The Big Myth: How American Business Taught Us to Loathe Government and Love the Free Market

by Naomi Oreskes

A hardline reactionary well known for his antisemitic and anti-labor views, Disney testified to communist infiltration in the industry, blaming a 1941 strike at his studio on communist agitation and naming various industry figures—including one of his own animators—as communists.

Harvard law professor Yochai Benkler has demonstrated how disinformation and propaganda on the internet are asymmetric, with far more right-wing than left-wing claims.115 This should not come as a surprise: propaganda is bound to be asymmetric, because its purpose is political, not analytical, and propaganda requires time, money, and access to outlets.

But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.

Adam Smith, the hero of capitalism, here insists on the necessity of regulating banks. (He may also be fairly read as endorsing the necessity of building codes.) His explanation is clear and simple: Restraints on liberty are justified when the actions of a few individuals endanger the rest.

Smith—the hero of libertarians, the father of free-market economics, the patron saint of self-interest—spent a significant section of his most famous work discussing banks and banking precisely because it illustrated an essential and nonnegligible point: that regulations do infringe liberty, but they are necessary when the “natural liberty of a few individuals … endanger[s] the security of the whole society.”

For Smith does not merely acknowledge the problem, he solves it. Hayek had insisted that he was not antigovernment, but merely wanted a “clear set of principles” by which to distinguish when regulation was justified.

Moreover, Smith notes, in any conflict, the masters, having more assets, can hold out longer than the workers.58 So they are multiply advantaged: by their intrinsic position, by their assets, and by the legal protections that they have granted themselves.

Yet Smith absolutely affirms that workers are entitled to a minimum standard of decency: “No society can surely be flourishing or happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.”63 If one were not persuaded by arguments of equity, Smith offers the practical argument that well-fed workers are better workers.64 “That men in general should work better when they are ill fed than when they are well fed, when they are disheartened than when they are in good spirits, when they are frequently sick than when they are generally in good health, seems not very probable.”65 Thus he concludes that when a “regulation, therefore, is in favour of the workmen, it is always just and equitable, but it is sometimes otherwise when in favour of the masters.”

In book 5, Smith identifies four major domains that market forces might not adequately address: defense, justice, public works and institutions, and the “expense of supporting the dignity of the sovereign.”

The intent of these acts was clear: to prevent corporations or other private groups from undermining capitalism by undermining competition, but also, and crucially, to prevent them from undermining democracy. As legal scholar Timothy Wu puts it, “antitrust represented a democratic choice of economic structure and a check on the political and economic power of the monopolies.”

In this and many other ways that Friedman would rarely acknowledge, the rich are a good deal freer than the poor. Nothing in unregulated capitalism is a level playing field.11 As Anatole France put it, “the law in its majestic equality forbids rich and poor alike from sleeping under bridges.”

He divides these into two classes: monopoly and other market “imperfections,” and what most economists would call “external costs” (but Friedman labels “neighborhood effects”). His response to these problems is that, while they may be real, any government intervention to address them is likely to be a cure worse than the disease.

Setting that aside, Friedman’s frequent invocation of Adam Smith raises a fundamental question, relevant to the entire Chicago school: who made Adam Smith God? Friedman quotes Smith as if he had proved a system of natural laws, and therefore one need only offer an apt quotation to bulletproof any point. But what, exactly, does a quotation from Adam Smith demonstrate? Like most Enlightenment philosophes, Smith believed in a natural order, but The Wealth of Nations is a treatise, not a statement of the results of scientific investigation.

The most serious flaw in the book, however, is that its central thesis is demonstrably false: capitalism and freedom are not indivisible. Capitalism did not bring freedom to the four million souls who lived under American slavery. Nor did it bring freedom to the millions of African Americans in the Confederate states who had been emancipated in 1863 only to be subjected to Jim Crow segregation after Reconstruction ended in 1877.

A few years after the publication of Capitalism and Freedom, the economist Paul Samuelson tried to test the indivisibility thesis. Comparing Norway, Sweden, the United Kingdom at two points in its history (1948 and 1960), and the United States at three (1928, 1953, and 1960), Samuelson generated a graph indicating no clear relation between economic and political freedom. To the extent that the analysis suggested any relation, it was a negative one: when or where economic freedom increased, political freedom decreased.

To Chitester’s (or PBS’s) credit, several episodes ended by offering discussants the opportunity to raise critical points. One of these was the democratic socialist Michael Harrington, whose book The Other America, published the same year as Capitalism and Freedom, was a stinging indictment of poverty in the United States. Harrington said that he admired Adam Smith, but that the world had changed since 1776, witnessing the rise of multinational corporations with a “tremendous tendency towards monopoly and concentration.” Friedman’s ahistorical invocation of an outdated eighteenth-century theory, Harrington argued, particularly his “mystical belief in the invisible hand of the marketplace,” did not make sense in the modern world.

Eisenhower not only supported Social Security, but expanded it. He wrote to his brother that “should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again … There is a tiny splinter group, of course, that believes you can do these things,” but “their number is negligible and they are stupid.”

Reagan also made an increasing number of appearances before civic groups, including some extreme right-wing ones, such as the racist John Birch Society and the radical right Christian Anti-Communism Crusade.

It’s become commonplace to identify our recent decades of business-friendly deregulation and the resulting skyrocketing inequality with the so-called Reagan Revolution. But that revolution started with Jimmy Carter.

But Carter wanted the tax reform to be revenue neutral; this was accomplished by abandoning middle-class tax relief. Between inflation and a scheduled Social Security tax increase, the 1978 Revenue Act increased the middle-class tax burden.

Whatever Carter’s intent, the 1978 Revenue Act helped to bring an end to the era in which the gap between the wealthiest and poorest Americans had shrunk, and to launch a new gilded age of inequality.

The U.S. government was (and still is) effectively an insurance company with an army.

If Jimmy Carter began the Reagan Revolution, Bill Clinton completed it. Both Carter and Reagan worked to deregulate large swaths of the American economy, but Clinton in some ways went further, with dramatic deregulation of telecommunications and financial markets. In 1996, he declared that the “era of Big Government is over.”

in 1987 the Fairness Doctrine was abolished, eliminating the requirement that licensed broadcasters provide balanced coverage of public affairs.

the merger between Citicorp and the Travelers Group to form Citigroup. The merger took advantage of a provision of the Bank Holding Company Act that grants a two-year grace period to any company that becomes a bank holding company by virtue of an acquisition. Citigroup was taking a chance that within two years “financial modernization legislation” would be passed to render what they had done legal. Whether they had inside information, had been lobbying Congress, or had other reason to believe this was a good gamble, they were right: Citicorp merged with Travelers in April 1998 and Gramm-Leach-Bliley was enacted in November 1999. Under the new act, the merger was now legal; some critics called it the “Citigroup Relief Act.”

By 2000, the subprime loan market was worrying many observers. Some thought the Fed or the SEC might have informal authority to do something about subprime mortgages, and in 2000, Federal Reserve governor Edward Gramlich asked Fed chairman Alan Greenspan to send examiners to investigate. But Greenspan—a libertarian and Ayn Rand acolyte—refused.65 Nor would he raise margin requirements (minimum down payments) on lending for the purpose of buying stock. The Fed had a long history of imposing such requirements, so it was well within Greenspan’s authority to do so, and as the stock market climbed to unprecedented heights some observers felt he should. He demurred. Greenspan also refused to investigate the proliferation of complex and opaque financial instruments, including the so-called collateralized debt obligations, which pooled millions of subprime mortgages and then sliced and diced them in ways that advocates insisted were safe (on the theory that the risk was being spread) but that turned out to be anything but when the housing market subsequently went bust.

Greenspan worked with Robert Rubin and others within the Clinton administration to prevent the Commodity Futures Trading Commission from regulating these new financial instruments.66 The sudden bankruptcy and bailout of the hedge fund Long-Term Capital Management in 1998 didn’t slow the deregulatory train. Rubin (at that point still treasury secretary) and Summers (at that time Rubin’s deputy secretary) insisted that “market discipline” should be relied upon to prevent problems, not federal regulation—in other words, the same self-regulation that hadn’t worked before. Then, Congress went further, making it illegal to regulate most kinds of financial derivatives. This was achieved through the Commodity Futures Modernization Act, which Clinton signed in December 2000.

Columbia economics professor, Nobel Memorial Prize laureate, and one-time World Bank chief economist Joseph Stiglitz argues that the Glass-Steagall repeal—“the culmination of a $300 million lobbying effort by the banking and financial-services industries”—was determinative. “The proponents said, in effect, Trust us: we will … make sure that the problems of the past do not recur.” But the problems did recur.75 Financial regulation—like telecom regulation—needed retooling for the twenty-first century. But instead of updating the relevant regulations Congress and the Clinton administration gutted them. The Gramm-Leach-Bliley Act effectively removed the guardrails that for six decades had done the job they were built to do.

Stiglitz thinks the biggest effect of the Glass-Steagall repeal was cultural: commercial banks, previously known for their pinstriped conservatism, were encouraged to shed their stodgy skins. Investment banks typically handled the money of wealthy clients with a high tolerance for risk, and when they merged with commercial banks, “the investment bank culture came out on top.”

Congress passed NAFTA in 1993 with more Republican than Democratic support.84 The treaty Clinton signed created the world’s largest market, valued at an estimated $6 trillion, encompassing more than 365 million people.85 NAFTA eliminated about half of all existing tariff barriers in agriculture, manufacturing, and the service industry, with the goal of phasing out most of the rest over ten to fifteen years. It also sought to eliminate most or all nontariff barriers, such as licensing requirements for trucks crossing the U.S.–Mexico border.

Clinton was wrong: many of the fears were founded. NAFTA did some good; many experts believe it helped the U.S., Canadian, and Mexican economies, albeit by a small amount. According to Lorenzo Caliendo of Yale and Fernando Parro of the Federal Reserve, the deal yielded a 0.08 percent increase in net economic welfare. Mexico benefited the most, with a gain of 1.31 percent, and Canada lost a marginal 0.06 percent.88 Clearly, the net beneficial effect was far smaller than its advocates had promised.89 But like most economic policies, this one affected some people and some sectors more than others.

The most obvious harm came to American manufacturing jobs. NAFTA did not kill American manufacturing, as is sometimes alleged. Those jobs as a percentage of total nonfarming employment had been declining since the 1950s, and they continued to decline at roughly the same rate after NAFTA. But the treaty did severely affect workers in some parts of the country. A 2016 study coauthored by economists Shushanik Hakobyan of the International Monetary Fund and John McLaren of the University of Virginia concluded that the hardest hit were blue-collar workers in California, Texas, New York, Michigan, and Ohio; the most affected industries were automobile manufacturing, textiles and footwear, and computers and electrical appliances.

Between 1993 and 1995, 64 percent of U.S. manufacturing firms in key industries used the threat of moving plants to Mexico to weaken unions and depress wages; by 1999 the figure was 71 percent. This created downward wage pressure in NAFTA-vulnerable industries—even when the companies stayed in place—and the effect rippled outward: Hakobyan and McLaren found that service industry wages in NAFTA-impacted regions fell significantly as well. “The blue-collar diner worker in the footwear town is hurt by the agreement, as is the blue-collar footwear-factory worker in a town dominated by insurance companies. Worst hit of all is the blue-collar footwear worker in a footwear town, particularly if that worker never finished high school.” College-educated workers, however, “skate away mainly unharmed.”

Former Clinton labor secretary Robert Reich, who was a proponent of NAFTA, experienced a conversion and became a vocal opponent of the subsequent Trans-Pacific Partnership, which he characterized as a “Trojan horse in a global race to the bottom.”

It has long been established by economists that trade policy in general tends to be characterized by large redistributional effects.98 Conservatives often rail against “income redistribution,” particularly if achieved by progressive taxation, but they essentially endorsed income redistribution away from blue-collar workers and toward the middle and upper classes when they supported NAFTA.

The ideas that animated NAFTA—as well as financial and telecom deregulation—came together in the 1990s under the rubric of the “Washington Consensus,” endorsed in the United States by Bill Clinton and in the United Kingdom by Prime Minister Tony Blair.

He identified ten: Fiscal discipline Reordering public expenditure priorities Tax reform Liberalizing interest rates A competitive exchange rate Trade liberalization Liberalization of inward foreign direct investment Privatization Deregulation Property rights

Naomi Klein framed it differently: “Crises are, in a way, democracy-free zones—gaps in politics as usual when the need for consent and consensus do not seem to apply.”

price systems are rationing systems—they simply allocate larger rations to people with more money and smaller ones to people with less. The fact that people welcomed the abandonment of government-imposed rationing, as they did after World War II, does not prove that rationing was inefficient; it just proves that people didn’t like it. As for emissions trading—much beloved by many economists for its market orientation—that is a form of rationing, too.

A physicist, an engineer, and an economist are stranded on a desert island with nothing but canned food. The physicist proposes to make a fire and heat the can until it bursts. The engineer proposes to climb to a local ridge and drop the can, which will burst on landing. The economist says: “Assume a can opener.”

The two countries with the lowest levels of income inequality—Finland and Sweden—lead the world in most measures of well-being. In contrast, the United States, which is very wealthy but very unequal, trails many much poorer countries in health, education, life expectancy, and many other measures.

The novelist Kim Stanley Robinson has summed it up: “the invisible hand never picks up the check.”

As Lincoln said, “for some the word liberty … may mean for some men to do as they please with other men, and the product of other men’s labor.”

Philosopher José Medina puts it this way: it is “not uncommon for members of unjust societies to have distorted images of themselves as knowers … interiorizing a superiority complex … with negative epistemic consequences.”68 Among these negative consequences is arrogance, which diminishes openness to facts that challenge your worldview and impedes meaningful reflection and self-correction.69 Epistemic arrogance can also lead to a kind of “cognitive immaturity”—as when grown-ups engage in magical thinking. Such immaturity can become pathological “when the subject becomes absolutely incapable in acknowledging any mistake.”

In Friedman’s world, intellectual competition is a rich man’s game: survival of the fittest becomes the triumph of the richest. Then, in circular logic, the survivors credit their survival to their own superiority, rather than, as Darwin would have stressed, the randomness of inherited wealth, inherited racial privilege, and inherited social position.

Bruce Bartlett, a political adviser to Ronald Reagan and George H. W. Bush, wrote in the New York Times: “The big problem for those who continue to cite The Road to Serfdom as a guide”—or, we might add, who look to markets to solve social problems—“is that they must essentially ignore everything that happened after 1944.”79 Events since 1944—a point at which, Bartlett wrote, “it looked as if the United States were traveling in the same direction as Europe, and Hayek’s thesis was not implausible given recent history”— have proven both that economic liberalization does not necessarily lead to political liberalization, and that government actions to address market failure do not put a country on the road to serfdom.

Loose talk about “free markets,” “free market forces,” or, most egregiously, “The Free Market” creates the erroneous impression that markets have a native state. From there it follows that governments should not interfere with their (supposedly) natural functioning.82 But markets have always operated under rules—sometimes tacit and informal, other times explicit and formalized. This is what the rule of law is: we set boundaries for human activities based on our assessment of how they affect both participants and bystanders.

As Robert Reich has put it, the decisions we make about how markets should (and shouldn’t) operate don’t “intrude” on the market, they define it, just as the rules of football define the game.

If we expand our purview to the world at large, we have many examples of social welfare programs that work well in democratic countries; and by many measures, the European social democracies are more democratic than the United States. (The Economist’s Democracy Index 2022 placed the United States at twenty-six, behind all the European social democracies, as well as Japan, South Korea, Uruguay, Costa Rica, and post-Pinochet Chile.)

when we compare outcomes across different U.S. states, we find that the evidence falls strongly on the side of higher levels of taxation and stronger degrees of regulation, rather than less.