In reality, the devil is in the details. Free markets can and often do drive productivity (cost vs. results), but only when there is competition in the market. In any market, businesses work hard to remove competition. Without any regulation, the most powerful businesses remove competition, via collusion, acquisition, or construction of barriers to enter the market. In US history, we’ve seen markets controlled, often with negative consequences for most people, resulting in anti-trust laws, and other laws intended to promote competition for the public good.

IMHO, the three big problems of the day are all linked by the failure of the government to properly regulate free markets, and this failure to act is nested in the ideology of privatization. For example, we now have the idea that some corporations are “too big to fail”. Why were they allowed to get so big? IMHO, the only reason to allow large corporate mergers in a market is to control competition, which is not in the public’s interest, and not even in investors’ interests.

GM should never have been allowed to grow so big that its failure becomes a national issue. Government regulation can split markets vertically (GM spits off Pontiac, Saturn, Hummer) and horizontally (required standards for engine interfaces ala outboard motors on boats), and it should. Sure, there’s sometimes an economy of scale that happens with large corporations,
but often, that’s counterbalanced by organizational difficulties. I doubt there’s any economy of scale for Bank of America.

The other area that ideology departs from reality is the notion that free markets are created by business, and any government regulation is interference with the natural order. That’s backwards, as the government creates the free market, via its laws, currency, police force, courts and justice system. If there’s a natural order, it’s “might makes right”, or “survival of the fittest” – nothing that anyone would accept in civilized society.

The government also grants monopolies, via patents and copyrights. Current notions of Intellectual Property have transformed these monopolies from tools for the public good, to idealogical rights issues, to the point where people assume the have a natural right to own ideas. The danger is the for the US, the ideas will be owned by large corporations with monopoly privileges constructing large barriers to entry in markets.

I’d like to see us get down to the pragmatics of a free-market economy, where we all see it as a means to an end. I think free markets are powerful tools, and one that the US has done well with over its history. Unfortunately, since Reagan/Thatcher, it’s become an ideology seen as some sort of fundamental value system, which has hurt us in the last 20 years, resulting in increased disparity and increasing instability.