more to flow in paid by those that have been raping it and us. If we put as much effort into protecting the American engine as we have playing  paranoid dead end nation building games we would actually be so strong no one could stop us they would only emulate.





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